Central Bank of Bahrain: Financial Stability Report - February 2017

Transcription

1. FINANCIAL STABILITY REPORT February 2017 / ISSUE NO. 22
2. Financial Stability Report February 2017 Production : Financial Stability Directorate Central Bank of Bahrain PO Box 27, Manama Kingdom of Bahrain www.cbb.gov.bh The Financial Stability Report (FSR) is a semi-annual report prepared by the Financial Stability Directorate. It is available in PDF format in the Publications and Data section at http://www.cbb.gov.bh.
3. Central Bank of Bahrain Financial Stability Report- February 2017 Table of Contents Table of Contents ................................................................................................................. i List of Tables ...................................................................................................................... iii List of Charts ....................................................................................................................... v Preface ................................................................................................................................. 1 Executive Summary ............................................................................................................ 3 Part I: ................................................................................................................................... 7 Developments in the International and Domestic Financial Markets .............................. 8 1. 2. Developments in the International Financial Markets......................................................... 8 1.1 Overview ................................................................................................................................................. 8 1.2 Global Macro-financial Environment .................................................................................................... 10 1.3 Recent Trends in the Global Economy .................................................................................................. 10 Developments in Bahrain’s Financial and non-Financial Sector ............................... 19 2.1 Overview ............................................................................................................................................... 19 2.2 Bahrain’s Banking sector ...................................................................................................................... 20 2.3 Monetary indictors ............................................................................................................................... 27 2.4 The Bahraini Households Sector ........................................................................................................... 28 Part II: ................................................................................................................................ 27 Performance of the Banking Sector ................................................................................ 27 3. 4. 5. Overall Banking Sector ............................................................................................. 28 3.1 Overview ............................................................................................................................................... 28 3.2 Overall Banking Sector Performance .................................................................................................... 28 3.4 Overall Assessment of the Banking Sector ........................................................................................... 32 Conventional Banks .................................................................................................. 33 4.1 Overview ............................................................................................................................................... 33 4.2 Conventional Retail Banks .................................................................................................................... 33 3.3 Conventional Wholesale Banks............................................................................................................. 39 4.4 Overall Assessment of the Conventional Banking Sector ..................................................................... 45 Islamic Banks ............................................................................................................ 46 5.1 Overview ............................................................................................................................................... 46 Table of Contents i
4. Central Bank of Bahrain Financial Stability Report- February 2017 5 .2 Islamic Retail Banks .............................................................................................................................. 47 5.3 Islamic Wholesale Banks ...................................................................................................................... 51 5.4 Overall Assessment of the Islamic Banking Sector ............................................................................... 55 Part III: ............................................................................................................................... 56 Developments in the Equity Market and Payment Systems .......................................... 56 6. Performance of Equity Market .................................................................................. 57 6.1 Overview .................................................................................................................................................... 57 6.2 Bahrain Market Trends .............................................................................................................................. 57 7. 5.3 GCC Market Trends ............................................................................................................................... 63 5.4 International Market Trends ................................................................................................................ 64 5.5 Overall assessment of the equity market ............................................................................................. 64 Payments and Settlements Systems ....................................................................... 65 7.1 Overview .................................................................................................................................................... 