Gulf economies to face squeeze on funding as bank deposits fall

Cash in GCC banks likely to dwindle more this year amid lower oil prices, Moody's says.

Regional economies are expected to face tightening funding options this year as bank deposits continue to wither amid ­lower oil prices, according to the rating agency Moody’s.

Deposit growth rates slowed to 3 per cent in the GCC last year from about 10 per cent in 2014, the agency said in a report published on Wednesday, warning that money was likely to remain tight in 2016 and might become tighter if governments are less willing to spend as deficits widen.

That would limit the ability of companies to grow and act as a dampener on economies around the region, it said.

“The widening gap between oil prices and fiscal break-even prices across GCC governments has resulted in a significant increase in some of these governments’ deficits, which has weakened their own creditworthiness,” analysts at Moody’s led by Nitish Bhojnagarwala wrote in the report.

“In turn, these developments also highlight the reduced capa­city or possible willingness of these governments to support both the broad economy and the banks in times of stress, if needed.”

Deficits in countries in the region, including the UAE and Saudi Arabia, have widened over the past year as the more than 60 per cent drop in oil prices empties coffers and forces governments to dip into sovereign wealth funds and borrow more money to keep spending on infrastructure and social services.

Some countries have been more affected than others according to how dependent on oil they are. At the top of the list of those reeling the most from lower oil prices is Saudi Arabia, while the UAE leads those that are least dependent.

UAE banks, for instance, have some advantages relative to their peers because of a more diversified economy and macro-prudential measures taken by the country since the financial crisis of 2008, the rating agency said. Still, deposit growth at UAE banks is likely to slow this year to 3 per cent from 10 per cent annually between 2012 and 2014.

Moody’s noted, however, that UAE government borrowing has only moderately increased despite declines in credit growth and that within the Emirates, Dubai would be most resilient to lower oil prices because of its even more diversified economy.

“Within the UAE, the non-hydro­carbon and private sector-driven growth of Dubai is expected to be resilient to lower oil prices to some extent and this will support the overall financial fundamentals of Dubai-based banks, which were impacted the most during the global financial crisis,” Mr Bhojnagarwala said.

Nevertheless, strains are starting to appear in parts of Dubai’s economy.

The Dubai Economy Tracker, a monthly assessment of business activity in the emirate provided by Emirates NBD, recorded a score of 48.9 in February. Any score below 50 indicates that the economy is contracting.