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GCC banks and financial institutions face an increased risk from capital outflows as the ongoing Iran conflict puts a strain a credit channels in the region, S&P said
The ratings agency has singled out banking systems in Bahrain and Qatar that could require external or government support in the case of significant outflows, based on their net external debt position.
“In a severe stress scenario, Bahraini banks may require… liquidity support or higher stability of the regional components of the banking system’s external debt,” S&P stated.
According to S&P, other banking systems, including the UAE and Saudi Arabia, remain in net external asset position and should be able to withstand moderately high capital outflows using their own liquidity, “assuming hostilities do not drag on.”
Elevated exposure
While higher oil prices are expected to bring “some relief” to the fiscal outlook of GCC sovereigns in the near term, the extent of obstructions to key trade routes or to production have the potential to induce fiscal strain through weakened revenues, which could be particularly relevant for governments with weaker balance sheets, larger banking systems and limited export options, S&P warned.
“We consider the gravity of the situation has moved from high to severe in our pre-defined scenarios, and consequently, the potential for events to weaken credit quality across sectors has increased,” it said.
Oil and gas companies are already facing disruptions at regional ports, including in Oman and the UAE, they said.
A prolonged conflict could pose a bigger risk on the global oil market, affecting volume flows and prices, the ratings firm said. “We expect the impact on oil and gas companies to extend beyond producers to all entities connected to the value chain. This includes shipping companies, port operators, and downstream businesses.”
Corporates also run the risk of elevated exposure to energy price volatility, supply-chain disruptions, operational disruptions, and higher security and insurance costs in the near term, according to S&P.
“Companies with high-value, prominent assets such as airports, ports, hotels, and tourism landmarks face elevated exposure to physical disruption and cyber risk. There could also be regulatory intervention for sectors such as utilities and telecommunications,” they said, adding that companies that rely on export routes via the Strait of Hormuz are especially susceptible to operational network vulnerabilities.
(Writing by Bindu Rai, editing by Seban Scaria)
