GCC bank­ing sec­tor face liq­uid­ity tight­en­ing

The Pak Banker - - FRONT PAGE -

DUBAI: Fis­cal deficits across the GCC are seen widen­ing fur­ther in 2016 de­spite fis­cal re­forms and spend­ing re­trench­ment fol­low­ing the sharp de­cline in oil prices. The grow­ing fis­cal gap is ex­pected to be cov­ered largely through do­mes­tic bor­row­ing pro­gramme, which in ef­fect will ad­versely im­pact bank­ing sec­tor liq­uid­ity across the re­gion, ac­cord­ing to a re­cent re­port from Abu Dhabi Com­mer­cial Bank (ADCB).

"Do­mes­tic fund­ing will re­main im­por­tant for cov­er­ing the GCC's fis­cal deficit in 2016, though a num­ber of mem­ber coun­tries have in­di­cated a greater fo­cus on ex­ter­nal bor­row­ing. Th­ese will in­clude fur­ther draw­downs of govern­ment de­posits in their bank­ing sec­tors, as well as bor­row­ing from banks," said Mon­ica Malik, Chief econ­o­mist of ADCB.

Saudi Ara­bia sold float­ing-rate bonds in Fe­bru­ary 2016, which is widely seen as a move to main­tain de­mand for govern­ment debt in a tight­en­ing liq­uid­ity en­vi­ron­ment. The Saudi govern­ment has been is­su­ing 20 bil­lion Saudi riyals (Dh19.58 bil­lion) of do­mes­tic bonds to banks ev­ery month from Au­gust 2015 to fi­nance the deficit. The Qatar Cen­tral Bank can­celled its T-bill auc­tion in Jan­uary 2016 on the back of weak de­mand from banks. This was af­ter re­duc­ing the amount of T-bills is­sued at the end of 2016. Do­mes­tic bond yields have also risen in Oman.

"The GCC in­ter­bank rates have sta­bilised in early 2016, and to have fallen mod­er­ately in the UAE. How­ever, we be­lieve that the over­all theme will be one of tight­en­ing. How­ever, an ex­pected de­cel­er­a­tion in pri­vate-sec­tor credit growth in 2016 could re­duce the pres­sure some­what," said Malik.

On the ex­ter­nal fund­ing side, for­eign debt is­suances and syn­di­cated bor­row­ing will be im­por­tant to re­duce the draw­down of FX re­serves and do­mes­tic tight­en­ing in the bank­ing sec­tor. With the sov­er­eign down­grades of Bahrain, Oman and Saudi Ara­bia by the rat­ing agen­cies, the cost of fund­ing is ex­pected to in­crease.

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