Barclays issued its quarterly report on emerging countries in which it indicated that the slowdown in global growth and financial markets instabilities would have a limited impact on GCC countries given reduced supply from sanctions-hit countries, significant room for manoeuvre by OPEC suppliers and large financial buffers that could support countercyclical fiscal policies. Reduced reliance on funding from EU-based banks, stronger GCC bank balance sheets, and continued progress on Dubai restructuring have also dampened refinancing risks.
While reliance of GCC countries on EU banks for provision of financing remains relatively important, the latter has declined based on the past 12 months of available data. Also, while some banks or corporates in Qatar and the UAE still depend on EU bank funding, GCC banks are in a better position today to face another period of financial turbulence. On the one hand, some Dubai banks, which constituted the weakest link during the previous financial crisis, have shown a significant improvement in liquidity and a slowdown in new NPL. On the other hand, GCC banks’ reduced reliance on external funding and geographical concentration in their domicile markets are likely to partially shield them from a possible renewed global slowdown.
In addition, fiscal expansionary policy would be the main growth driver in the GCC countries. The 23% spending spike in 2011 was intended to address some socioeconomic grievances in light of regional domestic unrest. Barclays expects an additional increase in spending of a further 3.8% this year. While most GCC spending increases in the current year are a result of government commitments made last year, their impact on private sector activities has been pronounced, including near record high growth in some sectors in Saudi Arabia (manufacturing, construction and transport and communications).
In fact, private sector activities have maintained an expansionary mode in both Saudi Arabia and the UAE for an extended period, according to the latest PMI data. Furthermore, Saudi Arabia overall GDP expanded by 5.9% year-on-year in the first quarter of 2012, compared with 5.6% in the same period last year. While most of the growth came from the hydrocarbon sector, the expansion of the non-hydrocarbon sector remained elevated at 5.7%. As such, in case of further deterioration in the global financial market, the GCC countercyclical fiscal policies, supported by sufficient accumulation of surpluses in previous years, will act as a form of defence against any negative spillover into the domestic market, particularly the non-hydrocarbon sector.
The Mena Weekly Monitor – Bank Audi