The Gulf Cooperation Council (GCC) region is encountering increasing economic obstacles due to rising global trade disputes, particularly threats of US tariffs, and a considerable drop in oil prices affecting its markets.
A recent report from S&P Global Ratings outlines the indirect but significant risks faced by GCC economies, suggesting that banks may experience heightened market instability and investor reluctance.
Nonetheless, financial institutions in the region seem to be well-equipped to withstand these challenges, supported by considerable liquidity, robust profitability, and strong capitalization, according to credit analyst Mohamed Damak.
S&P has adjusted its oil price projection for 2025 to $65 per barrel, a decrease from earlier forecasts, which reflects escalating trade tensions and diminished global demand. This reduction, about 15 percent lower than mid-2024 Brent crude averages of $80 per barrel, poses a risk to government income and expenditure in the oil-dependent GCC economies.
Countries like Saudi Arabia, the UAE, Qatar, and others are largely dependent on hydrocarbon exports, which comprise 60-80 percent of their fiscal revenue, according to data from the International Monetary Fund (IMF). Falling oil prices may hinder public investment in initiatives like Saudi Arabia’s Vision 2030, potentially stifling growth in both the oil and non-oil sectors.
The IMF had forecast GCC GDP growth at 3.2 percent for 2025 prior to the tariff escalation, but analysts now predict a potential downgrade to 2.5 percent if oil prices decline further. A sustained fall below $60 per barrel could worsen fiscal deficits, as Saudi Arabia’s break-even oil price is projected at $80-$85 per barrel by Bloomberg Economics. Decreased public spending may also impact corporate profitability and consumer sentiment, indirectly affecting the asset quality of banks.
A recent report from Fitch Ratings indicated that GCC exports to the US are mainly hydrocarbons, which are exempt from tariffs. Non-hydrocarbon exports that are subject to a 10 percent tariff (or 25 percent for aluminium and steel) make up a small portion of trade, providing banks with some insulation from direct tariff shocks. “However, the real threat lies in declining oil prices and reduced global demand, potentially leading to lower government spending — a vital element of banking operations in the GCC. Weaker oil prices and lower global economic activity may diminish government expenditure, which strongly impacts banking conditions in several GCC states,” Fitch noted.
Despite these challenges, GCC banks are starting from a position of strength. By the end of 2024, the 45 largest banks in the region reported an average nonperforming loan (NPL) ratio of 2.9 percent, which is significantly better than the global banking average of 4.5 percent, based on World Bank data. Provisions exceeding 150 percent of NPLs create a significant buffer against possible loan defaults. Furthermore, banks continue to maintain solid profitability with a return on assets of 1.7 percent and strong capitalization measured by an average Tier 1 capital ratio of 17.2 percent, well above Basel III requirements.
The stress tests conducted by S&P further illustrate this resilience. In a moderate scenario, anticipating a 30 percent increase in NPLs or a minimum NPL ratio of 5.0 percent, 16 banks could incur $5.3 billion in losses. In a more severe case, with a 50 percent increase in NPLs or a 7.0 percent NPL ratio, the losses projected for 26 banks could reach $30.3 billion. However, these amounts are still below the $60 billion in net income generated by these banks in 2024, indicating that profitability would be more affected than solvency.
Damak highlights that the liquidity and cautious investment portfolios of banks — dominated by high-quality fixed-income assets, which comprise 20-25 percent of total assets — further lessen the risks.
Although the general outlook appears positive, there are vulnerabilities. Qatari banks, with considerable net external debt, are more vulnerable to capital outflows, although government backing supported by Qatar’s $475 billion sovereign wealth fund (according to the Sovereign Wealth Fund Institute) mitigates systemic risks. Saudi banks, essential for financing Vision 2030’s $1.25 trillion in projects, might face challenges if access to capital markets tightens. Conversely, UAE banks, which have the region’s strongest net external asset position, show the highest resilience against hypothetical outflows of 50 percent of nonresident interbank deposits and 30 percent of nonresident deposits.
Market volatility also presents risks for banks with ties to capital markets or private equity investments, despite these activities only contributing modestly to overall revenue. Margin lending linked to declining asset values is another concern, but conservative collateral policies help minimize potential losses. The anticipated 25-basis-point rate cut by the US Federal Reserve in 2025, which is expected to be mirrored by GCC central banks, should assist bank margins. Nonetheless, more aggressive rate cuts could compress profitability and slow down lending growth.
Historical trends indicate that GCC regulators may intervene to alleviate some of the pressures. During the Covid-19 crisis, measures like loan deferrals aided banks in navigating uncertainty, and similar strategies are expected to be employed if trade tensions escalate. The US’s 90-day tariff suspension for non-China countries introduces more uncertainty, potentially dampening business and consumer confidence further. Full tariff implementation could worsen the economic impact, with Goldman Sachs predicting a 0.5 percent reduction in global GDP.
