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Subdued oil prices could weaken Gulf banks’ asset quality, cautions IIF

November 2015

November 16, 2015 | 17:35 | Dubai

The banking systems in the GCC are well positioned to cope with low oil prices in the next few years although liquidity conditions are tightening and rates are rising. However, prolonged low oil prices would weaken asset quality and profitability, Washington-based Institute of International Finance (IIF) has cautioned in its latest report.

It said the drop in oil prices will shift the aggregate current account of the MENA region’s oil exporters to a deficit of $82 billion in 2015, from a surplus of $233 billion in 2014. While most oil exporters have room to smooth the adjustment due to large buffers and the ability to borrow, that space will become increasingly limited, and oil exporters will need to move seriously toward fiscal consolidation to avoid a significant rundown of foreign assets, it said, adding that Non-oil growth in the GCC will weaken further to 2.6% in 2016, from 3.9% in 2015.

The oil price drop has not led to significant pressure on dollar-pegged currencies, reflecting confidence underpinned by large foreign currency assets. “We expect the authorities in the GCC to maintain their pegs. The flexibility of the labor market allows for improving competitiveness without the need for currency adjustment,” the report said.

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