what are the impacts of the crash of oil prices on gcc economies and financial services
Post on 21-Feb-2017
162 Views
Preview:
TRANSCRIPT
Naim Tliba
2016, a year of challenges for countries of Gulf Cooperation Council
February 15, 2016 Naïm TLIBA
What are the impacts of the crash of oil prices on GCC economies and financial services
This document and its content are strictly personal and result from a personal analysis and data mined from sources mentioned in the document
Naim Tliba 2 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
2016, the crossroad for countries of Gulf Cooperation Council Assessment and outlook of GCC economics and financial markets
This document aims to give an overview on : - Outlook for the oil price for GCC countries over the next 12 months - Impact this may have on the domestic economies in the GCC - Impact on financial services sector and banks' focus in the medium and long term - Policy options for a GCC Central Bank to counter negative impact on GDP
Countries of Gulf Cooperation Council surprised the whole world by increasing their oil production and consequently sacrificing their whole economic model since almost 2 years.
Naim Tliba 3 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Agenda
Impacts on GCC economies and growth opportunities • How oil prices impact GCC GDPs and what are the solutions ? 2
GCC • Assessment in 2016 after the drop of oil prices: Where do we stand? • Outlook of oil prices
1
Impacts on financial services sector and opportunities • Focus on KSA Banking market • Obstacles and impacts for GCC Banking market • New source of growth can come from financial services • GCC Financial Markets – A strong potential at the crossroad of Asia and Europe
3
What are the potential leverages for Central banks to counter negative impacts on GDP? • Potential answers of GCC central banks… and governments • But all actions within GCC must take into consideration the global perspectives • Beware: Debt and Liquidity are not the (only) answer • How can central banks manage Financial stability risks ?
4
Appendices A
Naim Tliba 4 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
GCC - Assessment in 2016 after the drop of oil prices: Where do we stand?
Oil prices dropped from $110 a barrel in july 2014 to $30 a barrel in January 2016 as OPEC decided to protect its market share by increasing its production in order to anticipate the return of Iran in the game and the growing competition of Schist oil. However, macroeconomic context has complicated 1. Weak global growth impacted the oil prices by maintaining the demand at the same level 2. Important concerns regarding emerging markets such as Brazil and especially China who knew successive crashes despite central bank actions on currency 3. Increase of rates by the FED may create a distortion for GCC economy
• Declining of oil revenues generated important current account imbalances for Gulf countries (Oil represented up to 80% of exportations for some countries)
• GCC countries will see their current account balance dwindle from a surplus of 15 % of GDP in 2014 to a deficit of 0,25 % in 2015
• Non-oil growth is projected at below 4 percent for both 2015 and 2016, reduced of 1,75 percent compared with 2014, begins to have effects, notably in Saudi Arabia and the United Arab Emirates
• Oman and Bahrain have less than two years of FX reserves to cover their budget deficit if they continue at this rate [assuming oil prices of around $40 a barrel]
• The less impacted country is UAE which have the more diversified its economy
Oil prices, at a glance Key take-aways
Bloomberg Screenshot – WTI Light Crude
Naim Tliba 5 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
GCC - Outlook for the oil prices
• IMF don’t predict an upswing of oil prices in 2016
• World bank lowered its forecast for oil price from $51 to $37, expect even a decrease of 27% in 2016 and do not expect a rebound
• SocGen’s predictions remains to neutral
• According to the BofA analysis, Kuwait, Qatar and UAE have sufficient sovereign wealth funds and central bank reserves to maintain spending at current levels with oil at $30 a barrel while Oman and Bahrain would run out of money in 2 to 3 years.
Key messages
“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, Senior Economist at World Bank and lead author of the Commodities Markets Outlook.
