GCC economic recovery will gather pace in 2022, say economists

But rising bad loans are a challenge for regional banks, especially in UAE and Qatar

Waheed Abbas

Published: Sun 16 Jan 2022, 1:05 PM

Economic recoveries in the Gulf region will continue to gather pace this year, driven by the oil sector as Opec+ continues to raise its oil production quota, say economists.

“GDP growth in the Gulf will be stronger than most expect this year on the back of rising oil output… With fiscal policy being kept tight and interest rates set to rise in line with the US Federal Reserve, there will be some headwinds to non-oil sector recoveries. Even so, we think that GDP growth in the Gulf will surpass consensus expectations,” said James Swanston, economist for the Mena region at Capital Economics.

It's expected that global oil supply will increase strongly this year on the back of Opec+ raising its output quota as well as some US supply coming back online.

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“Coming alongside only a modest improvement in global oil demand, this will probably push the oil market back into a surplus this year and put downwards pressure on prices. The result is that we expect Brent crude to drop from around $84 per barrel now to $60 per barrel by the end of the year,” said Swanston.

Brent price closed the week at $86.6 per barrel while WTI ended at $83.32.

Mohamed Damak, senior director of financial services at S&P, said Gulf Cooperation Council (GCC) economies are recovering from the Covid-19 pandemic, thanks to higher oil prices, still supportive government spending, and normalising non-oil activity.

James Swanston added that governments in the Gulf suggested that fiscal policy could be loosened if oil prices remained high. For example, Saudi Arabia hinted at a cut to the value-added tax (VAT) rate.

“But if oil prices fall as we expect, budget positions will deteriorate – we estimate that only Kuwait and Qatar would still record budget surpluses with oil at $60. The result is that the window for governments to loosen policy will close.”

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Bad loans are a challenge

However, rising bad loans will pose a major challenge to the regional banking sector, especially in the UAE and Qatar, causing credit conditions to tighten, said Capital Economics.

“Bad loans to rise, credit conditions to tighten in Mena banking sectors. So far, most banking sectors have come through the pandemic relatively unscathed. But as support measures are scaled back and interest rates rise in line with the US Federal Reserve, bad loans are likely to rise further and credit conditions will tighten,” added Swanston.

He pointed out that these risks are most acute in the UAE and Qatar.

“In the UAE, non-performing loans already stand at a record high of over eight per cent and, once the World Expo rolls out of Dubai in March, higher rates of overcapacity could eat into banks’ balance sheets. Similarly in Qatar, after the Football World Cup ends later in the year, the boom in private sector credit prior to the pandemic, which was largely directed to sectors that were most vulnerable to restrictions, such as real estate and tourism, could unwind poorly and see bad loans rise,” Swanston added.

Mohamed Damak of S&P said the non-performing loans (NPLs) ratio continued to increase, reaching 3.7 per cent on average on September 30, 2021, compared with 3.1 per cent at the end of 2019.

“We expect NPLs to continue increasing but not exceed 5 per cent on average,” Damak added.

-waheedabbas@khaleejtimes.com