A fair report card for GCC from Moody’s

Rating agency says conservative policies have benefitted region

Moody’s Investors Service, the US rating agency, released a slew of upbeat reports on the GCC this week, revealing improving fundamentals for governments and corporations across the region amid signs of economic recovery.

The gains are most significant in Saudi Arabia, the region’s largest economy, where the pace of growth had slowed in the wake of a three year oil slump. Conservative fiscal policies are easing as individuals spend more and companies expand. The kingdom’s economy is expected to grow 1.3 per cent this year after contracting 0.7 per cent last year. As a result, Saudi Arabia’s banks are likely to become more profitable this year as are those in Kuwait.

Governments in the region are becoming more pro-active in taking measures to open up economies, pivoting to Asia and striking strategic alliances outside traditional markets.

Adnoc, the UAE’s biggest oil producer, sold a stake in its unit Adnoc Distribution in an initial public offering in December on the Abu Dhabi stock exchange. Meanwhile, Saudi Aramco, the world’s biggest oil producer, is planning to sell a 5 per cent stake in an IPO on its stock exchange, possibly this year or the next.

“GCC governments have done fairly in balancing reform implementation while preventing a systemic shock in the corporate sector,” said Rehan Akbar, a senior analyst at Moody’s. “Following a prolonged period of low oil prices, governments are identifying privatisation candidates and rationalising capital contributions to government related issuers.”

In Saudi Arabia, profits at banks will outperform their GCC peers this year as the economy improves on greater government spending and as higher interest rates boost net interest margins, the rating agency said. Moody’s said that Saudi Arabian banks reported a 9 per cent increase in net profit in 2017 as net interest margins rose to 2.9 per cent from 2.5 per cent in 2016.

In Kuwait, the rating agency said the banking system is stable as the country’s robust economic growth boosts businesses and non-performing loans abate amid new accounting procedures for bad debt.

Moody’s is also forecasting buoyant credit growth over the next 12 to 18 months at around 6 per cent, that will largely be driven by households due to higher pace of job creation.

Meanwhile, Islamic finance is set to outpace the growth of conventional banking as governments increasingly tap the sukuk market and individuals use more Sharia-compliant financial instruments.

Islamic banking penetration in the GCC, where growth has been most pronounced, increased to 45 per cent in September 2017 from 31 per cent in 2008, while during the same period sukuk issuances more than doubled to $100 billion.