Naim Tliba 6 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
How oil prices impact GCC GDPs and what are the solutions ? Crash of oil price foster to emergence a new paradigm
• Given the lack of diversification, the GDP will automatically drop for most of Gulf Countries
• Following a record budget deficit in 2015, Saudi government is about to take a series of measures in order to adapt public finances accordingly, as they are not expecting an important increase of oil prices in the upcoming years, despite tentative of talks with Russia to a raise of prices
• More widely, GCC have few flexibility and will see their public finance continue to deteriorate in the mid-term
• The decline of public and external net assets remains sustainable even with oil price assumptions conservative
• Governments will likely: • increase their efforts regarding structural
reforms to limit dependencies on oil and to diversify the economy
• adopt a new fiscal policy • cancel or delay largest investments,
particularly regarding infrastructure projects
Selected economic indicators (IMF)
KSA Economic forecasts (Tradingeconomics.com)
Key outcomes
Naim Tliba 7 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Impact of low oil prices on GCC financial services – focus on Banks (1/2) Forecast of KSA banking market
§ 2016 Forecast are not optimistic and based on a 50$ a barrel § Decrease of deposits by governments, and mechanically decrease of corporates and individual deposits § Decrease of loans and refinancing existing customers due to decrease of deposits, § Increase borrowing costs
§ Lending growth can run ahead of the expansion in banking assets and deposits across the forecast period: however the potential drying-up of liquidity in the market may create a credit-crunch effect that will slow-down the lending business
Naim Tliba 8 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Impact of low oil prices on GCC financial services – focus on Banks (2/2) 2016 context: Low oil prices (below $50)
• Loss of deposit growth from oil revenues à governments drawing down on their savings
• Short-term pressures on the money market, leading to spurts in overnight lending rates
• Government borrowing continue to spiral upwards, which may result on supplanting the private sector and deprive them of credit facilities
• US hiking interest rates, rise in government borrowing will make matters difficult for the private sector to grow. Reduced opportunities to lend amid an environment of increasing short-term rates would constrain net interest margins, and subsequently lower profitability for GCC banks.
• Impact on banks are important and will affect spending by banks to face:
• International regulation tsunami
• Digitalization of banking and financial services
• Liquidity shortage will impact the cost of capital, which will spike.
• Wider spreads demanded by bond investors implies a significant deterioration of liquidity in the banking sector, which adversely affects the loan market
• These 5 factors combined with a limited international interests create too many uncertainties for allowing rational forecasts.
• Without such forecasts , investors find refuge only in government instruments, which increase the demand for sovereign issues at the expense of corporate issues.
Decrease of Government deposits
Rise of O/N Money Market rates
Rise of government borrowings
Rise of US interest rates
Rise of cost of capital
1
2
3
4
5
• Corporates risk to suffocate by the lack of credit to face the new market trends
• Banks will meet difficulties to support their corporate clients and will see their deposits decreasing
• Given these facts and the economic environment, perspective for GCC banks will be strongly impacted in the upcoming years
• We may see consolidation between GCC banks to develop synergies and reduce costs (Opportunities fpr M&A business)
Obstacles raised for GCC banks Impacts What we can expect
• Corporate issues will have to face withdrawals following a potential liquidity dried up in the primary markets.
Naim Tliba 9 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
New source of growth can come from financial services industry Becoming among the Top 5 of Financial Markets requires to adopt rules of Global Market
Open capital of
state-owned companies
Important capabilities for Total or partial IPOs • Airports • Airline companies • Banks • Real estate • etc
Create a competitive
market
GCC markets should aim to attract further foreign investments and revamp the market according to:
• International regulations, especially those impacting so that international investors can be confident by participating and investing in the GCC.(EMIR/DFA is a key example among others), by adapting its market infrastructure: CSDs, CCPs, connectivity to trading venues and partnership with international marketplaces
• Market best practices in terms of efficiency allowing an easy access to the market with a legal and framework protections.
GCC remains a relatively closed market where most companies are state-owned. Investors must be given reasons to invest in GCC, and these are 2 potential solutions that could help the country
• Become the “market of the middle” between Asia and Europe
• Develop a major issuance market: • Bonds, EMTNs, ETFs, Funds • Develop partnership with international marketplaces
Rationales Opportunities
• Attract foreign investments and foreign financial intermediaries
• Consolidation of banking sector (it is also an opportunity) to face tomorrow’s challenges
Attract innovators,
entrepreneurs and investors
• Develop Structures for attracting and supporting entrepreneurs and innovation
• Implement legal structures for capital investment and Private equity
• Develop a strong private-equity marketplace
1
2
3
Naim Tliba 10 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
GCC Financial Markets – A strong potential at the crossroad of Asia and Europe How Middle-east can finally be the market of the middle between Europe and Asia
Incoming investment
Outgoing Investments
Major Markets
Other Key Markets
Emerging markets
Legend
1. Attract foreign capital in GCC • Direct investment in GCC markets • Investment through international places (multi-
listing opportunities) 2. Gain deposits beyond the GCC
• H+2 to H+4 from Europe and H-5 from Tokyo à GCC is ideally located to become a 4th financial market Zone
H+5
H+4
H-3
H-4
Gain investments & deposits Become the place of the middle and fill the blank
Naim Tliba 11 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Potential answers of GCC central banks… and governments (1/2) 4 options: Expansionary monetary policy or new regime?
