IMF Report: Impact of the Global Financial Crisis on GCC Countries and Challenges Ahead

May Khamis and Abdelhak Senhadji co-ordinated a team comprising Maher Hasan, Francis Kumah,  Ananthakrishnan Prasad, and Gabriel Sensenbrenner to prepare this report - which is well worth a read.

As I've mentioned before (and am likely to do in the future), reports like this are not only interesting "autopsies" but can serve as diagnostic tools for investors and lenders during underwriting stage as well as later during the all important monitoring phase.  The second best thing to knowing whether to get into an investment is knowing when to get out.  Not in the sense of calling the market top, but recognizing when the car is racing towards the brick wall.  Studies like this can provide some useful (and very common sense) warning indicators.

Here's the link to the study.

And here are my comments on early warning indicators.

1. Page 10 - "Non Productive" Sector Lending.  When bank loans are being excessively funneled into construction, real estate and securities purchases, you know that there are problems ahead.   Particularly if this continues for more than a year to two.
2. Page 11 Figure 7 - Excessive Credit Growth.  Growth above the growth in GDP.  Amounts over  12 to 15% per annum for more than a couple years.  Also Figure A3 on page 55.
3. Page 15 Figure 14 - Leverage.  As companies take on more debt, they have less flexibility in a downturn. When the "boom" is caused by lending to non productive sectors, to finance punting in securities, when the downturn comes it's going to be a hard landing.
4. Page 26 Figure 24 - Increased Reliance on Foreign Banks for Financing.  This is a double edged sword.  Usually this financing is denominated in foreign not local currency.  When the downturn comes the borrowers are even more hard pressed to replace or refinance as foreign investors are generally the first to turn tail and run.  With GCC currencies generally pegged to the US Dollar the issue of replacing foreign currency borrowings is less than say it would be in Argentina.
5. Page 55 Figure A4 - High Loan to Deposit Ratios.  A clear sign of a lack of real liquidity in the banking sector and a vulnerability to depositor withdrawal or failure of lenders to provide financing.

And some interesting slides.

1. Page 31 Box 2 highlights the vulnerabilities of neighboring labor exporting countries on declines in the GCC markets as well as potential changes in labor needs.  You'll see that Yemen and Jordan are particularly exposed as remittances are a significant portion of their GDP from remittances - 7%.
2. Page 33 - Kuwait Investment Companies on and off balance sheet assets represent 100% of GDP and 56% of Kuwaiti banks capital.  A rather scary thought given the profound distress in the investment company sector.
3. Pages 49-52 Annex I - GCC Country policy responses.
4. Pages 59-65 Annex II - A rather "optimistic" view of the state of regulation in the GCC.