How Are the Profits of Gulf Cooperation Council Banks Affected by Fiscal Imbalances Across the Region? Evidence from a Panel Analysis Approach

Abstract

The Gulf Cooperation Council (GCC) countries are expected to undergo a prolonged period of fiscal adjustments as the oil price continues to decline. This study examines how the profits of GCC banks are affected by fiscal imbalances across the region. Using various panel regressions, I control for bank-specific variables, namely credit growth and risk taken, and I examine the response of GCC banking profits to larger fiscal deficits, larger public-debt-to-GDP ratios, lower international oil prices, and slower non-oil GDP growth. The recessionary effect of declining non-oil GDP and increasing public debt-to-GDP ratios are statistically significant and could weaken GCC banking profits, whereas the effect of cyclical fiscal deficits is not statistically significant. As private demand for credit is crowded out, banking systems with substantial investments in public debt could see deteriorating profits. GCC countries enjoy strong fiscal buffers coupled with active macro-prudential measures, all of which would mute any potential fiscal imbalances.

Keywords: GCC, Banking Profits, ROAA, Fiscal Imbalance, Debt-GDP Ratio

JEL Classification: G21, E62, H63, B22