GCC firms struggle to get finance as region grapples with low oil prices

Companies in the GCC are struggling to gain access to finance for growth and expansion as the region grapples with an environment of low oil prices, according to a new report by accounting body ICAEW.

The report claimed that bank lending, along with the overall money supply in GCC economies, has gradually slowed over the past couple of years and also begun to contract in some countries.

Brent crude oil prices are forecast to average $44 per barrel in 2016, edging up to $50 per barrel in 2017. However, this is still below breakeven oil prices for government budgets, which consequently remain in deficit across most of the region.

GDP across the Middle East region is expected to grow by 2.4 per cent this year and 2.8 per cent next year, compared to 2.8 per cent in 2015.

Low oil prices have tightened financial conditions across the region in three specific channels, the report stated.

Firstly, lower oil revenues mean governments have less funding to support investment and development.

Total government spending is reported to have fallen by 15-20 per cent in Saudi Arabia, Kuwait, Oman and Bahrain between 2014 and 2016, with further expenditure restraint expected in the coming years.

Secondly, reduced revenues also mean a lower stock of government deposits in the local banking system, and therefore a shortfall in cash to lend to households and firms.

Lastly, the “damage” that lower oil prices have inflicted on public finances and credit ratings mean ongoing expenditure restraint is crucial, the report warned.

Government debt stocks remain low by international standards, but with deficits at double-digits of GDP, they are rising steeply.

This has led ratings agencies to downgrade Saudi Arabia, Oman and Bahrain in the first half of 2016.

Local banks, which hold government debt as assets, have in turn had to increase capital buffers, restricting their ability to lend.

The report urged GCC governments to step up efforts to improve the financing environment, warning that access to finance will be a key driver for economic diversification across the region.

Tom Rogers, ICAEW economic advisor and associate director of Oxford Economics’ Macroeconomic Consultancy said: “A tighter financing environment may mean GCC firms struggle to get the finance they need in order to invest or expand, or if they do get it, it will be at higher interest rates.

“However, there are ways in which this challenge can be overcome. For example, governments should try and prioritise growth-enhancing policy areas when rationalising public spending, improve the environment for inward foreign investment, and in some cases boost competition within the banking sector.”

If regional governments attract more foreign direct investment, this would have multiple benefits including access to foreign liquidity, transferring technology and supporting exchange rate pegs, the report stated.

Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia said: “Attracting FDI will not only provide an additional source of financing, it will also create healthy competition that should ultimately benefit the financial sector and the economy.

“Banks and finance providers may find their profitability under pressure from any moves to boost competition in their sectors, and develop other financial sector areas.”

He added: “While the business environment in the GCC region has improved in recent years, limitations to foreign ownership, poor investor protection and punitive bankruptcy laws still pose challenges to attracting FDI.”