Banks for members of the Gulf Cooperation Council, which includes Saudi Arabia, face pressure from low oil prices despite government support, Moody's said.
Crude oil prices continue to hold near 10-year lows as markets favor the supply side. A rally sparked by talks of a production freeze from members of the Organization of Petroleum Exporting Countries faltered by the end of last week after U.S. data showed oil inventories at historically high levels.
Moody's Investors Service reported Monday the banks for GCC members might get squeezed by dual pressures from low oil prices and dwindling options for governments looking to arrest the slide.
"Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks' ratings in the region continue to benefit from their governments' willingness to tap accumulated wealth to support counter-cyclical spending," Khalid Howladar, one of the report's authors, said in a statement. "However, continued oil price declines signal increasing challenges to the sustainability of this dynamic."
Standard and Poor's last week lowered its sovereign credit rating for Saudi Arabia because of the pressure from the long decline in crude oil prices. For fiscal year 2015, the country reported total revenue at $162 billion, an estimated 15 percent decline from budgeted revenues. Oil revenues are expected to reach $118 billion in 2016, a decline of 23 percent from the previous year.
For the GCC as a whole, Moody's said regional banks may be forced to be more selective in where they target support given the dwindling options in the era of lower oil prices. Moody's said redistribution of oil wealth has long been a tool used by regional banks to support their respective economies.
"As low oil prices persist, however, oil-related government revenues will continue to decline and, in the absence of some repatriation of foreign capital placed internationally by sovereign wealth funds, liquidity in the banking system could reduce further," the report said.
By Daniel J Graeber
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