US-based Moody’s Investors Services has put the Omani banking system on a negative outlook, due to a weaker operating environment and declining government ability to support banks.

Oman’s GDP growth is expected to slow to 2.5 per cent in 2016, as government spending falls.

This will affect loan growth, which will slow from double figures to 7 – 9 per cent in 2016, according to Moody’s projections.

Asset quality will also decline, with the problem loan ratio rising from 2.3 per cent in 2014 to 3 per cent over the next 12 months. Government related entity (GREs) delaying contractor payments will be a driver of this trend.

Lending is also concentrated in the real estate and construction sectors, which are more volatile and already had a 3.4 per cent problem loan ration in 2014.

However, banks have adequate buffers to manage the slowdown, according to Moody’s.

Government and GRE deposits have been carefully maintained at 35 per cent of total deposits. However, inflows will slow, meaning Omani banks will have to rely more on expensive market funding.

Increased government borrowing, could also crowd out the private sector and run counter to efforts to build it up.

Moody’s predicts the Islamic finance sector will continue its rapid growth, increasing from 6.3 per cent of assets in mid-2015 to 10 – 12 per cent in the next two years.

In Kuwait, Moody’s expects the government to continue to spend on infrastructure to support the economy, as well as having the assets to support banks in trouble. The outlook therefore remains stable, although growth expectations are similar.

Credit growth should continue at 8 per cent a year, while problem loans fell from 4 per cent at the end of 2014 to 3 per cent for 2015 and 2016.

High government spending will push GDP growth up to 3 per cent in 2015 and 2016, and 4 per cent after that.

The main challenge facing Kuwaiti banks is competition for new loans and deposits, which will keep margins low.