When oil prices started to plummet two years ago, there was a widely-held belief that banks in the Middle East could weather the storm by relying on government support and diversifying their lending portfolios into non-energy related sectors.
By John Anderson
With the vast amounts of capital stored in the regions various sovereign wealth funds, there were few who believed the banks couldnt survive through what was expected to be just a temporary depression in energy prices.
Yet two years later, with oil now predicted to trade in the mid $40-a-barrel range for the foreseeable future, the strains on the banking system are starting to show. Perhaps hardest hit are the financial institutions in Saudi Arabia, a country which can only balance its budget with oil over $100 a barrela far cry from the current price of $40.
Recent figures show that deposit growth in Saudi has slowed from 12 percent in 2014 to just 1 percent last year. While the Saudi banks can still rely on liquidity injections from the Saudi Arabian Monetary Authority, the sovereigns fiscal deficit of 15 percent is placing a drag on liquidity conditions within the banks.
A clear sign of that has been the marked increase in the three-month SIBOR rate which has increased in the last nine months from 75 basis points to 1.75 percent.
While the liquidity crunch is affecting all the countries of the GCC, it is Qatar that appears to be in better relative shape than the others, due in large part to a successful economic diversification program.
The diversification program begun in earnest well before the drop in oil prices has seen significant investment in infrastructure projects such as a new airport, metro and a new port. The net result is that 50 percent of Qatars GDP now comes from outside the energy sector as compared to around 75 percent in Saudi Arabia.
At a time when several of its neighbours were experiencing rating agencies credit downgrades, Standard & Poors recently affirmed Qatars AA long-term and A-1+ short-term local and foreign currency sovereign credit ratings, along with its stable outlook.
"Rating agencies and investors have continued to have confidence in Qatars financial sector, as seen in Qatars high credit rating and upgrade to emerging market status by leading rating agencies," says Governor of the Qatar Central Bank (QCB), Sheikh Abdulla Bin Saoud Al-Thani.
Among the countrys financial institutions, Qatar National Bank is definitely doing better than its regional counterparts, having recently posted a 7.1 percent rise in first-quarter net profit, beating analysts forecasts.
Half-owned by Qatars sovereign wealth fund, QNB was the beneficiary of targeted government spending on infrastructure. The bank has already achieved its goal of becoming the largest financial institution in the Middle East and Africa. QNB has also sought to protect itself against a sustained slump in energy prices by expanding its global presence through acquisitions, including a deal in December to buy Turkeys Finansbank from National Bank of Greece for 2.7 billion euros.
Among the other large economies in the region, the United Arab Emirates (UAE) banking sector remains only moderately exposed to a prolonged period of low oil prices. As is the case in Qatar, the diversification of the UAE economy and a stringent regulatory regime around both the banking and real estate markets.
What will differentiate the banks in the region over the short- and medium-term will be two factors. First, the degree to which their home countries have succeeded in implementing economic diversity programs. And secondly, the degree to which theyve been able to expand geographically into other parts of the world not dependent on energy prices for growth.