KUWAIT CITY: Liquidity conditions in the GCC banking sector is gradually improving but pressures will continue to persist during 2017, despite some visible strengthening of oil prices following supply cut deals among oil producers, according to analysts.
Liquidity has stabilised but continues to apply pressure on GCC banks, and may still deteriorate in some markets. Due to falling oil revenue, government deposits in banks have either been shrinking or at least not growing as fast as in the recent past.
The main consequence of tighter liquidity can be seen in higher funding costs and lower loan growth. Customer deposits form the bulk of GCC bank funding. Interbank rates have gone up significantly in all GCC countries.
“We believe this (interbank rates) increase has stabilised, but the higher costs are the new normal, after a period of exceptionally high liquidity. The liquidity tightening will be partially reduced by lower demand for loans as GDP growth slows, rebalancing supply and demand,” said Redmond Ramsdale, Senior Director, Financial Institutions at Fitch Ratings.
