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Banks in the Gulf Cooperation Council (GCC) states have remained stable despite political disruptions, which tend to trigger risk aversion among investors, prompting higher funding costs or even capital outflows from the system, according to a new report by S&P Global.
For GCC banks, "the largest funding item--private domestic deposits--has increased year-on-year over the past three decades despite a series of disruptive regional events, including Yemeni civil wars, the Arab Spring uprisings, the Iraq War, Qatar boycott, and several Houthi missile attacks," said analysts Benjamin Young and Mohamed Damak in the report.
The report pointed to four contributing factors that explain how GCC banking systems preserved deposit stability and maintained trend growth despite numerous geopolitical shocks.
Expatriates dominate the population, but not bank accounts: Although foreign residents comprise about 90 percent of the populations in Qatar and Dubai, they represent a far smaller percentage of retail deposits. In contrast, non-national retail deposits in Kuwait and Saudi Arabia represent less than 20 percent of the total because incentives for retaining out-of-contract migrant labor are less common, the ratings agency said.
Oil revenue has supported public spending, corporate development and population growth: Economic development policies backed by oil revenues have pulled vast amounts of expatriate labour to the region and incentivized corporate expansion, which has supported deposit growth.
Depositors from higher-risk countries add to stability: The stability of most GCC banking systems has led them to be seen as safe havens for savings,
investments, and business development from less stable countries in the wider Middle East and sub-continental Asia. While lower-paid migrants tend to be structural remitters, higher-paid workers are encouraged to retain wealth by the host. "The growth of the latter could increase deposit instability but can also be an important funding item if linked to longer-term incentives," S&P said.
Wealthy public sectors also support bank deposit stability: In the GCC, income from the sale of oil and gas underpins public sector deposit growth, which is generally routed through national oil and gas companies. Oil revenue has facilitated the development of some of the world's largest sovereign wealth funds which have continued to earn returns during periods of low prices, the report said.
(Writing by Brinda Darasha; editing by Daniel Luiz)
