The Gulf Cooperation Council (GCC) region is grappling with increasing economic pressures as heightened global trade disputes, especially US tariff threats, and a significant drop in oil prices affect its markets.
A recent report by S&P Global Ratings identifies notable but indirect risks to the GCC economies, suggesting that banks may encounter amplified market volatility and decreased investor confidence.
Nevertheless, the region’s financial institutions seem to be in a strong position to endure these challenges, supported by adequate liquidity, profitability, and capital strength, as noted by credit analyst Mohamed Damak.
S&P has adjusted its oil price forecast to $65 per barrel for 2025, lowering it from earlier predictions. This revision reflects escalating trade tensions and diminished global demand. The revised price represents a decline of approximately 15% from mid-2024 Brent crude averages of $80 per barrel, jeopardizing government revenues and expenditures in oil-dependent GCC economies.
According to data from the International Monetary Fund (IMF), hydrocarbon exports are a major source of revenue for countries such as Saudi Arabia, the UAE, and Qatar, contributing 60-80% of fiscal income across the region. A reduction in oil prices could limit public investment in initiatives like Saudi Arabia’s Vision 2030, impacting growth in both oil and non-oil sectors.
The IMF had earlier projected a GDP growth of 3.2% for the GCC in 2025 prior to the escalation of tariffs; however, analysts now predict a possible downgrade to 2.5% if oil prices continue to decrease. A prolonged decline below $60 per barrel could worsen fiscal deficits, with Saudi Arabia’s breakeven oil price estimated between $80-$85 per barrel by Bloomberg Economics. Diminished government spending may also impact corporate profits and consumer sentiment, indirectly affecting banks’ asset quality.
A recent Fitch Ratings report pointed out that GCC exports to the US mainly consist of hydrocarbons, which are exempt from tariffs. Non-hydrocarbon exports, which are subject to a 10% tariff (or 25% for steel and aluminium), make up a minor portion of the trade, providing some insulation for banks from direct impacts of tariffs. “However, the primary concern stems from declining oil prices and weaker global demand, which could lead to reduced government spending — a vital factor for banking operations in the GCC. Lower oil values and diminished global economic activities may result in decreased government expenditures, heavily influencing banking conditions across many GCC nations,” Fitch remarked.
Despite encountering these challenges, banks in the GCC approach the current situation with strong fundamentals. By the close of 2024, the top 45 banks in the region reported an average nonperforming loan (NPL) ratio of 2.9%, considerably lower than the global banking average of 4.5%, as reported by World Bank data. Provisions that exceed 150% of NPLs provide a solid cushion against potential loan failures. Furthermore, banks continue to maintain robust profitability, with a 1.7% return on assets, and strong capitalisation, reflected in an average Tier 1 capital ratio of 17.2%, exceeding Basel III requirements.
S&P’s stress testing highlights this resilience; in a moderate scenario where NPLs increase by 30% or reach a minimum 5% ratio, 16 banks could incur losses of $5.3 billion. In a more severe scenario projecting a 50% NPL rise or a 7% NPL ratio, 26 banks could see losses totaling $30.3 billion. These estimates remain below the $60 billion net income generated by these banks in 2024, indicating that profitability, rather than solvency, may be impacted.
Damak remarks that the banks’ liquidity and their conservative investment strategies — primarily comprising high-quality fixed-income assets that account for 20-25% of total assets — further mitigate potential risks.
While the overarching outlook remains favorable, certain vulnerabilities persist. Qatari banks, which hold significant net external debt, are more susceptible to capital outflows; however, government backing, supported by Qatar’s $475 billion sovereign wealth fund, lessens systemic risks. Saudi banks, which play a crucial role in financing Vision 2030’s ambitious $1.25 trillion project framework, may encounter constraints if access to capital markets becomes limited. Conversely, UAE banks, boasting the strongest net external asset position in the region, demonstrate greater resilience to hypothetical outflows of 50% of nonresident interbank deposits and 30% of nonresident deposits.
Market fluctuations also pose risks for banks involved in capital markets or private equity investments, although these activities contribute minimally to revenue streams. Margin lending linked to declining asset valuations raises concern, yet the conservative collateral coverage helps manage potential losses. The anticipated 25-basis-point rate cut by the US Federal Reserve in 2025, likely mirrored by GCC central banks, should bolster bank margins. However, more significant rate reductions could compress profitability and hinder lending expansion.
Historical trends indicate that GCC regulators may intervene during heightened pressures. During the Covid-19 pandemic, banks benefited from forbearance measures like loan moratoriums, and similar support is expected should trade tensions escalate. The recent 90-day tariff suspension for countries outside of China, announced by the US, adds to the uncertainty, potentially eroding business and consumer confidence further. A full implementation of tariffs could deepen economic repercussions, with Goldman Sachs predicting a 0.5% impact on global GDP.