• GCC currencies peg to the US dollar implies main policy rate must roughly track movements in US interest rates, even though this could lead to economic distortions.
• Concerns are being raised by the
US monetary tightening, à Saudi Central Bank (SAMA) followed the FED and raised rates by 25 basis points in December 2015 despite the sharp slowdown of the Saudi economy.
• According to analysts, GCC rates will rise as oil exports are denominated in US currency, and US rate rises only expected to be gradual. As of today it seems difficult to forecast any adjustment or de-peg of GCC currencies.
1 Decrease Central bank deposit rates
§ Purchase of government bonds through open market result in order to put down pressure on interest rates, resulting in increase of money supply and promote investment.
§ Banks will have more cash to inject in local economy by increasing volume of loans , especially to develop business (especially entrepreneurship)
2 Decrease reserve requirements
• Highly difficult to decrease directors rates due to the peg to US Dollars
3 Purchase government debt
§ This will allow banks to borrow money directly from the central bank and avoid potential liquidity issues in the money market.
§ As a result banks will be able to lend at an attractive rate to their clients and may help to encourage investments.
§ It aims to reduce the assets (HQLA) held by the banks at the central banks (% of deposit liabilities), and allowing them to inject more money in the economy
A quick recap of the situation
A. Devaluation of local currencies B. Cut the Peg to US Dollar and adoption of
floating exchange rate C. Speed-up the implementation of the single
currency market within GCC
4 Change in FX Regime
Complexity
• These 3 options require deep economical reform and diversification
Feasible Highly Complex
Appreciation of complexity
• A direct leverage on the multiplier effect
• It seems possible as long as key ratios required by Basel 3 allow to limit the risk
• Central banks will have to increase their balance sheet
• This must be in line with the economic policy
• However “Debt” must not be the single economic tool and must be used with caution
4 options between central banker’s hands
Naim Tliba 12 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Potential answers of GCC central banks… and governments (2/2) Coordination between GCC Central Banks and Governments is not an option
1 Central bank coordination with governments
2 Debt
§ Coordination of governments and central banks, especially by financing government debt
§ Defining a medium-term debt strategy matched by explicit evaluations of tensions having potential consequences on the cost or the negotiability of the debt portfolio, especially with a responsiveness to oil prices
§ Issuance of government bonds (both conventional and islamic) allowing banks to get new investment opportunities
§ Take advantage of international structures for bond issuances in other currencies
3 Coordination of GCC Central banks
§ As the different countries are economically interdependent and even aiming to adopt a single currency, GCC Central banks will have to coordinate their actions to avoid imbalances
3 Key actions that GCC would probably manage The currency policy remain a tough decision to make… or not
4 Start a new currency policy § The most logical economic choice for GCC currency policy would not be
devaluation, but rather floating exchange rate regime, a currency linked to a basket of currencies, or a basket of currencies including oil.
§ Allowing more currency flexibility and a higher negative correlation to oil should provide growth support when oil prices are low
§ Policy should be aligned with the GCC project to have a single currency
Legend Risky
Cautiously
Mandatory
§ Governments must initiate actions to support central bank decisions
§ Debt showed its limit through European countries that run into debt that is resurging today.
