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A Sharp Increase In Geopolitical Risk Could See GCC Banks Require Sovereign Support

Monday, July 8, 2019/ Editor -  

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Key Takeaways
 
- GCC banking systems should be able to absorb foreign funding outflows without government support in a hypothetical modest stress scenario.
 
- However, in our more severe hypothetical stress scenario, we see potential funding gaps in all banking systems aside from Kuwait's, with Qatari and Bahraini banks requiring the most support as a proportion of GDP.
 
- Most GCC governments possess sufficient liquid assets and foreign exchange reserves to support banks under our hypothetical stress scenarios, but such support could weigh on some sovereigns' fiscal and external profiles.
 
July 08, 2019 - Dubai, UAE
 
Tensions between the U.S. and Iran have increased, but S&P Global Ratings has not changed any bank or sovereign ratings or outlooks in the Gulf Cooperation Council (GCC). This is because, in our base case, we do not expect direct military conflict between the two countries or their regional allies. Furthermore, we expect the Strait of Hormuz to remain open to the global oil trade. For more details about these assumptions see Appendix and 'Credit FAQ: How U.S.-Iran Tensions Might Affect Gulf Sovereign Ratings,' published June 11, 2019, on RatingsDirect.
 
If the strait were blocked (even for a few days), or if there is a significant escalation in tensions between allies of either the U.S. or Iran that could affect Gulf countries, the potential related loss of investor confidence could weigh on the ratings of GCC banks and sovereigns.
 
Against this backdrop, investors are asking us about the potential implications for banks and sovereigns in the GCC. Here, we respond to such questions and present some bank-funding-related hypothetical stress test scenarios. We exclude potential second-round effects on banks' asset quality or capitalization. Nevertheless, we think these could be significant if tensions were to increase materially.

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