65 7.3 Scripless Securities Settlement System (SSSS) ............................................................................................ 66 7.4 ATM Clearing System (ATM) (to be filled by Retail Banking Directorate) .................................................. 67 7.5 Bahrain Cheque Truncation System (BCTS) ................................................................................................ 68 7.6 Electronic Fund Transfer System (EFTS) ..................................................................................................... 69 7.7 Opportunities and challenges of the rise of FinTech .................................................................................. 70 Annex: ............................................................................................................................... 73 Financial Soundness Indicators ...................................................................................... 73 Table of Contents ii
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Central Bank of Bahrain Financial Stability Report- February 2017 List of Tables Table 2-1 : Evolution of the size of the Banking sector in Bahrain ............................................................ 16 Table 2-2: Personal Loans Breakdown ...................................................................................................... 23 Table 2-3: Business Loans By Sector ......................................................................................................... 25 Table 2-4: Selected Construction Permits by Type ................................................................................... 26 Table 3-1 Capital Provisions Ratios ........................................................................................................... 29 Table 3-2: NPL Figures............................................................................................................................... 29 Table 3-3: Impaired Loan Ratios by Sector ............................................................................................... 30 Table 3-4: Distribution Lending (% total loans) ........................................................................................ 30 Table 3-7: Profitability of Retail Banks (%)................................................................................................ 31 Table 3-8: Retail Banks’ Liquidity Profile (%) ............................................................................................ 32 Table 4-1 Capital Provisions Ratios for Local Conventional Retail Banks ................................................. 34 Table 4-2: NPL Figures for Conventional Retail Banks .............................................................................. 34 Table 4-3: Conventional Retail Banks’ Impaired Loan Ratios by Sector ................................................... 34 Table 4-4: Distribution of Conventional Retail Banks’ Lending (% total loans)* ...................................... 35 Table 4-5: Distribution of Local Conventional Retail Banks’ Lending (% total loans)* ............................. 36 Table 4-6: Distribution of Overseas Conventional Retail Banks’ Lending (% total loans)* ....................... 37 Table 4-7: Profitability of Retail Banks (%)................................................................................................ 39 Table 4-8: Retail Banks’ Liquidity Profile (%) ............................................................................................ 39 Table 4-10: Capital Provisions Ratios for Local Conventional Wholesale Banks ...................................... 40 Table 4-11: NPL Figures for Conventional Wholesale Banks .................................................................... 40 Table 4-12: Conventional Wholesale Banks’ Impaired Loan Ratios by Sector.......................................... 41 Table 4-13: Distribution of Conventional Wholesale Banks’ Lending (% total Loans)* ........................... 41 Table 4-14: Distribution of Conventional Local Wholesale Banks’ Lending (% total Loans)* .................. 42 Table 4-15: Distribution of Conventional Overseas Wholesale Banks’ Lending ....................................... 43 Table 4-16: Profitability of Wholesale Banks (%) ...................................................................................... 44 Table 4-17: Wholesale Banks’ Liquidity Profile (%)................................................................................... 45 Table 5-1: Capital Provisions Ratios for Islamic Retail Banks .................................................................... 47 Table 5-2: NPF Figures for Islamic Retail Banks ........................................................................................ 47 Table 5-3: Islamic Retail Banks’ NPF Ratios by Sector (% of gross facilities per sector) ........................... 48 Table 5-4: Distribution of Islamic Retail Banks’ Lending by Economic Activity (% of total facilities)* ..... 49 Table 5-5: Distribution of Islamic Retail Banks’ Lending by Islamic Instrument (% of total facilities)* .... 50 Table 5-6: Profitability of Islamic Retail Banks (%).................................................................................... 50 Table 5-7: Liquidity Measures for Islamic Retail Banks ............................................................................ 51 Table 5-9: Capital Provisions Ratios for Islamic Wholesale Banks ............................................................ 51 Table 5-10: NPF Figures for Islamic Wholesale Banks .............................................................................. 51 Table 5-11: Islamic Wholesale Banks’ NPF Ratios by Sector ..................................................................... 52 Table 5-12: Distribution of Islamic Wholesale Banks’ Lending by Economic Activity (% total facilities)* 52 Table 5-13: Distribution of Islamic Wholesale Banks’ Lending by Islamic Instrument (% of total facilities)* ......................................................................................................................................... 53 Table 5-14: Profitability of Islamic Wholesale Banks (%) .......................................................................... 54 Table 5-15: Liquidity Measures for Islamic Wholesale Banks ................................................................... 54 Table 6-1: Market Capitalization on the Bahrain Bourse .......................................................................... 59 Table 6-2: Price-Earnings Multiples .......................................................................................................... 60 Table 6-3: Sectoral Distribution of Shares Traded by Value (% of all shares traded) ............................... 60 Table 6-4: Sectoral Distribution of Shares Traded by Volume (% of all shares traded) ............................ 61 Table 6-5: Number of Transactions by Sector........................................................................................... 62 Table 6-6: Stock Market Indices in GCC counties ..................................................................................... 64 List of Tables iii
