Banks in the GCC could face funding gaps due to decreased lending by European banks in the region, according to US credit ratings agency, Moody’s.
“Although the economic reliance on European bank funding varies across the GCC, a decrease in lending from European banks to the region could lead to a short-term liquidity squeeze and, more likely, a longer-term structural shortfall,” says Khalid Howladar, vice-president and senior credit officer of Moody’s Financial Institutions Group.
The ongoing Eurozone debt crisis has led many European banks to pull back from non-core markets, including the GCC.
BNP Paribas, Credit Agricole, Royal Bank of Scotland (RBS) and Lloyds TSB have all implemented retrenchment strategies to “deleverage and build up capital buffers”, according to Howladar.
As of September 2011, European banks had active loans in the GCC worth $237bn.
There is an estimated $1.8 trillion worth of current and planned capital investments in the region over the next 15-years.
While the GCC’s governments, banks and central banks could boost liquidity in the short-term, the longer-term implications of a funding shortfall will be more difficult to solve. It could however, pave the way for Asian and some American banks to fill funding gaps and expand their interests in the region.
In the first nine-months of 2011, Asian bank financing activities accounted for 1.9 per cent of GCC gross domestic product (GDP) and American banks accounted for 2.3 per cent.
Saudi Arabia, Oman and Kuwait’s reliance on European bank funding remains low, accounting for about 10 per cent of GDP. Qatar, the UAE and Bahrain’s onshore and retail banks have a moderate vulnerability to European retrenchment, but Bahrain’s offshore and wholesale reliance is high, accounting for 200 per cent of GDP.
“Given the relatively low levels of government debt and relatively low cost, increased international sovereign borrowing is also a possibility, while the larger corporates are likely to seek funding directly from the bond markets,” says Howladar.