TGB Regional Banking Monitor: MENA — Q1 2024

The regional picture: Egypt tightens, the Gulf waits for the Fed

The Federal Reserve kept the federal funds target range at 5.25–5.50% at each of its meetings on 31 January, 20 March and 1 May 2024. On 1 May it said it did not expect a cut to be appropriate until it had gained greater confidence that inflation was moving sustainably towards 2%. The IMF's April 2024 Regional Economic Outlook noted that central banks with currencies pegged to the US dollar had maintained a tight stance, mirroring a Federal Reserve whose policy rate had been unchanged since August 2023. The Central Bank of the UAE showed the mechanism at work on 1 May 2024, holding its Base Rate at 5.40% after the Federal Reserve left its interest rate on reserve balances unchanged.

Egypt moved the other way. The Central Bank of Egypt (CBE) raised its key rates by 200bp on 1 February 2024 and by 600bp at a special meeting on 6 March 2024, a cumulative 800bp in Q1 2024.

Growth is the other dividing line. The IMF projected growth in the MENA region and Pakistan at 2.6% in 2024, up from 1.6% in 2023 but 0.7 percentage point below its October 2023 forecast. GCC growth slowed sharply to 0.4% in 2023 after voluntary OPEC+ production cuts, and the IMF expected the cuts to hold GCC growth to 2.4% in 2024 before a rise to 4.9% in 2025. It also warned that in several countries high financing needs would likely be met mostly through domestic bank financing, deepening sovereign-bank linkages.

Egypt: a rate reset backed by external money

The decision of 1 February 2024 took the overnight deposit, overnight lending and main operation rates to 21.25%, 22.25% and 21.75%. The special meeting on 6 March 2024 raised the same three rates by 600bp to 27.25%, 28.25% and 27.75%, and lifted the discount rate to 27.75%. The CBE said it would continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces, and that sufficient funding had been secured to provide foreign exchange liquidity. It acknowledged that the tighter stance could cause a short-term contraction in the private sector's real credit growth. Its inflation target is 7% (±2 percentage points) on average in 2024 Q4, a level it expected inflation to remain substantially above.

External financing arrived alongside the policy change. On 29 March 2024 the IMF Executive Board completed the first and second reviews of Egypt's Extended Fund Facility arrangement, approved in December 2022, and augmented it by about US$5 billion, allowing an immediate drawing of about US$820 million. The IMF said the US$35 billion Ras El-Hekma investment deal had alleviated near-term balance of payments pressures. The authorities committed to use a large part of the new financing to improve reserves, clear foreign currency backlogs and arrears, and reduce government debt.

By the time the MPC held all rates unchanged on 23 May 2024, annual headline and core inflation had fallen to 32.5% and 31.8% in April 2024, from peaks of 38.0% in September 2023 and 41.0% in June 2023. That still left the overnight deposit rate of 27.25% some 5.25 percentage points below headline inflation. The CBE expects a significant decline in inflation in H1 2025, citing tighter policy, the unified foreign exchange market and base effects. IMF staff projected end-of-period inflation of 32.1% for 2023/24 and 15.3% for 2024/25.

Activity was weak going into the adjustment: real GDP grew 2.3% in Q4 2023, taking growth in the first half of FY 2023/24 to 2.5%, against 4.2% a year earlier. For banks, the main link to the adjustment runs through the state, since the IMF listed Egypt among the economies where banks' exposure to sovereign debt was already high.

Saudi Arabia: oil cuts slow growth, bank earnings rise

SAMA's repo and reverse repo rates were set at 6.00% and 5.50% on 26 July 2023, when each was raised by 25bp. The IMF expected voluntary oil production cuts, most notably by Saudi Arabia, to put a temporary damper on growth in 2024.

Bank earnings did not reflect the oil slowdown. Al Rajhi Bank reported net income of SAR 4,405 million for the first quarter of 2024, up 6.3% from SAR 4,145 million a year earlier, on total operating income of about SAR 7,229 million. Its total assets rose about 7.8% to SAR 836 billion and customer deposits about 8.6% to SAR 604 billion. Return on assets was 2.1% and return on equity 19.3%, and the bank reported non-performing loan coverage of 175%.

