While the direct exposure of certain countries’ banking systems to the oil sector appears limited, S&P believes the risks may be “underestimated” because some of the oil-related activities fall under the government’s umbrella.


By Santhosh V Perumal/Business Reporter



The global contagion of weaker crude may be ‘underestimated’ in the banking sector of certain oil-exporting countries, particularly Qatar, due to the direct credit exposure to government and related entities, according to the international credit rating agency Standard and Poor’s (S&P).
While the direct exposure of the other countries’ banking systems to the oil sector appears limited, S&P believes the risks may be “underestimated” because some of the oil-related activities fall under the government’s umbrella.
“Exposure to government and its related entities is significant in some of the GCC (Gulf Co-operation Council) countries, particularly Qatar, where it represented almost one-third of the banking system’s loan portfolio as of November 30, 2014,” the agency said.
Following the significant drop in oil prices over the past few months, reaching around $55 per barrel for the Brent crude as of mid-February compared with more than $100 a year ago, S&P has revised its price assumptions.
“We now expect Brent’s price to stabilise around $55 in 2015 and increase slightly to around $65 in 2016,” it said.
Oil’s price decline could affect the oil exporting  countries’ banking systems either directly through banks’ exposure to and deposits from oil- or government-related companies or indirectly through lower investments and economic growth, which may weigh on banks’ asset quality and profitability indicators.
The banking systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure, S&P said.
In most of the oil-exporting countries it looked at, government spending and investment projects remain among the main generators of economic growth and opportunities for the banking system. That is particularly true for the GCC countries, where government investments account for a large share of total investments.
Fiscal buffers accumulated over the past years, as well as investment projects that are part of strategic initiatives, such the Dubai Expo 2020 and Qatar World Cup 2022, are also likely to remain insulated from the mounting pressure on government budgets. Banks in Qatar, Oman, and the UAE display significant concentration in their funding profiles, with around 30%-40% of deposits coming from government and its related entities.




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