Favorable Operating Conditions for Banks in the Middle East Amid High Oil Prices and Interest Rates
In a recent webinar on the region’s banking sector, Fitch Ratings emphasized that high oil prices and interest rates are creating a favorable operating environment for banks across the Middle East, despite regional tensions.
Saudi Arabia’s Lending Growth Outpacing Regional Average
Saudi Arabia is expected to see lending growth double the regional average of 5-6 percent for the fiscal year 2024, driven by significant non-oil GDP growth. This presents new business opportunities for the Kingdom’s financial institutions and heightens competition for liquidity.
GCC Banking Sector Standing Out Globally
Fitch Ratings highlighted the Gulf Cooperation Council as a standout in the global banking landscape, benefiting from robust oil prices, elevated interest rates, substantial government expenditure, strong non-oil sector growth, and high investor and consumer confidence. These factors contribute to solid business conditions and healthy financial metrics for banks in most markets.
Record US Dollar Issuance and Peak of the Cycle
GCC financial institutions experienced record US dollar issuance in the first quarter of 2024 due to favorable pricing conditions, lending increases, refinancing needs, and strong investor demand. However, the credit rating agency noted that regional banks are currently at the peak of their cycle, with lower hydrocarbon prices posing a risk to financial operating environments across the Middle East.
Unique Challenges Faced by Different Countries
While the UAE has enjoyed stronger liquidity conditions, enhancing banks’ profitability metrics, Qatar’s banking sector notably relies on non-domestic funding, making it vulnerable to external political and economic shocks. Each country in the region faces its own set of challenges amidst the favorable operating conditions.
Thriving Banks in the GCC and Benefits of Rising Interest Rates
Fitch Ratings affirmed that banks in the GCC are thriving due to high oil prices, contained inflation, and rising interest rates. Financial institutions in the UAE are improving, and banks in Saudi Arabia, Qatar, and the UAE are well-positioned to benefit from rising interest rates due to quick loan book repricing and substantial low-cost funding.