Credit growth has been moderate in the Gulf for five years. The trend looks less closely tied to the oil cycle than previously, but the current oil price fall will affect available bank liquidity. Slowing lending growth could reduce non-oil sector growth. In the Gulf, monetary policy tools have limited effectiveness in terms of supporting lending. Banks have some surplus liquidity that can be mobilised, particularly in the United Arab Emirates (UAE) and Saudi Arabia. Beyond that, governments’ financial ability to support the economy will be decisive.
■ Moderate bank credit recovery since 2011
The 2009 economic and financial crisis brought a step change in bank lending growth in the GCC countries. Although the Gulf economies were relatively unaffected by the financial turbulence, private sector lending growth was weak in 2009 and 2010 (averaging 2% and 4.8% respectively, compared with 15% for all emerging markets ex China). Since then, the pace of growth has remained moderate, averaging 10% between 2011 and 2013 (9% for emerging markets ex China), and 14% to the end of September 2014. Given moderate inflation, real growth of credit remains consistent with economic activity. Looking only at non-oil sector activity (the oil sector makes relatively little use of domestic credit), the gap between real growth in lending and in the non-oil economy rises gradually, but remains moderate, suggesting no overheating in banking activity. The gap was negative in 2009 and 2010 (-3.8% and -3.0% respectively), but was estimated at 5.8% at the end of September 2014. This is far from the gaps of more than 10% in 2007-2008. In addition to the pace of lending growth, a disconnection is worth highlighting between the trend in oil export revenue and private sector lending since 2009. This link is natural in such an oil-rent economy due to the reinjection of some of the petrodollars into the economy through public spending. Since 2009, the increase in private sector lending (averaging 9%) has been much lower than the increase in oil revenue (averaging 22%).
There are a number of possible reasons which explain this moderate lending growth given the growth in oil revenue. The cleaning up of bank balance sheets, particularly since the real estate debt crisis in Dubai, has held back banking activity in the UAE. Similarly, the difficulties at investment houses in Kuwait may have restrained lending there. In connection with these events, tighter regulations have been introduced, aimed at combatting property speculation. However, while there may have been a gradual trend to autonomy in the non-oil sectors relative to changes in oil income, we believe that the oil cycle will continue to be key to economic activity in the GCC states.
■ Oil price fall
The oil price fall since September 2014 has not so far had any effect on bank liquidity. Interbank rates have been stable in all Gulf states and have continued to decline despite the more than 30% oil price fall. For example, the Saudi interbank rate has fallen by about 7 bp over the last three months. Bank funding mainly comes from local deposits with only a quite marginal proportion coming from capital markets. Public sector deposits are also quite large (averaging more than 15% of total deposits) and form a source of government support for the banking sector. It is likely that the rate of growth in deposits will slow with the fall in oil revenue. A slowing rise in central bank external assets automatically affects money supply growth. The expected slowdown in public spending growth (decline in certain budget items, delay in investment projects) will have a negative effect on bank lending growth.
■ Possible interest rate pressure
With the Gulf currencies pegged to the US dollar and free capital movement, local interest rates are closely tied to those of the US Federal Reserve. Since 2009, countries have fallen into one of two categories when it comes to the spread between the local interbank rate and the Fed Funds rate. The spread is very narrow in Saudi Arabia, Bahrain and Oman. It is positive (maximum spread of 200 bp since end 2009) in the UAE, Qatar and Kuwait. For the latter group, the rate spread is linked to greater pressure on liquidity because of faster lending growth. Qatar has embarked on a wide-ranging economic diversification plan which is reflected in private sector lending growth averaging 15% during the first three quarters of 2014. In the UAE, lending growth is strong again, at more than 20% at an annual pace. In addition to possible pressure on liquidity, part of the interest rate spread compared with the former group of countries may be due to counterparty risk. In Kuwait, even though the investment houses crisis has been resolved, there is still some fragility in the banking sector.
The announcement of the end of monetary policy looseness by the US Federal Reserve might lead to a rise in the Fed Funds rate in 2015. Such a rise is expected to be minimal (about 50 bp) given the uncertainties surrounding the economic recovery. However, rate rises in the Gulf could affect lending and therefore non-oil sector growth. According to IMF estimates, a 100 bp rise in in the Fed Funds rate reduces non-oil activity by about 0.1%. Such weak transmission of the consequences of a rate rise is due in particular to the narrowness of the money markets in the GCC countries. It therefore seems that the expected rise in US policy rates will have a negligible impact on banking activity. Factors such as the importance of self-financing (particularly for SMEs) and the cash settlement of certain transactions (part of Dubai real estate) also imply lower sensitivity of lending to small changes in interest rates.
■ Limited monetary stimulus instruments Maintaining strong growth in the non-oil sector is a priority for all GCC states, particularly as they need to face up to a large increase in the labor force (Saudi Arabia and Oman in particular) or limited oil resources (Dubai and Bahrain). From the point of view of monetary policy, action on interest rates is both constrained and of limited effect. Open market operations are not very large. The Saudi central bank (SAMA) issues T-bills to regulate liquidity. The stock of securities issued has been reduced by 8% since the beginning of the year to 28% of M2 compared with 34% at the end of 2013. At a time of sustained lending growth (+13% year on year in September 2014) and a slowdown in the increase in SAMA's external assets, the central bank is expected to continue with its loose policy over the next few quarters.
BY Pascal DEVAUX