Some banking systems in Gulf Co-operation Council (GCC) countries could face funding gaps in the event of a sustained retrenchment by European banks from the region, said Moody’s Investors Service. Although the economic reliance on European bank funding varies across the GCC, Moody’s says that a decrease in lending from European banks to the region could lead to a short-term liquidity squeeze and, more likely, a longer-term structural shortfall. In order to meet this gap, local GCC banks would need to grow as well as adjust their own funding structures. Asian banks are also likely to be a growing source of foreign funding.
The European banks’ retrenchment from the region has been prompted by the on-going euro area debt crisis and their need to deleverage and build up capital buffers. Overall, European bank lending to the GCC region amounted to around US$237bn as of September 2011. Moody’s expects the likely deleveraging to result in a sustained reduction of lending to the GCC at a time when the region faces sizable funding requirements, with an estimated US$1.8 trillion of capital investments underway or planned over the next 15 years.
Moody’s believes that a short-term liquidity squeeze among GCC banks that would result from European banks’ retrenchment could in some cases be moderated through temporary liquidity support from governments, central banks as well as the GCC banks’ improved liquidity positions since the last ‘crunch’ in 2009.
However, GCC banks will also face longer-term structural funding shortfalls that would, in Moody’s view, be more difficult to address. The affected GCC countries would have to find new sources of funding to support future credit growth and economic development plans. Local banks would need to grow both in size and sophistication as well as undergo structural funding changes to meet this need.
Moody’s believes that Asian and, to a lesser extent, American banks could potentially fill some of the gap as their bank financing activities in the GCC represented only 1.9% and 2.3%, respectively, of the region’s GDP as of September 2011. Moreover, given the relatively low levels of government debt and relatively low cost, increased international sovereign borrowing is also a possibility, while the larger and more creditworthy corporates are likely to seek funding directly from the bond markets.
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