(MENAFN- Khaleej Times) GCC banks are better positioned in terms of financial fundamentals now than in 2008 when the economic crisis hit and oil plummeted, but a drop in deposit inflows could lower the level of available liquidity in the systems, Moody's Investor Service said on Wednesday.
The ratings agency said it expects low oil prices to pressure GCC banks' liquidity and profits, but foresees resilience.
The most immediate impact arising from a prolonged period of low oil prices on GCC banks will be felt on the liability side, "notably reduced deposit inflows from government and government-related entities" that could lower the level of available liquidity in the systems, the ratings agency said in a report.
Moody's expects the downside effects of the lower oil prices projected for 2015 and 2016 to be moderated by the policy response of GCC governments, which will likely opt to stimulate their economies through public spending. "Depending on the policy responses, a sustained drop in oil prices would have negative effects on public spending, confidence and hence economic growth," it said.
The Oman and Bahrain banking systems are most immediately vulnerable because of each sovereign's combination of high fiscal break-even oil prices ($103/bl and $127/bl respectively) and low or near zero reserve buffers (60 per cent of GDP for Oman, zero for Bahrain).
In addition to a decline in liquidity levels, both banking systems will face growth, profitability and possibly asset quality pressures.
The Saudi Arabia and the UAE banking systems are likely to be moderately affected, despite large reserve buffers (100 per cent and 140 per cent of GDP respectively) and a larger non-oil sector, due to their relatively high fiscal break-even oil prices ($106/bl and $77/bl).
"However, both governments can sustain elevated public spending levels to stimulate economic growth and support their banking systems, but they will face more immediate pressures to rationalise future spending and cut subsidies. As such, we expect subdued credit growth, lower profitability and in the longer term, some asset-quality weakness," Moody's said.
The Kuwait and Qatar banking systems are likely to be least immediately impacted given their sovereign's very low fiscal break-even oil prices ($54/bl and $60/bl respectively for 2015) and large reserve buffers (320 per cent and 140 per cent of GDP). "These twin strengths will allow them to moderate the effects of a protracted decline though continued public spending, thus helping support their economies and banking system fundamentals," said Moody's.
GCC banks have better financial fundamentals today than those they had when the economic crisis hit and oil plummeted to $34 per barrel in 2008 down from $147 six months earlier. "When considering these buffers together with the likely support that GCC governments will provide to their domestic economies, we expect broad stability in the stand-alone ratings of the banks."
In Standard & Poor's opinion, upside for sovereign sukuk issuance in GCC countries is limited in 2015. Although S&P expects that lower oil prices will lead to fiscal deficits in some countries in the GCC, most governments' net asset positions will remain strong enough to enable their financing.
S&P sees some potential for increased sukuk issues, but the rationale behind choosing sukuk over conventional capital market instruments remains a decision for each individual government. S&P expects that most sovereign sukuk issues will relate to infrastructure projects and refinancing needs.
According to the ratings agency, GCC governments, corporations and project finance companies comprise the bulk of the second-largest sukuk market in the world, after Malaysia. "As a result, prevailing market sentiment suggests that overall sukuk issuance goes hand in hand with oil prices, which, independent of seasonal factors, is why sukuk issuance from November 2014 has been so subdued."
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