The rating agency S&P Global has cautioned the GCC banks on potential risks to their exposures to certain sectors. The banks’ exposure to sectors directly affected by this risk, include oil and gas, mining and quarrying, manufacturing, and some power generation and public-sector lending, the global rating agency noted yesterday.
“For GCC banks, our findings show direct exposure to sectors exposed to energy transition accounted for about 12 percent of their lending (14% of rated GCC banks) at December. 31, 2018,” said Mohamed Damak, S&P Global Ratings Sector Lead, Financial Institutions for Middle East/Africa. However, indirect exposure is substantially higher, as other sectors tend to correlate with its performance either directly through the supply chain or indirectly through government spending or consumer sentiment and spending.
The rating agency noted the energy transition away from fossil fuels toward renewables could put downward pressure on hydrocarbon exporting economies and issuers in the Middle East if they are not able to diversity sufficiently quickly.
“As global investors get to grips with the implications of climate change for their portfolios, they are likely to reappraise their appetite for investment in sectors and regions they perceive as most at risk from decarbonization initiatives,” said Dhruv Roy, S&P Global Ratings Head of Sovereign and Financial Institutions Ratings for Middle East/Africa. “But Gulf Cooperation Council (GCC) economies still rely heavily on hydrocarbons, and we expect the pace of diversification to remain gradual.” Banks’ exposure to energy transition in the GCC can take several forms, including credit risk and lower investor appetite.
The effect of energy transition on oil and gas prices and investor appetite will be an important factor for the long-term creditworthiness of GCC banks. If oil and gas prices or investor appetite were to decline significantly, GCC banks could be affected through the potential deteriorating creditworthiness of their exposures to these sectors and the overall bearing on their economies.
