Oil factor limits GCC banks' credit portfolio, says IMF

(MENAFN- Gulf Times) Banks in the Gulf Co-operation Council (GCC) will find difficulty diversifying their credit portfolio owing to the dependence of non-oil sector on the hydrocarbons segment, according to the International Monetary Fund (IMF).

"While the GCC banks have credit exposures to different sectors of the economy, even the non-oil sectors are dependent on developments in the oil sector (directly or through government spending). This economic structure constrains the ability of banks to truly diversify their credit portfolio," IMF said in a report.

Oil revenues dominate fiscal revenues and support government spending. Oil revenue as a percentage of total government revenue was close to 80%, on average, for the GCC countries in 2013.

Observing that the GCC economies remain dependent on oil as a key driver of growth, the report said this dependence on oil leads to credit portfolios that have large correlations with government expenditures, which in turn are correlated to oil developments.

As a result, banks' portfolios do not benefit as much from the potential diversification that lending to different sectors of the economy would usually provide. Rather, most sectors are ultimately driven by government spending.

The geographic distribution of banks' credit exposures is also concentrated in the GCC region, contributing to the oil exposure of banks. Consequently, GCC banks' net income is highly correlated to oil-driven fiscal developments.

This implies that the oil price is a significant risk factor driving credit default. Besides, lending to large and connected private and public sector groups can result in concentrated exposures to these groups and sometimes represent a large percentage of bank capital and have the potential to impair bank solvency in the event of default, the IMF said.

As of 2012, the share of hydrocarbon GDP was over 30% in all GCC economies, except for Bahrain where it was 16% (similar to Norway). However, oil revenues are also key drivers of non-oil activity via fiscal spending including capital spending (infrastructure) and public sector wages.

Non-oil industrial activities are commonly energy intensive and resource related (metals, petrochemicals, and construction), while services (retail, restaurants, transport, communication, and social services) are heavily driven by oil revenues and government spending.

Manufacturing is often linked to oil, construction is importantly driven by government projects that are financed with oil revenues, and commerce is fuelled by domestic consumption dependent on public sector wages that also depend on oil revenues.

Fiscal spending in infrastructure and investment projects fuels bank credit to public sector entities or private contractors, the IMF said, adding bank credit for personal lending is importantly driven by public sector wages and oil developments.

Further, the GCC banks have exposures to connected counter parties that arise from the ownership and control links in the GCC corporate sector. It is important that banks hold sufficient capital in light of these risks in their portfolios, the global lender said.

Finding that the GCC economies are bank-cantered with still developing local debt markets, the IMF said shocks to banks are then costly since tighter credit will translate quickly into output losses.