After a difficult 2018, banks in Mena and Turkey (Menat) are likely to face more of the same this year due to tighter global liquidity conditions, a stronger US dollar, and geopolitical as well as local instability, S&P Global Ratings said in a report.

The region's prospects for economic growth will be dampened, notably by Turkey's expected contraction, added the report titled "Banks In Emerging Markets: The Overcast 2019 Outlook For Banks In The Middle East, North Africa, And Turkey”.

S&P expects t -0.5 per cent real GDP growth for Turkey in 2019. Much of the lira's depreciation has passed through into higher inflation, it said in the report.

A 26 per cent minimum wage hike scheduled for this year is likely to push prices up further, cutting into consumers' already weakened purchasing power. On a positive note, lower commodity prices could provide some breathing space, as most of these countries are commodities importers. Oil prices to stabilize around $55 in 2019-2020, the report said.

“We expect nominal loan growth in 2019 to stabilize around 7 per cent-8 per cent on average, ranging from 0 per cent for Turkey to 17 per cent for Egypt. However, we consider these figures, if adjusted for inflation, as insufficient to cope with the region's economic development needs in Menat,” the report noted.

Several economies in the region, and in particular Jordan and Lebanon, are facing an overall stagnation in lending activities. The Syrian conflict in particular, coupled with social domestic tensions, generally depressed tourism and trade activities, notably for Lebanon and Jordan. Upcoming elections in Turkey and Tunisia will be critical for the stability of their economies and banking sectors.

“Weak asset quality will continue to weigh on our view of the credit quality of banks in the region. This is particularly relevant for Turkey, where we estimate that problematic loans (Stage 2 and Stage 3 loans) could climb to about 20 per cent of total loans,” the report said.

“Tunisia is also another country where we continue to view asset quality negatively. While banks' reported nonperforming loans dropped slightly in the past two years, we think asset quality indicators could be worse if banks were to adopt International Financial Reporting Standards 9 (IFRS 9).”

“High dependence on foreign funding remains one of the most prominent risks for Menat banks, in our view. While some still rely on non resident transfers (Morocco, Lebanon, Jordan, and Egypt), which we expect to continue growing, others are more dependent on volatile wholesale external funding (Turkey),”the report said.

“We expect return on assets to decline slightly for Menat banks in 2019, to an average of about 1.2 per cent. Some banks have benefited from higher government bonds yields (particularly in Egypt, Lebanon, Tunisia, and Turkey). Others have continued to benefit from low cost-to-income ratios in a global comparison, given the low cost of labour in some systems. We expect both trends will continue in 2019,” S&P concluded. – TradeArabia News Service