News Column

Fed taper, market swings not to hurt Gulf banks

February 6, 2014

Staff Reporter MUSCAT The US Federal Reserve's $85 billion stimulus tapering programme or the soggy global growth is unlikely to unmoor banks in the Gulf in the next one to two years, according to a report by rating agency Standard & Poor's. The report 'Market volatility is unlikely to unanchor Gulf banks', released on Wednesday said that banks in the region suffered, as many did worldwide, from the global financial crisis that began in 2008. But they had since gradually recovered. "We expect that healthy regional economic growth, supported by high oil prices, is likely to lift business and local government demand for loans, boosting bank earnings in 2014," said S&P credit analyst Emmanuel Volland . These views had been factored into the ratings on the 26 banks covered in the Gulf Cooperation Council (GCC), 17 of which had stable outlooks and five carried positive outlooks on their long-term ratings, he said. The biggest risks to the ratings were oil or geopolitical shocks, which would reduce the Gulf countries' 'solid external and fiscal positions, but this is not our base-case scenario', the report added. The region's proximity to armed conflicts in the Middle East , like Syria's , represented the main area of geopolitical risk, it said. While the GCC, through the power of reserves, was able to contain the impact of financial crisis, it revealed some weaknesses in the financial sector in certain countries, such as Kuwait , Bahrain , and the UAE . Banks in the Emirates fed into the real estate boom starting in 2002 by lending to developers and local government-related entities. When property prices plunged six years later, banks were left with rising non-performing loans and some large restructured transactions, the report said. Aimed at preventing such a recurrence, some central banks revised regulations governing limits on loans and other credits that domestic banks may extend to borrowers, relative to regulatory capital. But the new rules were also likely to have a broader impact, and help develop the country's capital markets. "After UAE banks nearly halted lending from 2008-2012, they started granting loans again last year and we expect to see a 10-12 per cent expansion in nominal terms this year and next," the report said. Partly because of greater corporate and infrastructure issuance in the Gulf, the sukuk market worldwide should resume growing again this year, after volumes dropped 13 per cent in 2013. Especially as the Fed ratchets down its tapering programme, market conditions were expected to remain favorable for sukuk issuance and for the creditworthiness of banks in the Gulf. "What distinguishes the GCC, say from many other emerging market regions, is the absence of recourse to external debt. Excluding Qatar , all Gulf banking systems enjoy a net external asset base position," said Volland. OMAN TRIBUNE

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Source: Oman Tribune

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