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The Risks to Banks from Middle East Conflict
As the Israel-Hamas war grinds on, industry observers are increasingly thinking about the implications for different economic sectors. This includes the region’s banks, which have been increasingly exposed to external funding in recent years.
Alongside the Russia-Ukraine war, the Israel-Hamas war is contributing to global geopolitical uncertainty that S&P Global Ratings expects to affect investor confidence, trade and capital flows in 2024.
The war has so far been contained to Israel and Gaza, but what risks would banks face if it spread? In a November report, S&P Global Ratings analysts looked at the potential implications for banking systems across the Middle East and North Africa.
The analysts assumed various levels of outflows for external liabilities, such as 50% for some interbank liabilities and 10% for capital market liabilities, based on recent data from central banks. To fund these outflows, banks would need to sell assets, so the study makes assumptions about the valuations such assets might achieve in a stressed environment.
While the study found external funding outflows could reach $220 billion in a stressed scenario, or about 30% of cumulative external liabilities, banks had sufficient liquidity to cover this in most cases. There was only a funding deficit in Egypt, Jordan and Qatar.
The results “show the resilience of most selected banking systems should Middle East tensions escalate and hit investor confidence,” the analysts wrote. However, they warned that “a higher level of outflows, an outflow of local liabilities, or lower liquidity of external assets could result in different outcomes.”
Given the impact on banks of a stressed scenario, investors might naturally be curious about the potential knock-on effect for governments. In a second report, S&P Global Ratings examined just that.
In recent years, external debt has increased among countries in the Gulf Cooperation Council, which comprised most of those analyzed in the earlier report. These countries are expected to have $660 billion of gross external public and private debt maturing annually in 2023–25, up from about $250 billion in 2013. The expansion is being fueled by the region’s banks, which are stepping up to support ambitious post-oil economic diversification plans, such as Saudi Vision 2030.
Despite the recent buildup of external liabilities, the overall picture seems reassuring for banks. Regional economies’ net external positions were dominated by strong fiscal reserves, S&P Global Ratings said, along with moderate to low levels of gross external debt in most sectors. Most of the region’s banking systems enjoyed net external asset positions, meaning they could cover external outflows without government support. Referring to the earlier report on banking sector liabilities, S&P Global Ratings found that, in almost all countries, government assets could comfortably cover any losses.
“Even as bank-driven external liabilities increase, we expect most regional governments will remain in a position to prevent and, if needed, cover any outflows,” the report said.
Today is Friday, December 15, 2023, and here is today’s essential intelligence.
Written by Mark Pengelly.
Economy
Economic Research: 2023: China's Weak Recovery And 2024: Supply Chain Adjustment
The post-COVID recovery didn't last. The Chinese economy initially bounced back in early 2023 after Beijing relaxed its pandemic lockdowns and eased up on financial restrictions targeting developers at the end of 2022. But the property sector downturn remained a drag on confidence and consumption. And the shadow of the pandemic continued to hang over consumer spending with people worried about their jobs and the economy, and some were slow to return to their pre-pandemic lifestyles.
—Read the article from S&P Global Ratings
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Capital Markets
Listen: Private Markets 360 | Episode 8: Powering The Global Private Markets (With Adam Kansler Of S&P Global Market Intelligence)
President of S&P Global Market Intelligence, Adam Kansler, joined Jocelyn and Chris on the podcast to discuss its capabilities and offerings for private markets industry participants. With the end of the year in sight, Adam also dove into the themes that drove industry activity in 2023, and what he expects to see in the market in 2024.
—Listen and subscribe to Private Markets 360, a podcast from S&P Global Market Intelligence
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Global Trade
Listen: Brazil’s Emergence As A Dominant Agriculture Exporter
Over the past 20 years, Brazil’s growth in the production of feedstuffs like soybeans and corn has been remarkable. In the process, it has become a powerhouse exporter. To accomplish this, it took the convergence of Brazil modernizing its agricultural production and transportation systems along with the equally meteoric demand growth of a willing buyer, China. S&P Global Commodity Insights' chief agricultural economist Paul Hughes speaks with feed and grains senior analyst Anamaria Martins and grains and oilseeds pricing manager Rafael Savoia about the factors behind this astounding transformation, the implications for world trade, the beneficiaries and what is likely ahead.
—Listen and subscribe to Commodities Focus, a podcast from S&P Global Commodity Insights
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Sustainability
As COP28 Unfolds, Middle Eastern Companies’ Climate Disclosure Is Rising With More Room To Improve
As the UN’s COP28 climate change conference wraps up in Dubai, United Arab Emirates, S&P Global Sustainable1 analyzes the greenhouse gas emissions and climate disclosure rates of companies headquartered in the Middle East. Its analysis, based on the S&P Global Trucost Environmental dataset, finds that companies in the region have increased their GHG disclosure rates over the past five years, but levels still lag compared to the rest of the world.
—Read the article from S&P Global Sustainable1
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Energy & Commodities
COP28: Leaders Agree To Transition Away From Fossil Fuels In Final Text
World leaders agreed a final text of the global stocktake at the 28th UN Climate Change Conference on Dec. 13, which included "transitioning away" from fossil fuels and working "toward the phasedown" of unabated coal. Many considered that a step in the right direction, with a clear signal to urgently reduce fossil fuel use though some view it as a compromise, as the document did not include the word phaseout.
—Read the article from S&P Global Commodity Insights
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Technology & Media
AI Investment Sags As Financing, Intellectual Property Issues Complicate Deals
Funding of AI companies has not returned to the high levels seen during the COVID-19 pandemic despite a surge of interest over the last year. M&A activity involving AI companies is down 37% from its peak, while private equity and venture capital-funding deal volume has fallen by 44% over the last couple of years, according to S&P Global Market Intelligence.
—Read the article from S&P Global Market Intelligence