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 undertake a prolonged period of fiscal adjustments to minimize their exposure to oil price volatility and diversify their economies. Public debt financing of fiscal deficits is expected to follow as oil-related revenues continue to fluctuate. Using dynamic panel regressions on 36 GCC banks over the period of 2000-2014, this study assesses how returns on average assets (ROA) are affected by fiscal imbalances. The results show that the recessionary effects of declines in non-oil GDP and increases in public-debt-to-GDP ratio 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 can mitigate any potential fiscal imbalances.

Keywords: GCC banking profits, ROAA, fiscal imbalances, debt-to-GDP ratio

JEL Classification: G21, E62, H63, B22