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IMF highlights of pitfalls of GCC Covid response

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Arabian Post Staff

Though the monetary and financial measures by the GCC banking authorities helped to offset negative balance sheet effects from virus containment measures, relaxed regulatory and prudential measures could have obscured deterioration in asset quality and led to higher risk-taking by banks on loans where risk classification was deferred or reduced, IMF said in a sectoral report.

The support measures helped to mitigate consequences of the twin shocks to the GCC economies, avoid distress among temporarily affected borrowers, and ensure liquidity in the banking system. As new infections have increased in 2021 and some public health measures have been re-introduced, GCC countries have extended many support measures into 2021, including moratoriums on loan repayments

The pandemic and collapse in oil prices in 2020 created a twin shock for the GCC economies. To combat and contain the pandemic, countries imposed public health measures including closure of nonessential businesses, social distancing requirements, and border restrictions, which were eased later in 2020. These measures helped to contain the health crisis, but they negatively affected economic activity, resulting in recessions, with non-oil real GDP contracting by about 4 percent in 2020.

Annual credit growth in contact-intensive trade and services sectors also decelerated from an average of 15 percent in 2018–19 to 8 percent in 2020. Overall credit growth in the GCC was about 6 percent in 2020 which was in line with the credit growth in Ems.

GCC banking systems remain well-capitalized, but profitability and asset quality have declined. Systemwide capital levels remained strong in 2020, above 17 percent in all GCC countries and increasing in all countries except Bahrain as several banks issued additional capital bonds. However, the economic recession led to a decline in asset quality and profitability in the majority of GCC banking systems.

NPLs increased in all GCC countries, with varying degrees, except Bahrain. Return on assets declined, falling the least in Qatar by 0.2 percentage points and the most in the UAE by 0.9 percentage points. Net income of the largest five banks in each country declined by 30 percent from a year ago, reflecting higher provisions for loan losses which increased by about 70 percent in 2020 as banks building their buffers against potential deterioration in asset quality and withdrawal of policy support measures. The systemwide provisions coverage changes in the GCC countries are heterogeneous as in a selection of Ems.

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