(MENAFN- Khaleej Times) GCC countries need to further bolster their macro-prudential framework to ward off a potential systemic risk, International Monetary Fund said in a working paper.
The IMF, which last month cut its economic growth forecast for the GCC to 1.8 per cent this year, down from 3.3 per cent in 2015, and urged spending cutbacks, said there is a need to strengthen the regulatory capacity to monitor and assess systemic risks. "Arab countries have to strengthen their capacities for monitoring time-varying, and cross-sectoral, risks," said the report 'Macro-prudential policy and financial stability in the Arab region'. "Effective early warning systems and regular assessments of systemic risks are integral parts of macro-prudential policies. Macro stress testing would help the regulators to align the macro-prudential toolkit with the changing nature of financial risks," said the working paper authored by Ananthakrishnan Prasad, Heba Abdel Monem, and Pilar Garcia Martinez. "Better monitoring of systemic risks and addressing financial vulnerabilities could be achieved through several steps, including developing a financial stability risk map," IMF working paper said. This map includes all the risk elements crucial for financial stability, including credit growth, financial activities, and interconnectedness, it explained. "In addition to market risk, the map would also identify liquidity risk, contagion risk, real estate exposure risk and other risks related to linkages between different components of the financial sector, structural indicators and financial infrastructure." The paper noted that many countries in the Arab region, particularly the GCC, are ahead of others around the world in implementing some measures now widely accepted as macro-prudential tools. "These measures include the loan-to-deposit ratio, regulations on personal lending such as debt service to income ratio and limits on loan tenor, and limits on concentration, including on real estate exposure," the IMF paper said. Stressing that there is an urgent need to address the challenges related to Basel III implementation, the IMF paper pointed out that while a number of Arab countries are ahead in implementing Basel III requirements, others are in the early stages of applying these standards. "Further efforts are needed to enable Arab countries to implement Basel III regulations." The oil-exporting GCC economies are heavily reliant on the extraction sector for their fiscal revenues. Their export earnings are translating into increased vulnerabilities to oil prices shocks, the IMF document that discusses the experience of Arab countries in implementing the policies noted. It noted that since the global financial crisis, the GCC countries have sharpened prudential regulation by tightening capital and liquidity requirements and are in the process of implementing Basel III standards on capital, liquidity, and leverage. A number of central banks have established a separate financial stability office/unit and set up an early warning system, in addition to conducting periodic stress testing of banks. The Arab regulatory authorities should work on addressing the challenges they are likely face to cope with the Basel III framework, especially with regard to liquidity standards. On the potential vulnerabilities in credit, the IMF document said the majority of the Arab world's bank domestic credit is concentrated in the private sector, except for Qatar, Algeria, Yemen, and Lebanon which have a high percentage in the public sector. Private sector credit distribution also varies within the GCC and Arab oil importing countries. Bahrain, Egypt, Morocco, and Tunisia have a high percentage of their private credit for trade, industry, and finance sectors. However, banks in the GCC countries have a large share of the credit portfolio in personal consumption loans. For many GCC banks' credit is also concentrated in the real estate sector. Furthermore, many GCC countries face borrower concentration risk in their credit portfolio.- Issac John Associate Business Editor of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.