Cheap oil trips up Gulf’s banks

Corporate and national balance sheets are tipping into the red as oil’s historic low price bites deep

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Late last year, tales of indebted managers closing down their businesses and fleeing the United Arab Emirates re-emerged. In an echo of the financial crisis, there were stories that owners of small and medium sized enterprises were leaving the country rather than risk jail for not paying debts.

A wave of expats leaving cars at the airport has yet to materialise, but dozens of corporate directors — especially contractors reliant on government spending — have been folding their businesses as payments slow after the collapse in oil prices.

In late March the UAE Banks Federation, whose chairman says its 49 members have up to $2bn in at-risk loans, announced a new mechanism that would provide a three-month moratorium on legal action against companies that meet the qualifying criteria.

Abdul-Aziz al-Ghurair, chairman of the federation and chief executive of Dubai lender Mashreq, talked of the federation’s “more proactive role” in helping banks and borrowers work together to avoid default, amid “concerns about the sustainability of SME and corporate lending and its effect on the economy as a whole”.

For a federation that has jealously guarded the rights of UAE banks to threaten legal action against debtors, the move underlines lenders’ concerns about the threat of bad loans — and the rising provisions that will eat into profits. It also shows that the impact of the collapse in oil prices is still ricocheting through the region’s financial services sector.

The historically low oil price has bitten the public sector too. For the first time in more than a decade, the states of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE — face twin fiscal and current account deficits, according to rating agency Moody’s.

Fiscal deficits have ballooned to 12.5 per cent of GDP on average, forcing Gulf governments into painful measures such as subsidy reform and the introduction of sales tax from 2018, while the GCC states’ current account deficit has grown to 10 per cent cent of GDP for the first time since the oil crash of the late 1990s. This has slowed the pace of large-scale overseas investments that characterised the boom and signals a need to attract foreign investment.

Saudi Arabia, facing a forecast 19 per cent budget deficit this year, according to the IMF, is looking to borrow up to $10bn from a consortium of international banks, followed by the kingdom’s first bond issuance. Bahrain is expected to continue tapping international bond markets and Oman will follow suit.

In March, Moody’s placed 31 out of 56 rated GCC banks on review for downgrade. In the countries most affected by the oil slide — Saudi Arabia, Bahrain and Oman — all rated banks are under review. Bahrain and Oman both had their long-term ratings downgraded. Saudi Arabia’s is under review.

Abu Dhabi satellite image © Getty/Universal Images Group

“People are getting more nervous about the oil price as the drop is looking more structural than cyclical in nature,” says Shabbir Malik, a Dubai-based banks analyst with Egyptian investment bank EFG Hermes. “This is affecting consumer confidence and would affect banks’ profitability.” Buthe adds that banks have “decent capital buffers” and will be more selective when lending.

After cruising through an oil fuelled boom between 2010 and 2013, governments and state-owned companies are pulling deposits from regional lenders as liquidity dries up. The annual growth rate in GCC deposits has slowed dramatically to 2-7 per cent, according to Moody’s, compared with 10-20 per cent before the oil slide.

Banks are increasingly cautious when lending to emerging markets. “The mood around emerging markets has changed,” says Ashok Aram, chief executive for Europe, Middle East and Africa at Deutsche Bank. “Interbank liquidity and capital markets financing have become more expensive.”

Banks are funding themselves at these higher rates, squeezing profitability, and credit growth has fallen to as low as 2 per cent in some parts of the GCC. With hydrocarbon prices and property projects declining, banks have fewer of their traditional opportunities for safer lending. Given slow growth of new assets and higher risk provisions, “banks will need to reorient themselves to this new environment,” Mr Aramadds.

As domestic institutions face a tougher environment, however, global banks can once again set up local lending activity and help open up regional access to international markets. “There is lots of work with sovereigns rebalancing their budgets, which will create opportunities, and also big companies are now more willing to engage with the global banks in order to access alternative pools of capital,” says Mr Aram.

Advisers say companies hit by low oil prices are looking to sell non-core assets or restructure their finances as the slump continues. Pervez Akhtar, regional managing partner for the Middle East and north Africa at Freshfields, the law firm, says the growing flow of larger, complicated transactions in sectors such as education and healthcare has forced the company back into hiring mode.

He points to regional private equity firm Abraaj’s sale of its 49 per cent stake in payments company Network International to Warburg Pincus and General Atlantic. Other market participants see Dubai businessman Mohammed Alabbar’s bid to buy Kuwait’s Americana, a long delayed deal, as a positive indicator. This year there has already been £4.9bn of investment into Saudi Arabia across 16 companies, according to deal tracker fDi Intelligence; the 2015 total was £6.4bn across 74.

While the oil price is draining liquidity from the region, the traditional flow of Gulf money to developed markets has been buoyed by geopolitical concerns and a hunt for better returns.

Mohammed al Ardhi, executive chairman of Investcorp, says the bank’s client base, drawn from the Gulf’s wealthiest merchant families, is concerned about the impact of oil prices on government spending, and therefore their core businesses. “The weak sentiment in the Gulf is making our investors look favourably at the west,” he says.

While the oil price crash continues to mar the Gulf’s fiscal plans, there is plenty of wealth in the region seeking returns — and investors appear poised to bring cash off the sidelines.

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