Gulf Cooperation Council (GCC) banking systems have remained remarkably resilient to numerous geopolitical shocks while witnessing almost uninterrupted annual increases of their largest funding item – private domestic deposits – over the past three decades.
The only decline in regional private sector domestic deposits was as a result of the 1990 Gulf War and, while external funding proved to be less stable, related withdrawals were only temporary.
While the nature of the geopolitical threat or shock – for example whether there is a direct physical threat – is clearly important, we believe there are four factors that explain the historical resilience of GCC bank funding.
Expatriates dominate the population, but not bank accounts
Although foreign residents comprise about 90 percent of the populations in Qatar and Dubai, they represent a far smaller percentage of deposits. In Qatar, for example, only about 20 percent of retail deposits are from non-nationals, but expatriates account for about 95 percent of the population.
Non-national deposits in GCC banking systems have been limited because migration to the Gulf is spurred by economic opportunity and most expatriates are typically lower-income earners who send the lion’s share of their wages home to support their families.
However, the value of outward remittances recorded in the GCC indicates that higher earners have also saved and invested outside of the GCC, since residence is usually tied to employment and domestic investment opportunities have been fairly limited.
Behaviourally, we view this type of deposit as likely to be more confidence sensitive and mobile amid geopolitical shocks. Over the past decade, measures to encourage middle- and high-income expatriates to maintain their savings locally have increased, through the offering of mortgage products and more recently the relaxation of some residency rules.
Since then, regional populations and domestic retail deposits have continued to increase while remittances have remained steady, which could imply expatriates now account for a larger portion of domestic deposits. Deposits from GCC citizens will also continue to rise as populations expand, but the previously mentioned factors could mean the proportion of potentially more confidence-sensitive domestic deposits is increasing.
Oil revenue has supported public spending and, in turn, long-term corporate development and population growth
Ambitious hydrocarbon-backed economic development policies have pulled vast amounts of expatriate labour to the region and incentivised corporate expansion, which has supported deposit growth.
Governments have spent heavily on regional infrastructure, which has helped to attract multinational corporates and in turn, a highly-skilled, paid, and bankable workforce, thereby boosting consumption. Until recently, regional laws frequently required majority national ownership of foreign companies, enabling the retention and re-investment of corporate profits within the country.
This had promoted the development of large, often family-owned, holding companies with significant local working capital and treasury operations. Service sector and downstream developments have also promoted the creation of small and midsize enterprises and are helping develop a local skill base, attracting companies to the region.
Depositors from higher-risk countries add to stability
The stability of most GCC banking systems has led them to be seen as safe havens for savings, investments, and business development from less stable countries in the wider Middle East and sub-continental Asia.
Relative wealth levels between home and host countries are also an important factor in deposit stability, because lower-paid migrants tend to be structural remitters, while higher-paid workers might have the flexibility to choose an investment destination and are increasingly the target of policies aimed to retain wealth by the host. The growth of the latter could increase deposit instability but can also be an important funding item if linked to longer-term incentives.
Wealthy public sectors also support bank deposit stability
In the GCC, income from the sale of oil and gas underpins public sector deposit growth, which is generally routed through national oil and gas companies. The sale of these hydrocarbons has generated huge revenue for regional governments, facilitating the development of some of the world’s largest sovereign wealth funds, which have continued to earn returns during periods of low prices.
Public sector entities maintain significant local balances to service their operations but also to demonstrate their support for individual banks – and more generally – financial sector development even through periods of low oil prices, economic stress, and most recently at the start of the pandemic.