§ Issuing debt must be done in a clearly identified strategy
§ No country can act apart without impacting other countries
§ Adopting a floating exchange rate regime can be relevant only if dependency to oil is massively reduced
Relevant actions driven by GCC Appreciation
Naim Tliba 13 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
But all actions within GCC must take into consideration the global perspectives 3 reasons to look around before and while acting to adopt a dynamic and relevant policy
• Crash of the 2nd economic market
• Systemic banks have not totally recovered from 2008 and 2011 crisis and are knowing a key turn in their strategy in 2016
• Chinese markets lost 20% of its market capitalization in 2016
• China used more than Bn$ 800 of its FX reserves (on 4,000) to support the Yuan
• China Debt is above Bn$ 20,000.00 (McKinsey study)
• Deutsche Bank appears weaker than ever following a loss of Bn€ 6.8, which is 2 times larger than in 2008
• Credit Suisse published a loss of Bn € 3,8 • Societe Generale perspectives of 2016 are clearly
engaged due to its exposition to fragile markets (Russia and eastern europe)
• 5 Central Banks are now applying negative rate to weaken their currency and re-boost inflation:
• Euro-zone “ECB” • Sweden and Denmark had to follow ECB • Switzerland • Japan
• US FED is now blind and no decision can be made regarding a possible increase of rates initially planned by J. Yellen
China raise more than one fear
Systemic banks are shaking
Currency War already started
1
2
3• Currency wars is
damageable for all countries and is increasing uncertainties for the upcoming months
• The world could enter into a new form of crisis where the China would need World Markets to initiate a bailout where FED and ECB , IMF would have to buy Chinese debt
• Central Bank are under pressure: Economists and governments are now called to setup a new world agreement on currencies like Bretton Woods or Plaza to answer to the new economic order
• Equity market is bearish and Asset managers are now selling their equities massively
• Debt and precious commodities (Gold) are the safest havens
Naim Tliba 14 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
Beware: Debt and Liquidity are not the (only) answer Why the usage of debt must be conditioned by the application of a strategic plan to attract capital
Lessons from Europe on debt Lessons from Britain on capital
• European debt crisis demonstrated that debt and liquidity are addictive and have a boomerang effect if they are not supported by an effective economic policy
• Despite debt provides an immediate return of 6% while capital cost 33%, it is harder to address debt in a deflationist environment
• Countries whose economic policy are turned to the debt are less resilient than balanced countries
• UK has been able to rebound faster and in a more diversified way than the rest of Europe
• UK created a specific environment where the conditions are ideal for entrepreneurs: • London became the
European capital of “Fintech”
• Beyond Finance, the British entrepreneur fabric is attracting capital and investments through investment capital and private equity firms
• Investments in capital has demonstrated its efficiency in facilitating innovation and entrepreneurship.
• Such economic policies are not only resilient to crisis, but their recovery is also faster
• Attract capital and investments locally are a key, and this can be made through
• Innovation and entrepreneurs • Investors in capital investments, and
private equity • A competitive capital market
• Banks should access to liquidity to provide financing and credit
• Accordingly, Central Banks can take and apply the more relevant measures to help banks doing so
• A brutal disengagement of government investments is dangerous: Without initial investments in infrastructure, there will be no confidence from foreign investors in the local market.
• Debts contracted by the government must serve essentially to help the development of non-oil activity, and not financing the debt and its interests
Naim Tliba 15 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
How can central banks manage Financial stability risks ? Wish the best and anticipate the worse: Reinforcing the existing controls due to the economic context
