Is There a Silver Lining to Sluggish Credit Growth in the Gulf Countries?

IMF Blog, December 7, 2010

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Bank credit has been very slow to pickup in the six nations of the Gulf Cooperation Council (GCC).
Sluggish credit growth in the post-crisis period was observed broadly in the Middle East and Central Asia region and elsewhere; however, credit to the private sector remained barely growing in the GCC despite policy efforts to revive it.
The negative impact of weak credit growth on short-term economic activity may be limited, partly because of how the current situation arose.

Pre-crisis (five years before the crisis) the GCC countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the U.A.E.—experienced significant increases in credit, spurred by favorable macroeconomic conditions.
At its peak, credit growth exceeded 30 percent year-on-year.
The crisis reversed the situation; credit growth quickly fell and remained anemic during 2010.
Supply-side factors:
- Funding strains have been overcome, but higher risk aversion and stricter lending policies by banks have stifled credit growth.
- Banks in all GCC countries reconsidered lending practices that had sometimes relied on the reputation of the borrower (“name lending”) rather than credit analysis.
Demand-side factors:
- Demand for credit appears to have dropped with the decline in real estate prices, the slowdown in construction activities and non-oil growth, and corresponding weakness in investor and consumer confidence.

The adjustment in credit growth reflects a much needed correction from very high—perhaps unsustainable—rates of credit growth witnessed during the boom years.
There are signs of a modest rebound in credit growth in Bahrain, Oman and Saudi Arabia.
Banking system health is generally satisfactory:
- Capital adequacy ratios remain strong.
- IMF staff stress tests indicate banks are generally resilient to severe shocks.
- Significant progress in financial and corporate restructuring during 2010 helped shore up market confidence.
Underlying sectoral shifts:
- Overall banking sector credit growth masks trends: credit is moving away from volatile sectors (like real estate and household equity purchases) toward more stable sectors such as industry, trade, and services.
- Credit growth to industry, trade, and services has been healthy in a number of countries.
Alternative financing channels supplement bank credit:
- Some governments are guaranteeing foreign debt issued by government-related entities (Qatar and Abu Dhabi).
- Some governments are increasing their advance payments to contractors (Qatar and Saudi Arabia), lowering the need to seek bank credit for working capital.
- Specialized credit institutions, especially in Saudi Arabia, have significantly increased credit to domestic sectors.
Corporates in the GCC generally appear to have adequate cash balances and can finance operations from these cushions in the short term.

Fiscal and monetary policies have been geared to support recovery, but these supports are not open-ended; private sector activity and private sector credit growth will need to resume a more active role.
Demand-side policy:
- It is appropriate for country authorities to maintain fiscal stimulus—if there is fiscal space—and quantitative easing in 2010, and possibly into 2011.
- These policies should be revisited at signs of a pickup in inflation, which remains relatively muted.
Supply-side policy to improve credit supply:
- Strengthen corporate governance, financial disclosure, and transparency.
- Build banks’ capacity to assess credit risk.
- Develop alternative domestic sources of corporate funding, primarily domestic or regional debt markets, to diversify financing channels and improve standards for financial disclosure.

Source: Masood Ahmed, December 7, 2010