The economies of the GCC region are grappling with increasing financial hurdles as escalating global trade conflicts, especially pertaining to US tariff threats, alongside a notable plunge in oil prices, affect market dynamics.
A recent report from S&P Global Ratings underscores the indirect, yet significant risks facing GCC economies, indicating that banks may encounter heightened market volatility and a decline in investor confidence.
Nevertheless, the financial institutions in the region seem equipped to endure these difficulties, supported by robust liquidity, profitability, and capitalization, according to credit analyst Mohamed Damak.
S&P has adjusted its forecast for oil prices to $65 per barrel by 2025, a decrease from earlier projections, which takes into account the intensifying trade conflicts and diminished global demand. This adjustment represents a notable 15% drop from mid-2024 Brent crude averages of $80 per barrel, endangering government revenues and expenditures in oil-reliant GCC economies.
According to the International Monetary Fund (IMF), Saudi Arabia, the UAE, Qatar, and other GCC states heavily depend on hydrocarbon exports, which contribute 60-80% of fiscal revenues regionally. A decline in oil prices could hinder public investment in initiatives like Saudi Arabia’s Vision 2030, negatively impacting growth in both the oil and non-oil sectors.
Prior to the escalation of tariffs, the IMF projected a 3.2% GDP growth rate for the GCC in 2025. However, analysts now raise concerns about a possible downgrade to 2.5% if oil prices further decline. A sustained price drop below $60 per barrel could worsen fiscal deficits, as Saudi Arabia’s breakeven price is estimated to be between $80 and $85 per barrel by Bloomberg Economics. Reduced government expenditures might also strain corporate profitability and consumer confidence, indirectly affecting banks’ asset quality.
Fitch Ratings recently reported that GCC exports to the US are largely comprised of hydrocarbons, which are tariff-exempt. Non-hydrocarbon exports, which face a 10% tariff (or 25% for aluminum and steel), make up a small portion of the overall trade, thereby shielding banks from direct tariff impacts. “The real danger, however, lies in falling oil prices and reduced global demand, which might lead to diminished government spending—a vital component of banking operations in the GCC,” Fitch noted.
Notwithstanding these challenges, banks across the GCC are entering this turbulent period from a strong position. By the end of 2024, the region’s 45 largest banks are expected to show an average nonperforming loan (NPL) ratio of 2.9%, significantly lower than the global banking average of 4.5%, according to World Bank figures. Provisions exceeding 150% of NPLs offer substantial safeguards against potential loan defaults. Additionally, the profitability of these banks remains robust, with a return on assets of 1.7%, and capitalization ratios are strong, boasting an average Tier 1 capital ratio of 17.2%, well above Basel III standards.
S&P’s stress tests reveal this resilience. In a moderate scenario, with a 30% increase in NPLs or a minimum NPL ratio of 5.0%, losses across 16 banks could reach $5.3 billion. In a more severe scenario, envisioning a 50% increase in NPLs or a 7.0% NPL ratio, projected losses across 26 banks could be $30.3 billion. These figures are still below the $60 billion in net income these banks are expected to generate in 2024, indicating that while profitability may be impacted, solvency should remain intact.
Damak mentions that banks’ liquidity and conservative investment strategies—predominantly comprising high-quality fixed-income assets, which represent 20-25% of total assets—further reduce risks.
Despite an overall positive outlook, certain vulnerabilities persist. Qatari banks, with considerable net external debt, are more susceptible to capital flight, although government backing, supported by Qatar’s $475 billion sovereign wealth fund, reduces systemic risks. Saudi banks, essential for financing the $1.25 trillion projects under Vision 2030, could encounter restrictions if access to capital markets tightens. Comparatively, UAE banks, holding the region’s strongest net external asset position, display the highest resilience against hypothetical outflows of 50% of nonresident interbank deposits and 30% of nonresident deposits.
Market fluctuations also present risks, particularly for banks engaged in capital markets or private-equity investments, although these operations account for a small portion of overall revenues. Margin lending, linked to declining asset valuations, raises additional concerns, but conservative collateral policies help limit potential losses. The anticipated 25-basis-point rate cut by the US Federal Reserve in 2025, which should be mirrored by GCC central banks, is expected to support banking margins. However, steeper rate cuts could compress profitability and hinder lending growth.
Historical trends suggest that GCC regulators may intervene to alleviate pressures. During the Covid-19 pandemic, measures such as loan payment deferrals assisted banks in managing uncertainty, and similar responses are expected if trade tensions escalate. The US’s recent announcement of a 90-day tariff halt for countries not including China adds an element of uncertainty, potentially further undermining business and consumer confidence. Should full tariff implementation occur, the economic impact could deepen, with Goldman Sachs projecting a 0.5% reduction in global GDP.