Private capital could help bridge GCC funding gaps

Financial sector shows resilience but low oil prices are set to affect quality of bank assets

Low oil prices have resulted in the aggregate current account balance of Middle East oil exporters swinging from a surplus of $228 billion (Dh837.4 billion) in 2014 (8.8 per cent of GDP) to a deficit of $77 billion in 2016 (3.6 per cent of GDP). However, the International Monetary Fund believes private capital can play a vital role in bridging the external funding gap.

The aggregate current account balance for oil exporters is projected to return to the black in 2019, albeit, as a small surplus in 2019. However, countries with persistent deficits, low financial buffers and limited exchange rate flexibility face external financing challenges.

These developments underscore the importance of continued fiscal consolidation efforts to help support fixed-exchange rate regimes and structural reforms to attract foreign private capital.

“In this context, improvements have been made with respect to easing access for foreign investors to capital markets [such as in Saudi Arabia],” said Jihad Azour, director of the IMF’s Middle East and Central Asia Department.

Low oil prices, combined with the ongoing cycle of US interest rate increases, are likely to continue to put pressure on the quality of bank assets, affecting the ability of lenders to supply credit to the private sector and contributing to weaker growth.

“Deepening domestic capital markets should be a priority reform area to ensure adequate funding for the development of the non-oil sector,” Azour said.