6. Central Bank of Bahrain Financial Stability Report- February 2017 Table 7-1 : RTGS Daily Average and Volume.............................................................................................. 66 Table 7-2: SSS Daily Average and Volume ................................................................................................ 67 Table 7-3: ATM Transactions Daily Average and Volume ......................................................................... 68 Table 7-4: BCTS Daily Average Volume and Value .................................................................................... 69 Table 7-5: EFTS Fawri+ Daily Average and Volume ................................................................................... 70 Table 7-6: EFTS Fawri Daily Average Volume and Value........................................................................... 70 List of Tables iv
7. Central Bank of Bahrain Financial Stability Report- February 2017 List of Charts Chart 1-1 : Real GDP Growth in Selected Europeans countries (Quaterly%) ................................................... 9 Chart 1-2: Real GDP Growth in Advanced Economies (Quaterly%)* ............................................................. 10 Chart 1-3: Quaterly Real GDP Growth in BRIICS (Quaterly%)* ..................................................................... 10 Chart 1-4: Real GDP Growth in GCC Countries (Annual percent change) ..................................................... 11 Chart 1-5: Yields on 10 Year Sovereign Bonds ............................................................................................... 11 Chart 1-6: Five Year Spreads on Credit Default Swaps .................................................................................. 12 Chart 1-7: Global Equity Market Indices (Re-indexed to January 2008) ........................................................ 13 Chart 1-8: Various Currencies Against US dollar ............................................................................................ 13 Chart 2-1: Retail Banks’ Assets (BD million) ................................................................................................... 17 Chart 2-2: Categorization of Retail Banks’ Assets (BD million) ................................................................... 17 Chart 2-3: Retail Banks’ Assets (%) by ........................................................................................................... 18 Chart 2-4: Retail Banks’ Assets (%) by Geographical Classification (Nov2015)*........................................... 18 Chart 2-5: Retail Banks’ Assets (%) by ........................................................................................................... 18 Chart 2-6: Wholsale Banks’ Assets ................................................................................................................ 18 Chart 2-7: Wholsale Banks’ Assets ................................................................................................................ 18 Chart 2-8: Wholesale Banks Assets by: Geographical Classification (2007) *.............................................. 19 Chart 2-9: Wholesale Banks Assets by: Geographical Classification (Oct.2015)*......................................... 19 Chart 2-10: Wholesale Banks Assets by ......................................................................................................... 20 Chart 2-11:: Loans to the Private Sector ....................................................................................................... 20 Chart 2-12: Loans to General Government ................................................................................................... 20 Chart 2-13: Total Deposits and total Domestic Credit (BD Million) ............................................................... 21 Chart 2-14: Money Supply (BD Billion) from July 2015 to November 2016 .................................................. 21 Chart 2-15: Monthly Inflation in 2013-2016 ( CPI%*) ................................................................................... 21 Chart 2-16: Personal Loans and Advances (Volume and % of GDP) .............................................................. 22 Chart 2-17: Growth Rate of Total Personal Loans and Advances (%) ............................................................ 23 Chart 2-18: Personal Loans Breakdown (November 2016) ........................................................................... 23 Chart 2-19: Retail Banks- Average Interest Rates on Personal Loans (%)...................................................... 24 Chart 2-20: Business Loans and Advances (Volume and % of GDP) .............................................................. 24 Chart 2-21: Business Loans by Sector November 2016 ................................................................................. 25 Chart 2-22: Retail Banks- Average Interest Rates on Business Loans (%)...................................................... 25 Chart 3-1: Impaired Loans by Sector.............................................................................................................. 29 Chart 3-2: Distribution Lending (% of total loans) ......................................................................................... 31 Chart 4-1: Conventinoal Retail Banks’ Impaired Loans by Sector .................................................................. 35 Chart 4-2: Distribution of Conventional Retail Banks’ Lending (% of total loans) ......................................... 