United Arab Emirates: fast balance-sheet growth, ample capital

The CBUAE kept its Base Rate at 5.40% on 1 May 2024 and the rate on its standing credit facilities at 50bp above the Base Rate.

System data show rapid balance-sheet growth through 2023. Total assets of banks operating in the UAE rose 3.1% in the fourth quarter of 2023 to AED 4,075.2 billion, up 11.1% year on year. Customer deposits grew 13.5% year on year to AED 2,521.9 billion, while gross credit rose 6.0% to AED 1,991.7 billion. Deposit growth was therefore 2.25 times credit growth over the year to December 2023. Aggregate capital and reserves rose 5.2% in the quarter to AED 488.7 billion, and the total capital adequacy ratio was 17.9% in December 2023, against a 13.0% requirement that includes a 2.5% capital conservation buffer. That is a margin of 4.9 percentage points over the requirement.

Emirates NBD reported profit of AED 6.7 billion for the first quarter of 2024, up 12% year on year and 67% on the previous quarter, which the bank described as a record. Its net interest margin was 3.52%, and it booked an impairment credit of AED 0.9 billion on regularised loan payments, while its impaired loan ratio improved to 4.4%. Deposits grew AED 26 billion in the quarter, AED 21 billion of it in current and savings accounts.

Qatar and Kuwait: solid buffers, slow private credit

The IMF's February 2024 assessment of Qatar put the banking system's capital adequacy ratio at 19% and its return on equity at 14.6% in Q2 2023. The non-performing loan ratio had edged up to 3.8%, with provisioning coverage close to 80%. Non-resident deposits had fallen by more than one-third from their recent peak, partly replaced by public-sector domestic deposits. The IMF described the exchange rate peg as a credible monetary anchor but warned that protracted or severe weakness in real estate could hurt the banking system.

The Central Bank of Kuwait (CBK) raised its discount rate from 4.0% to 4.25% effective 27 July 2023. IMF staff, in a statement on 9 May 2024, estimated that Kuwait's economy contracted by 2.2% in 2023 and projected a further 1.4% contraction in 2024, as oil production falls by another 4.3% under the OPEC+ quota cut in January. Growth in credit to the nonfinancial private sector fell to 1.8% in 2023. Bank lending rates rose in response to gradual CBK policy rate increases. Banks nonetheless maintained strong capital and liquidity buffers, profitability has rebounded from pandemic lows and non-performing loans remain low and well provisioned.

Morocco: key rate on hold as inflation falls back

Bank Al-Maghrib kept its key rate at 3% on 19 March 2024. Inflation fell from a peak of 10.1% in February 2023 to 3.4% in December 2023, averaging 6.1% over the year, and the central bank expects 2.2% in 2024 and 2.4% in 2025. Set against that 2024 forecast, the key rate implies a real policy rate of 0.8 percentage point.

Pass-through to borrowers has been partial. Lending rates rose a total of 112bp from the start of tightening to the last quarter of 2023, against 150bp for the key rate, a pass-through ratio of 0.75. The Bank forecasts bank credit to the non-financial sector to grow 4.4% in 2024 and 4.7% in 2025. It expects economic growth of 2.1% in 2024 and 4.3% in 2025. The Board flagged uncertainty from geopolitical tensions and elections abroad and from weather conditions and water stress at home.

Cross-country comparison

MENA banking monitor: policy settings and banking indicators (reference periods in brackets)

