Rising oil prices over the past two years have led to improved liquidity conditions for banks in the Middle East, but is that relatively benign environment coming to an end?
It has not been a good year for stock market listings in the Middle East. In the first half of 2018, there were only 13 flotations, raising a total of $1.3bn in capital, according to consultancy firm EY, and there has not been much activity since then. Most of the market debuts were by real estate investment trusts (reits), and if these are excluded, only five companies came to market, raising a total of $149m.
Across the GCC, banks are engaged in an ongoing struggle to recapture the profitability that was once their virtual birthright. The days of regular annual double-digit percentage increases in net income are distant, despite a steady increase in oil prices and revenues.
The GCC may be divided on many issues these days, but one thing that appears to be common to many of the economies is a trend for banking consolidation.
Inward investment into Saudi Arabia collapsed last year, according to newly published data from the UN Conference on Trade and Development (UNCTAD), raising serious questions about the prospects for the economic reform agenda being pursued by Crown Prince Mohammed bin Salman (MBS).
Bolstered by Saudi Arabia’s record-breaking $17.5bn bond issue in October, Middle Eastern sovereign debt issuance reached $104.1bn in 2017. That was 34 per cent more than the previous year, and the highest on record.
With global economic growth picking up and concerns about rising inflation, the chances of interest rates increasing this year appears relatively high. In particular, there is speculation the US Federal Reserve could increase interest rates on the dollar as soon as March.
Perhaps more than anything, Qatar’s government must be thankful for the huge savings it had built up before this year. The economy was faced with a potentially destabilising shock in early June, when Bahrain, Egypt, Saudi Arabia and the UAE imposed their boycott. Imports fell sharply and customers withdrew bank deposits in large volumes. However, Doha’s willingness to reach into its own pockets meant nerves were soothed and banks stayed liquid.
In terms of capital markets activity, 2017 was a strong year in the Middle East that saw a surge in initial public offerings (IPOs), coupled with a steady stream of sovereign debt issuances.
One of the most important pillars of Saudi Arabia’s economic reform programme is the push for more private sector investment and, as part of that, the privatisation of some key state assets. Privatisations are complex affairs and there are legitimate questions as to whether Riyadh will be able to sell everything on its list. But if it is successful, it will offer encouragement to other governments keen to follow suit.