GCC faces indirect but significant risks from trade war
The GCC region faces mounting economic challenges as intensifying global trade tensions, particularly US tariff threats, and a sharp decline in oil prices ripple through its markets.
A recent S&P Global Ratings report highlights the indirect but significant risks to GCC economies, with banks likely to face increased market volatility and investor risk aversion.
However, the region's financial institutions appear well-positioned to weather the storm, bolstered by strong liquidity, profitability, and capitalisation, according to credit analyst Mohamed Damak.
S&P has revised its oil price forecast to $65 per barrel for 2025, down from previous estimates, reflecting heightened trade disputes and weaker global demand. This drop, a roughly 15 per cent decline from mid-2024 Brent crude averages of $80 per barrel, threatens government revenues and spending in oil-dependent GCC economies.
Saudi Arabia, the UAE, Qatar, and other GCC nations rely heavily on hydrocarbon exports, which account for 60-80 per cent of fiscal revenues across the region, as per International Monetary Fund (IMF) data. Lower oil prices could curb public investment in projects like Saudi Arabia's Vision 2030, dampening growth in both oil and non-oil sectors.
The IMF projected GCC GDP growth at 3.2 per cent for 2025 before the tariff escalation, but analysts now warn of a potential downgrade to 2.5 per cent if oil prices fall further. A sustained drop below $60 per barrel could exacerbate fiscal deficits, with Saudi Arabia's breakeven oil price estimated at $80-$85 per barrel by Bloomberg Economics. Reduced government spending may also pressure corporate earnings and consumer confidence, indirectly straining banks' asset quality.
In a recent report, Fitch Ratings noted that GCC exports to the US are predominantly hydrocarbons, which are exempt from tariffs. Non-hydrocarbon exports, facing a 10 per cent tariff (or 25 per cent for aluminium and steel), constitute a small fraction of trade, insulating banks from direct tariff-related shocks. 'However, the real threat lies in declining oil prices and reduced global demand, which could curb government spending — a critical driver of banking activity in the GCC. Lower oil prices and weaker global economic activity could lead to reduced government spending, which strongly affects bank operating conditions in most GCC countries,' Fitch stated.
Despite these headwinds, GCC banks are entering the turmoil from a position of strength. At year-end 2024, the region's top 45 banks reported an average nonperforming loan (NPL) ratio of 2.9 per cent, significantly below the global banking average of 4.5 per cent, according to World Bank data. Provisions exceeding 150 per cent of NPLs provide a substantial buffer against potential loan defaults. Additionally, banks' profitability remains solid, with a 1.7 per cent return on assets, and capitalization is robust, with an average Tier 1 capital ratio of 17.2 per cent, well above Basel III requirements.
S&P's stress tests underscore this resilience. In a moderate scenario, assuming a 30 per cent NPL increase or a minimum 5.0 per cent NPL ratio, 16 banks could face $5.3 billion in losses. A harsher scenario, with a 50 per cent NPL spike or a 7.0 per cent NPL ratio, projects $30.3 billion in losses across 26 banks. These figures remain below the $60 billion in net income generated by these banks in 2024, suggesting that profitability, not solvency, would take the hit.
Damak notes that banks' liquidity and conservative investment portfolios — dominated by high-quality fixed-income assets comprising 20-25% of total assets — further mitigate risks.
While the overall outlook is positive, vulnerabilities exist. Qatari banks, with significant net external debt, are more exposed to capital outflows, though government support, backed by Qatar's $475 billion sovereign wealth fund (per Sovereign Wealth Fund Institute), reduces systemic risks. Saudi banks, critical to financing Vision 2030's $1.25 trillion in projects, could face constraints if capital market access tightens. In contrast, UAE banks, with the region's strongest net external asset position, exhibit the highest resilience to hypothetical outflows of 50 per cent of nonresident interbank deposits and 30 per cent of nonresident deposits.
Market volatility also poses risks to banks with exposure to capital markets or private-equity investments, though these activities contribute modestly to revenues. Margin lending, tied to declining asset valuations, is another concern, but conservative collateral coverage limits potential losses. The US Federal Reserve's expected 25-basis-point rate cut in 2025, likely mirrored by GCC central banks, should support bank margins. However, sharper rate reductions could compress profitability and slow lending growth.
Historical precedent suggests GCC regulators may step in to ease pressures. During the Covid-19 crisis, forbearance measures like loan moratoriums helped banks navigate uncertainty, and similar interventions are anticipated if trade tensions escalate. The 90-day tariff pause for non-China countries, announced by the US, adds uncertainty, potentially undermining business and consumer confidence further. A full tariff implementation could deepen the economic fallout, with Goldman Sachs estimating a 0.5 per cent drag on global GDP.
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