Lending in Gulf countries is expected to remain weak in the next period because of the banks' risk aversion, the International Monetary Fund (IMF) has said. Average real credit growth in the Middle East and North Africa (MENA) region plunged by nearly 17 percentage points in the aftermath of the global fiscal distress compared with the pre-crisis period of 2004-2008, the Washington-based Fund said in a working paper released this week. Credit slowdown was primarily due to slow deposit growth, which was exacerbated by an increase in net claims on the central bank or an increase in net claims on the rest of the world, IMF said. Moreover, net claims on the non-financial public sector declined in some cases, providing an offset to the decline in credit growth, it said. “The primary shock affecting most countries between the two periods was a marked slowdown of funding sources, particularly deposits, which severely constrained banks' ability to lend. With the exception of Jordan, the other countries experiencing credit slowdowns also saw deposit growth decline noticeably, by 12 percentage points on average,” the study said. “Thus, the contribution of deposits to the credit slowdown in the region was substantial, ranging from over four percentage points in Kuwait to almost 80 percentage points in Algeria.” In the six-nation Gulf Cooperation Council (GCC), the decline was as high as 22 percentage points. “Reviving credit in the MENA region remains a challenge... for those countries encountering their slowdown in the aftermath of a credit boom, history provides a sobering outlook for the next few years... a quick and robust rebound simply should not be expected,” the study said. The slowdown could also be based on “the balance sheet decomposition and the econometric analysis pointed to tightness in funding sources both domestic and external, which limited banks' ability to lend,” it said. It noted that conventional monetary policy had achieved some effectiveness in dampening the slowdown worldwide, adding that the current experience in MENA showed that unconventional policy had also been effective. “What remains most difficult is restoring banks' willingness to lend. Of course, as the economic recovery proceeds, the medium term outlook for bank lending should improve, and the supply of credit--along with its demand - should begin to recover. But lingering risk aversion, partly a product of the lack of transparency on the direction of financial regulation in the wake of the global financial crisis, will undoubtedly prove more difficult to overcome,” the IMF said. “Finally, some measure of credit slowdown may in fact be desirable for some time, as banks shake off the excesses of the past and possibly adapt their practices to a newer approach in which name lending is phased out in favor of modern, arms-length relationships.” Lending by banks in the GCC sharply slowed down in 2009, growing by only around 2.2 percent to $690.8 billion at the end of 2009, Moody's Investor Service said earlier in a separate study as against 33.4 percent growth recorded in 2008 and 34.9 percent in 2007. The study cited lower foreign borrowing as another factor for slackening credit, particularly in the UAE, one of the most open regional nations to global market. “Some countries, such as the UAE, experienced a marked decline in foreign borrowing, contributing 16 percentage points to the credit slowdown, although generally of a much smaller magnitude than that in deposits,” it said. “In other countries, such as Bahrain and Jordan, a drawdown of banks' foreign assets served to compensate for lost funding, thus dampening the credit slowdown, whereas in Saudi Arabia banks built up their foreign assets. Banks in Qatar were able to dampen the slowdown both by drawing down foreign assets and by borrowing abroad, the IMF study added. Noting the stress in the banking system and lethargic credit activity across the region, IMF Middle East and Central Asia Director Masood Ahmed said in another IMF report that “the main challenge for emerging markets in the Middle East will be to improve their competitiveness in order to raise growth and generate much-needed employment.”