Reduce financial stability risks implies strong macroeconomic policies and increased supervisory vigilance • Improved supervision of
banks and insurances
• Strengthening of prudential measures
• Readiness to deal with bank distress
• Readiness for calling shareholders for increase in banks capital
1 Credit Risks
2 Liquidity risks
3 Solvency risks
4 Stress testing
§ Monitor bank’s exposition to bank counterparties, client counterparties and issuers of securities, countries
§ Monitor bank’s investment portfolio (and the adequacy of Liquidity buffer)
§ Monitor insurers solvency
§ Conduct stress testing of market actors based on scenario customized to current GCC market
Naim Tliba
Appendices GCC
Gulf Cooperation Countries Oil Central Banks Saudi
UAE Qatar Peg Currency Crash Liquidity Risk
Credit Risk Systemic Bank Banking
Financial Services Financial Markets Capital Markets Post-Trade Issuing
Custodian CSD Prime Brokerage Trading Regulation
Regulatory Middle-east Riyadh Dubai Doha
Abu Dhabi Oman Quantitative Easing FX Regime Reserve requirements
Tadawul Dubai Financial Market Abu Dhabi Securities Exchange NASDAQ EURONEXT
LSE NYSE LSE ICE Stock exchange
#GCC #GulfCooperationCountries #Oil #CentralBanks #Saudi
#UAE #Qatar #Peg #Currency #Crash #LiquidityRisk
#CreditRisk #Systemic #Bank #Banking
#FinancialServices #Financia Markets #Capital Markets #PostTrade #Issuing
#Custodian #CSD #PrimeBrokerage #Trading #Regulation
#Regulatory #Middle-east #Riyadh #Dubai #Doha
#Abu Dhabi #Oman #Quantitative Easing #FX Regime #Reserve requirements
#Tadawul #Dubai Financial Market #Abu Dhabi Securities Exchange #NASDAQ #EURONEXT
#LSE #NYSE #ICE #Stockeschange
Naim Tliba 17 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
GCC bank ranking Source: Gulfnews
NK ASSETS NETPROFIT($000) RANK COUNTRY
QatarNa'onalBank 133,614,471 2,889,461 1 Qatar
Na'onalCommercialBank 115,967,489 2,344,851 2 KSA
Na'onalBankofAbuDhabi 102,395,511 1,518,886 3 UAE
EmiratesNBD 98,835,010 1,399,137 4 UAE
AlRajhiBankingCorpora'on 82,056,415 1,822,979 5 KSA
Na'onalBankofKuwait 74,323,098 933,653 6 Kuwait
KuwaitFinanceHouse 58,621,244 546,144 7 Kuwait
SambaFinancialGroup 57,973,021 1,334,687 8 KSA
FirstGulfBank 57,764,362 1,553,236 9 UAE
RiyadBank 57,223,811 1,160,642 10 KSA
AbuDhabiCommercialBank 55,545,729 1,143,856 11 UAE
BanqueSaudiFransi 50,340,507 937,691 12 KSA
SaudiBri'shBank 50,029,138 1,137,616 13 KSA
ArabNa'onalBank 43,911,561 767,241 14 KSA
DubaiIslamicBank 33,729,202 763,334 15 UAE
AhliUnitedBank 33,444,888 531,254 16 Bahrain
CommercialBankofQatar 31,772,623 533,026 17 Qatar
AbuDhabiIslamicBank 30,466,595 476,638 18 UAE
ArabBankingCorpora'on 29,356,000 318 19 Bahrain
MashreqBank 28,815,758 676,904 20 UAE
BurganBank 26,446,308 248,055 21 Kuwait
QatarIslamicBank 26,402,875 458,393 22 Qatar
SaudiHollandiBank 25,765,125 485,576 23 KSA
UnionNa'onalBank 25,446,023 550,102 24 UAE
BankMuscat 25,268,333 423,966 25 Oman
NK ASSETS NETPROFIT($000) RANK COUNTRY
SaudiInvestmentBank 24,967,051 383,061 26 KSA
AlBarakaBankGroup 23,463,589 274,767 27 Bahrain
AlRayan 22,003,920 554,173 28 Qatar
AlinmaBank 21,563,162 337,182 29 KSA
GulfInterna'onalBank 21,300,200 85,6 30 Bahrain
DohaBank 20,746,583 373,258 31 Qatar
GulfBank 18,187,890 120,982 32 Kuwait
BankAlJazira 17,747,714 152,658 33 KSA
CommercialBankofKuwait 14,373,105 167,594 34 Kuwait
AlKhalijiCommercialBank 14,077,493 154,645 35 Qatar
CommercialBankofDubai 12,773,551 327,323 36 UAE
BankAlBilad 12,061,310 230,408 37 KSA
AlAliBankKuwait 11,937,888 128,284 38 Kuwait
QatarInterna'onalIslamicBank 10,548,751 226,873 39 Qatar
BarwaBank 10,059,032 176,191 40 Qatar
RAKBANK 9,482,754 396,026 41 UAE
BankofBahrainandKuwait 9,311,092 133,794 42 Bahrain
BoubyanBank 9,034,208 97,253 43 Kuwait
BankDhofar 8,296,425 105,073 44 Oman
IthmaarBank 7,860,904 -8,847 45 Bahrain
Na'onalBankofOman 7,730,107 130,566 46 Oman
Na'onalBankofBahrain 7,283,130 142,12 47 Bahrain
UnitedArabBank 6,999,533 164,827 48 UAE
BankofSharjah 6,821,231 77,843 49 UAE
SharjahIslamicBank 6,650,072 80,304 50 UAE
Naim Tliba 18 What are the impacts of the crash of oil prices on GCC economies and financial services 15/02/2016
GCC Central Bank forecast Source: Tradingeconomics.com
UAE central bank forecast
KSA central bank forecast
Kuwait central bank forecast
Qatar central bank forecast
top related