Source: Central Bank of Egypt, MPC Press Release 23 May 2024: MPC decides to keep key policy rates unchanged, 23 May 2024; International Monetary Fund, Regional Economic Outlook: Middle East and Central Asia, April 2024, Chapter 1: An Uneven Recovery amid High Uncertainty, 18 April 2024; Saudi Central Bank (SAMA), The Saudi Central Bank's Decision on Repo and Reverse Repo Rates, 26 July 2023; Al Rajhi Bank, Al Rajhi Bank first-quarter 2024 profit announcement (Media Center), 29 April 2024; Central Bank of the UAE, CBUAE Maintains the Base Rate at 5.40%, 1 May 2024; Central Bank of the UAE, United Arab Emirates Monetary, Banking & Financial Markets Developments, 2023 - 4th Quarter Report, 29 February 2024; Emirates NBD, Emirates NBD's Q1 2024 results announcement, 25 April 2024; International Monetary Fund, Press Release No. 24/39: IMF Executive Board Concludes 2023 Article IV Consultation with Qatar, 7 February 2024; Central Bank of Kuwait, CBK Raises the Discount Rate by 25 Basis Points, 26 July 2023; International Monetary Fund, Press Release No. 24/147: IMF Staff Concludes Staff Visit to Kuwait, 9 May 2024; Bank Al-Maghrib, Press Release: Bank Al-Maghrib Board Meeting, Rabat, March 19, 2024, 19 March 2024.

Where system data exist, Gulf banks reported capital ratios of 17.9% in the UAE in December 2023 and 19% in Qatar in Q2 2023, while the IMF's concern for Egyptian banks centres on their exposure to sovereign debt. Credit growth is slower outside the UAE: credit to Kuwait's nonfinancial private sector grew 1.8% in 2023 and Bank Al-Maghrib forecasts 4.4% growth in Moroccan bank credit to the non-financial sector in 2024, against 6.0% growth in UAE gross credit in 2023.

Outlook risks

UAE policy rates remain anchored to the Federal Reserve, whose next meeting is on 11–12 June 2024 and which said on 1 May that it needed greater confidence on inflation before cutting. For Egypt, the test is whether inflation keeps falling from 32.5% in April 2024 towards the IMF's projected 15.3% end-of-period rate for 2024/25 while the exchange rate stays market-determined. In the Gulf, growth depends on oil output: IMF staff project Kuwait's oil production to fall 4.3% in 2024, and the IMF expects GCC growth to recover to 4.9% in 2025 amid a pickup in hydrocarbon production.

Primary sources: Central Bank of Egypt, MPC Press Release 23 May 2024: MPC decides to keep key policy rates unchanged, 23 May 2024; Central Bank of Egypt, Special Monetary Policy Committee Meeting, Press Release 6 March 2024, 6 March 2024; International Monetary Fund, Regional Economic Outlook: Middle East and Central Asia, April 2024, Chapter 1: An Uneven Recovery amid High Uncertainty, 18 April 2024; International Monetary Fund, Press Release No. 24/101: IMF Executive Board Completes the First and Second Reviews of Extended Fund Facility Arrangement for Egypt, Approves Augmentation of the Arrangement, 29 March 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (1 May 2024), 1 May 2024; Emirates NBD, Emirates NBD's Q1 2024 results announcement, 25 April 2024; Al Rajhi Bank, Al Rajhi Bank first-quarter 2024 profit announcement (Media Center), 29 April 2024; International Monetary Fund, Press Release No. 24/147: IMF Staff Concludes Staff Visit to Kuwait, 9 May 2024; Central Bank of the UAE, CBUAE Maintains the Base Rate at 5.40%, 1 May 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (31 January 2024), 31 January 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (20 March 2024), 20 March 2024; Central Bank of Egypt, MPC Press Release 1 February 2024: MPC decided to raise key policy rates by 200 bps, 1 February 2024; Saudi Central Bank (SAMA), The Saudi Central Bank's Decision on Repo and Reverse Repo Rates, 26 July 2023; Central Bank of the UAE, United Arab Emirates Monetary, Banking & Financial Markets Developments, 2023 - 4th Quarter Report, 29 February 2024; International Monetary Fund, Press Release No. 24/39: IMF Executive Board Concludes 2023 Article IV Consultation with Qatar, 7 February 2024; Central Bank of Kuwait, CBK Raises the Discount Rate by 25 Basis Points, 26 July 2023; Bank Al-Maghrib, Press Release: Bank Al-Maghrib Board Meeting, Rabat, March 19, 2024, 19 March 2024; Board of Governors of the Federal Reserve System, Minutes of the Federal Open Market Committee, April 30-May 1, 2024, 22 May 2024.