Financial Stability in a Higher-for-Longer Interest Rate Environment The Case of the Middle East and North Africa

IMF Working Papers, April 5, 2024

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This paper assesses the state and resilience of corporate and banking sectors in the Middle East and North Africa (MENA) in a “higher-for-longer” interest rate environment.
It uses granular micro data to conduct the first cross-country corporate and banking sector stress tests for the MENA region.
Authors: Adrian Alter, Bashar Hlayhel, Thomas Kroen, Thomas Piontek.
Date: April 5, 2024.
Length: 44 pages; Working Paper No. 2024/080; DOI: https://doi.org/10.5089/9798400270017.001; ISBN: 9798400270017.

Corporate sector debt at risk may increase from 12 to 30 percent of total corporate debt.
Banking systems would be broadly resilient in an adverse scenario combining higher interest rates, corporate sector stress, and rising liquidity pressures.
Tier-1 capital ratios decline by 2.3 percentage points in the Gulf Cooperation Council (GCC) countries in the adverse scenario.
Tier-1 capital ratios decline by 4.0 percentage points in non-GCC MENA countries in the adverse scenario.
In the cross-section of banks, banks with higher ex-ante vulnerabilities and state-owned banks suffer greater losses.
While capital losses are described as manageable, they could limit lending and adversely impact growth.

First cross-country corporate and banking sector stress tests for the MENA region using granular micro data.
Adverse scenario features:
- Higher interest rates (characterized as “higher-for-longer”).
- Corporate sector stress.
- Rising liquidity pressures.

Corporate sector exposure:
- Debt at risk increases sizably: from 12 to 30 percent of total corporate debt.
Banking sector impact:
- Broad resilience at the system level despite the adverse scenario.
- Heterogeneity across banks with pockets of vulnerabilities.
- State-owned banks and banks with higher ex-ante vulnerabilities face greater capital losses.
Potential macroeconomic feedback:
- Capital losses, although manageable, could constrain bank lending and thereby adversely impact growth.

Monitor corporate debt at risk closely given the potential rise from 12 to 30 percent of total corporate debt under stress.
Focus supervisory attention on banks with higher ex-ante vulnerabilities and state-owned banks that are likely to suffer larger losses.
Prepare contingency measures to mitigate lending constraints that could result from capital losses in adverse scenarios.
Strengthen liquidity monitoring and preparedness given the adverse scenario’s rising liquidity pressures.

Source: IMF Working Paper — Adrian Alter, Bashar Hlayhel, Thomas Kroen, and Thomas Piontek (April 5, 2024).