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GCC Sovereign External Balance Sheets Remain Strong Despite Higher Banking Sector External Debt

This report does not constitute a rating action.

S&P Global Ratings expects Gulf Cooperation Council (GCC) countries will need to roll over more gross external debt in the coming years, with banks accounting for a large proportion as they support government plans to accelerate nonhydrocarbon economic activity.

We expect short-term external funding, mainly in the form of interbank and nonresident deposits (including intra-GCC liabilities), to account for an average of just over 70% of combined GCC banking sector external debt in 2023. While regulators and individual banks try to lengthen the tenor of these facilities, we expect GCC banking systems' external liability growth to push combined national rollover requirements to nearly $700 billion per year by 2025, with the United Arab Emirates (UAE; not rated) and Qatar (AA/Stable/A-1+) together comprising over half of the total. The $660 billion is equivalent to roughly 40% of estimated combined 2023 current account receipts and usable reserves, compared to the $250 billion in 2013, which was about 14% (Brent oil prices averaged $108 per barrel that year, compared to an average of close to $82 per barrel through 2023 so far).

In our calculations, we assume the majority of interbank and nonresident deposits are short term. We typically view this type of funding as less stable and more confidence-sensitive, raising rollover risks. However, most systems' external liquidity profiles are solid and in substantial net external asset positions. We note that the overall system may not be representative of the liquidity positions of individual banks. However, even in stressed situations, we expect most banking systems to meet external funding outflows under their own resources (see "What A Regional Escalation Could Mean For MENA Banks' External Funding," published Nov. 13, 2023, on RatingsDirect).

Furthermore, even as bank-driven external liabilities increase, we expect most regional governments will remain in a position to prevent and, if needed, cover any outflows. In this, their capacity to do so is linked to the underlying sovereign rating.

Banks' External Balance Sheet Growth Is Increasing National Rollover Requirements

Combined, we calculate GCC banking systems' external liabilities coming due within the year will total $465 billion in 2023, more than two-thirds of national requirements. We forecast this will increase toward $500 billion by 2025.

Chart 1


Where domestic deposit growth is slower than credit demand growth and capital markets are still in the early stages of development, the implementation of national transformation plans has pressed some issuers, including banks, to attract foreign funding.

Notably, banks' external balance sheets have not developed at the same pace across the board. The UAE and Qatar display by far the largest net external balance sheet expansion, which is mostly concentrated on specific banks, with government-backed national champions predominating. In Qatar, the build-up of external debt was mainly channeled to finance large domestic projects. In the UAE, it was predominantly recycled in high quality external assets.

However, the situation is evolving, and we expect the greatest increases in banking system external rollover requirements to be in the UAE and Saudi Arabia (unsolicited A/Stable/A-1). For the latter, we expect bouts of relatively tight domestic liquidity and the need to fund Vision 2030 projects to increase foreign-funded bank credit. We expect the UAE will continue attracting external deposits, alongside oil-driven domestic liabilities being placed abroad. On the other end of the scale, we expect Kuwait's (A+/Stable/A-1) banks to reduce their contribution to the country's overall external liabilities in the next few years, with public sector external debt increasing.

Strong Net External Positions Can Mitigate Tighter Liquidity

While banks are driving annual national financing needs, regional economies' net external positions are mostly still dominated by formidable, and expanding, fiscal reserves. Moderate to low levels of gross external debt characterize most--but not all--economic sectors. Apart from Qatar, banking systems are also in net external asset positions, implying an ability to cover outflows of external liabilities without government support in a stressed scenario, depending on the liquidity of the external asset.

Chart 2


However, we note the region's strong and supportive governments have a track record of extending financial aid to entities, or even entire industries including banking systems, before funding strains become problematic. This remains our working assumption for all GCC systems aside from Bahrain (B+/Positive/B) and Oman (BB+/Stable/B), due to their more modest levels of government assets.

We expect gross and net external asset growth to continue for most sovereigns, reflecting large hydrocarbon-revenue-driven external surpluses, which are invested abroad. Our oil price assumptions are steady at $85 per barrel over the next three years (see "S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025," published Nov. 7, 2023).

Most Governments Can Cover External Liability Outflows In Our Hypothetical Scenario

Using our hypothetical stress scenario from "What A Regional Escalation Could Mean For MENA Banks' External Funding", we compared stressed banking sector liability outflows to liquid government assets. We found all systems, apart from Bahrain's retail banking sector, had very comfortable coverage. In other words, government assets (which include our estimates of external sovereign wealth fund assets) account for multiple times the stressed liability outflows.

Chart 3


Regional banking systems are driving up national gross external debt and we expect related rollover risks to banks and sovereigns will naturally increase as a result. However, most regional governments have liquid assets well exceeding hypothetical outflows and, if ever required, we expect sovereign resources would be rapidly deployed to reinforce confidence. Additionally, our hypothetical stress test highlights regional banking systems are well positioned to meet these requirements without presenting a direct claim on fiscal resources.

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Primary Credit Analyst:Benjamin J Young, Dubai +971 4 372 7191;
Secondary Contacts:Mohamed Damak, Dubai + 97143727153;
Trevor Cullinan, Dubai + (971)43727113;
Dhruv Roy, Dubai + 971(0)56 413 3480;
Juili Pargaonkar, Dubai +971-4-372-7167;

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