GCC liq­uid­ity crunch to per­pet­u­ate sub­dued growth

CFA member so­ci­eties sur­vey lists chal­lenges to GCC economies

Kuwait Times - - BUSINESS -

KUWAIT: Tight­en­ing liq­uid­ity will con­tinue to pose im­mi­nent chal­lenges to GCC economies ac­cord­ing to the lat­est CFA member so­ci­eties sur­vey, which gauged the opin­ions of CFA mem­bers and char­ter-hold­ers in the Mid­dle East. The sur­vey re­vealed that the ma­jor­ity of CFA mem­bers agree that shrink­ing govern­ment de­posits will re­sult in ad­di­tional cuts to in­fra­struc­ture projects in or­der to re­align spend­ing, and this will have neg­a­tive short-term eco­nomic ef­fects. CFA so­ci­eties in the re­gion be­lieve that re­duced funds al­lo­cated to in­fra­struc­ture projects would mean that the con­struc­tion in­dus­try will be af­fected the most by the liq­uid­ity crunch. Pri­vate sec­tor firms, par­tic­u­larly SMEs, will ex­pe­ri­ence greater dif­fi­culty in rais­ing cap­i­tal as cost of cap­i­tal will in­crease and banks are ex­pected to be­come more se­lec­tive in their lend­ing pat­terns. The find­ings in­di­cated that the bond mar­ket will emerge as a lead­ing fi­nanc­ing op­tion for the pri­vate sec­tor; though they ac­knowl­edged that re­gional debt markets are not yet de­vel­oped enough to cover fi­nan­cial needs of the econ­omy.

M.R. Raghu, CFA, Member and Found­ing Pres­i­dent of CFA So­ci­ety Kuwait, com­mented on the find­ings say­ing: “In­vest­ment pro­fes­sion­als recog­nise that the cur­rent liq­uid­ity chal­lenges have arisen be­cause a de­cline in oil prices and lower govern­ment spend­ing has neg­a­tive bear­ings on bank bal­ance sheets, as­set prices, eq­ui­ties and credit growth. In­vestors are also con­cerned that in eq­uity markets, such macroe­co­nomic con­di­tions will mean re­duced re­turns be­cause of the im­pact on cor­po­rate earn­ings. With oil prices un­likely to re­turn to his­tor­i­cal lev­els of above $100 in the near fu­ture, the lower eco­nomic growth rates cur­rently pro­jected might be­come the new nor­mal go­ing for­ward.”

He added: “On other hand, the re­cent sta­bil­i­sa­tion of crude prices and in­creased cash flow from in­ter­na­tional in­vestors through the credit markets is of­fer­ing GCC coun­tries hope of a re­bound. Eas­ing the cur­rent strains faced by the re­gional fi­nan­cial mar­ket would raise mar­ket per­for­mance.”

The in­vest­ment pro­fes­sion­als who were sur­veyed noted that banks in cer­tain GCC coun­tries do have re­silient cap­i­tal buf­fers and pro­vi­sion­ing lev­els, given their in­come from com­mod­ity ex­ports. Al­though, ac­cord­ing the sur­vey, banks in the re­gion will see an in­crease in Non­Per­form­ing Loans (NPLs), NPL ra­tios re­main rel­a­tively low while loan loss pro­vi­sions are ro­bust. This is pos­si­ble be­cause of strong macroe­co­nomic per­for­mance un­til the end of 2014, with this pe­riod also see­ing the in­tro­duc­tion of reg­u­la­tory struc­tures and im­proved risk man­age­ment within the fi­nance in­dus­try.

Ten key sur­vey find­ings:

1. 79% of mem­bers be­lieved that fall­ing govern­ment de­posits will lead to fur­ther cuts in govern­ment spend­ing for in­fra­struc­ture projects. 2. Govern­ment bud­get cuts to re­align spend­ing with de­clin­ing rev­enues will have neg­a­tive short-term eco­nomic af­fects, ac­cord­ing to 95% of re­spon­dents. 3. Cost of fund­ing, es­pe­cially lend­ing rates, will in­crease due to banks be­ing pres­surised by tight­en­ing liq­uid­ity, as per 77% of in­vest­ment pro­fes­sion­als in the re­gion. 4. 83% said that the in­creased cost and greater dif­fi­culty in rais­ing cap­i­tal would lead to a de­crease in pri­vate sec­tor ac­tiv­ity. 5. 53% felt that loan growth would be neg­a­tive in the short-term fu­ture, while only 32% thought it would be pos­i­tive. 6. 77 per­cent were con­vinced that the cur­rent liq­uid­ity con­di­tions will lead to an in­crease in Non-Per­form­ing Loans (NPLs) for banks in the re­gion. 7. Con­struc­tion and SMEs are the in­dus­tries that will be af­fected the most due to the liq­uid­ity short­fall. 8. 73 per­cent said that re­gional debt markets are not de­vel­oped enough to suf­fi­ciently cover fi­nan­cial short­falls, al­though the sur­vey also showed that CFA mem­bers feel the debt/bond mar­ket will be the lead­ing source of fi­nanc­ing for the pri­vate sec­tor. 9. 89 per­cent thought that the cur­rent cash flow en­vi­ron­ment will cause fur­ther dents to al­ready de­clin­ing cor­po­rate earn­ings. 10.The UAE has the largest avail­able cap­i­tal buf­fers to see out this chal­leng­ing pe­riod and is ex­pected to be the least af­fected by the liq­uid­ity short­fall.

M R Raghu, CFA So­ci­ety Kuwait

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