Other than political hostility, gulf countries will have to deal with plummeting economic growth and slow economic recovery. Last year, as the pandemic struck, Gulf countries fell into a sharp recession.
The blow that hit the gulf countries was so hard that the oil prices recorded a negative growth. Indirectly, the oil crisis affected the vital non-oil economic sectors such as hospitality, commerce, and real estate, while lower oil prices hurt state revenues.
S&P Global Ratings recently stated that economic recovery from the coronavirus crisis in the oil-rich Gulf region will be slow which has the potential of weighing on the region’s banking sector.
Events like Dubai Expo—the largest event in the Arab world, all set to welcome 190 participating countries and visitors from around the globe– and the World Cup in Qatar next year, will provide some support to the economic recovery but growth will remain below historical levels. Additionally, revenues from the rebounding oil market will also provide the much-needed boost to the country’s finances and economic growth.
S&P in a report on Sunday stated that “Indeed, most countries will not return to 2019 nominal GDP before 2023, with an even longer road for Saudi Arabia,”. Recently, Moody’s too in its global survey stated that most of the economies will not return to the pre pandemic levels until 2022.
Moody’s prediction coupled with S&P’s projection shows the world economic recovery in dim light and gives a reason for concern to the state authorities. It is also to be noted that US’s $1.9 trillion stimulus package has the potential to unbalance or unravel the fragile economic growth around the world due to capital flight from the developing nations.
In gulf countries, recovery in sectors such as aviation, tourism, and real estate will take time as these sectors were worst hit by the pandemic, and while vaccination programmes are progressing, there are downside risks due to discovery of new mutations in the novel coronavirus.
According to PwC survey, health uncertainty or threat form corona virus poses a grave threat and challenge for the CEOs around the world.
Thus, these factors are bound to weigh on bank’s asset quality with non-performing ratio expected to increase. On the front of profitability, according to S&P, it is to be noted that some banks are expected to post losses in 2021.
S&P in its recent report, stated, “We think that the measures implemented by most central banks in the region are supportive of liquidity but do not remove or reduce credit risk from the balance sheet of banks (yet),”.
Cost of risk will remain elevated following a jump of 60% in 2020 as banks set aside provisions in preparation for more stress.