Tightening liquidity will continue to pose imminent challenges to GCC economies, according to a survey of investment professionals in the region.
The CFA Society poll revealed that the majority of CFA members agree that shrinking government deposits will result in additional cuts to infrastructure projects in order to realign spending, and this will have negative short-term economic effects.
CFA societies in the region believe that reduced funds allocated to infrastructure projects would mean that the construction industry will be affected the most by the liquidity crunch.
Private sector firms, particularly SMEs, will experience greater difficulty in raising capital as cost of capital will increase and banks are expected to become more selective in their lending patterns, the survey said.
The survey also showed that the UAE has the largest available capital buffers to see out this challenging period and is expected to be the least affected in the Gulf region by the liquidity shortfall.
The findings indicated that the bond market will emerge as a leading financing option for the private sector although they acknowledged that regional debt markets are not yet developed enough to cover financial needs of the economy.
Amer Khansaheb, president of CFA Society Emirates, said: “Investment professionals recognise that the current liquidity challenges have arisen because a decline in oil prices and lower government spending has negative bearings on bank balance sheets, asset prices, equities and credit growth.
"Investors are also concerned that in equity markets, such macroeconomic conditions will mean reduced returns because of the impact on corporate earnings.
"With oil prices unlikely to return to historical levels of above $100 in the near future, the lower economic growth rates currently projected might become the new normal going forward.”
He added: “On other hand, the recent stabilisation of crude prices and increased cash flow from international investors through the credit markets is offering GCC countries hope of a rebound. Easing the current strains faced by the regional financial market would raise market performance.”
The survey showed that 79 percent of CFA members believed that falling government deposits will lead to further cuts in government spending for infrastructure projects while 83 percent said that the increased cost and greater difficulty in raising capital would lead to a decrease in private sector activity.
While 53 percent felt that loan growth would be negative in the short-term future, only 32 percent thought it would be positive and 77 percent were convinced that the current liquidity conditions will lead to an increase in non-performing loans for banks in the region.
The online survey was conducted from September 25 to October 10 and participants included 113 CFA members across its societies in Bahrain, Kuwait and the UAE.
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