International rating agency Standards & Poor’s expects Arab Gulf banks to reap the benefits of their economic recovery in 2022 thanks to the anticipated rise in the prices of oil.
“GCC Banks are set to benefit from a regional economic recovery this year (2022) amid higher oil prices, still supportive government spending and normalizing non-oil activity,” says Mohamed Damak, senior director for Middle East and Africa Financial Services at S&P Global Ratings.
The S&P report notes that Gulf Cooperation Council economies are recovering from the COVID-19 pandemic, but adds: “We expect banks’ asset quality indicators to deteriorate only slightly as regulatory forbearance measures have helped the corporate sector to deal with the negative effects of the pandemic. In our view, the nonperforming loan (NPL) ratio will rise in the next 12-24 months without exceeding 5%, compared to 3.7% on Sept. 30, 2021.”
It adds that corporates in general are seeing a gradual recovery but certain sectors such as aviation and hospitality remain under pressure, noting that the rise in Dubai real estate prices might be short-lived as the structural oversupply of residential property could challenge the market over the long term, making the recovery fragile.
“Amid a tight job market, accelerated inflation readings over the past few months, and increasingly hawkish forward guidance from the US Federal Reserve, we now expect three rate hikes in 2022, with the first hike expected in May. This will prompt a similar reaction from GCC central banks given their currency pegs. Banks will benefit from such an increase assuming no material impact on asset quality,” it says.
S&P emphasizes that lower global liquidity are likely to have a limited impact on GCC banks thanks to their strong net external asset positions or limited net external debt positions, but says that Qatar is more vulnerable than other countries due to its large and expanding net external debt position, although there are some mitigants.
It also expects Brent oil price to average $65 per barrel in 2022.
“Improving economic sentiment and higher hydrocarbon production should lead to accelerated economic growth in the region. However, an uncontrolled resurgence in the pandemic that reduces mobility could hamper the global and regional economic recovery,” the report warns.