IMF hails GCC banks’ ‘openness’ in new study

The global economic crisis that led to massive banks’ credit defaults has left lenders in the six-nation Gulf Co-operation Council (GCC) vulnerable and exposed, according to the International Monetary Fund (IMF).

However, the Washington-based money lender says banks in the GCC region enjoy a strong position and their asset quality has largely improved over the past years.

The latest fiscal report authored by IMF’s analysts, hails member countries for having “taken important steps to achieve economic and financial integration on nearly all fronts, over the past two decades.”

“GCC countries have achieved virtually unrestricted intra-regional mobility of goods and capital. Formal barriers to free movement of services, national labour and capital have been largely eliminated,” the analysts state.

After Dubai state-owned conglomerate Dubai World requested creditor banks for a standstill on debt payments in November 2009, several regional financial lenders were badly hit and this led to a plunge in their ratings after suffering credit defaults.

“The recent regional default problems have allied with the crisis to hit the banks' asset quality but they remained sound and well capitalised, the analysts stated in the working paper.

“The asset quality of GCC banks has improved significantly over the past five years. The ratio of non-performing loans (NPLs) to total loans has been on a declining trend since 2003, when it was at double digits, although the underlying trend is masked by the high credit growth rate during this period,” they said.

“NPLs stood at low levels in 2008 by international comparisons despite the crisis. However, the supervisory authorities in the GCC have required banks to take substantial general loan loss provisions in anticipation of rising amounts of NPLs in 2009, and possibly 2010. The coverage ratio of provisions to NPLs across the GCC is very high by international standards.”

Why region experiences common fiscal shocks

The experts warned about “common economic shocks”, brought about especially by what they describe as region’s macroeconomic convergence.

“This convergence criteria establishes ceilings on inflation rates, short-term interest rates, foreign exchange reserves, fiscal deficits, and public debt to gross domestic product (GDP) ratios,” the report says.

“The GCC countries have attained significant progress toward economic integration and have achieved the convergence criteria on nearly all fronts. Nonetheless, the financial markets in these countries are in different stages of development. Notwithstanding that, international markets differentiate among GCC countries in assessing risks as evidenced by trends in credit default swaps (CDS) spreads,” it says.

The IMF paper said that although some governments issue bonds, secondary markets for these instruments are virtually nonexistent in the GCC countries.

It noted that equity markets have recently expanded and significantly differ in size between member-states, but financial services constitute a major segment of market capitalisation in all the countries.

“The size of the banking system varies across countries, with Saudi Arabia and the UAE accounting for nearly 75 per cent of total banks’ assets and 70 per cent of capital. The operations of the banks are domestically oriented, relying mainly on lending and private deposits.”

Open regime for foreign exchange accounts

Figures in the research report showed that foreign assets and liabilities form a relatively small share of the total size of the balance sheet.

“Saudi Arabia’s banking sector is the most closed — only 8.6 per cent of liabilities originate abroad - while Bahrain has the most open banking industry - up to 47 per cent of liabilities - are foreign,” it states.

The IMF experts hailed the “openness” of banking operations in the GCC region, saying “All GCC countries operate an open regime for foreign exchange accounts for both residents and non residents.”

In the GCC, residents can open foreign exchange accounts domestically and abroad and resident accounts in domestic currency are convertible in foreign currency. Similarly, non-residents are permitted to open domestic currency and foreign currency accounts, the report stated.

“Restrictions however remain in a number of important areas. There are restrictions on the purchase of shares in the local markets by non residents, though GCC nationals get a more favoured treatment,” it added.

According to the study, mergers and acquisitions in the GCC were dynamic as the banking system was responding to various market developments in the financial sector and the opening up of the telecommunication sector.

“Kuwait, Saudi Arabia and the UAE were the most active in mergers and acquisitions within the GCC region,” it stated.