36 Chart 4-3: Distribution of Conventional Local Retail Banks’ Lending (% of total loans) ................................ 37 Chart 4-4: Distribution of Conventional Overseas Retail Bank’s Lending (% of toal loans) ........................... 38 Chart 5-1: Islamic Retail Bank’s NPF’s by Sector (% of gross facilities per sector) ........................................ 48 Chart 5-2: Distribution of Islamic Retail Bank’s Lending by Economic Activity (% of total facilities) ............ 49 Chart 5-3: Distribution of Islamic Retail Bank’s Lending by Islamic Instrument (% of total facilities) ........... 50 Chart 5-4: Islamic Wholesale Bank’s NPF’s by Sector .................................................................................... 52 Chart 5-5: Distribution of Islamic Wholesale Banks’s Lending ...................................................................... 53 Chart 5-6: Distribution of Islamic Wholesale Bank’s Lending by Islamic Instrument (% of total facilities) ... 54 Chart 6-1: Recent Trends in the Bahrain All-Share Index, Jan 2014-Dec 2016. ............................................. 58 Chart 6-2: Bahrain All-Share Index, Jan 2011-Dec 2016 ................................................................................ 58 Chart 6-3: Market Capitalisation by Sector, June 2016 ................................................................................. 59 Chart 6-4: Sectoral Distribution of Shares Traded by Value (% of all shares traded) in Dec 2016 ................ 60 Chart 6-6: Sectoral Distribution of Shares Traded by Volume (% of all shares traded) in Dec 2016 List of Charts v
8. Central Bank of Bahrain Financial Stability Report- February 2017 Chart 6-6 : Sectoral Distribution of Number of Transactions Traded (% of all transactions traded) in Dec 2016....................................................................................................................................................... 62 Chart 6-7: Annual Shares Traded by Value (% of all shares traded) .............................................................. 62 Chart 6-8: Annual Shares Traded by Volume (% of all shares traded) ........................................................... 63 Chart 6-9: Annual Number of Transactions by Sector ................................................................................... 63 Chart 6-2: Number and Value of ATM Transactions, December 2014- December 2016 .............................. 68 List of Charts vi
9. Central Bank of Bahrain Financial Stability Report- February 2017 Preface A key objective of the The Central Bank of Bahrain (CBB) is to ensure the continued soundness and stability of financial institutions and markets. As the single regulator for the Bahraini financial system, CBB attaches utmost importance in fostering the soundness and stability of the financial system. CBB recognizes that financial stability is critical to maintaining Bahrain’s position as a regional financial centre and ensuring that the sector continues to contribute significantly to growth, employment and development in Bahrain. Financial stability can be defined as a situation where the financial system is able to function prudently, efficiently and uninterrupted, even in the face of adverse shocks. This objective is the primary responsibility of CBB's Financial Stability Directorate, which conducts regular surveillance of the financial system to identify areas of concern and undertakes research and analysis on issues relating to financial stability. In pursuit of its objective of promoting financial stability, the CBB conducts regular financial sector surveillance, keeping a close watch on developments in individual institutions as well as in the system as a whole. The Financial Stability Report (FSR) is one of the key components of CBB’s financial sector surveillance framework. Produced semi-annually by the Financial Stability Directorate (FSD), its principal purpose is macro-prudential surveillance, assessing the safety and soundness of the financial system as a whole (intermediaries, markets and payments/settlement systems). The ultimate objective of such macro-prudential analysis is to identify potential risks to financial stability and mitigate them before they crystallize into systemic financial turbulence. The published FSR is prepared for the CBB management, reviewing recent trends and identifying areas of concern which require supervisory and policy attention. Financial Soundness Indicators (FSIs) are used to monitor the financial sector on a continuous basis. This new edition of the FSR is organized into seven chapters divided into three parts part as follows:  Part I: Looks at national and international developments: - Chapter 1: Reviews recent international financial developments. - Chapter 2: Examines the recent developments in Bahrain’s financial sector and the household sector.  Part II: Looks at the developments in the banking sector: - Chapter 3: Evaluates the financial condition and performance of the entire banking Sector of the Kingdom. - Chapeter 4: Evaluates the financial condition and performance of conventinoal banks - Chapter 5: Evaluates the financial condition and performance of Islamic banks.  Part III: Looks at the developments in equity market and payment and settlement systems. Preface 1
10. Central Bank of Bahrain - Financial Stability Report- February 2017 Chapter 6 : Reviews recent trends on the equity market. Chapter 7: Focuses on stability issues relating to the payment and settlement systems. Unless indicated otherwise, Chapter 3, 4 and 5 of the report analyzes data covering the period between end-March 2016 and end-Septem ber 2016. Preface 2
11. Central Bank of Bahrain Financial Stability Report- February 2017 Executive Summary Global Macro Financial Environment Overview The global economic and financial conditions faced new challenges in the second half of 2016 . The exit of the UK from the EU followed by the US election also added uncertainty to the global financial markets. The United States growth slowed down in the first half of 2016 before gaining some momentum in the second half. In the Euro Area, economic activity showed some improvement after the first quarter of the year. Growth for the BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa), was the weakest in emerging markets. The Australian, Canadian and UK economies had shown modest signs of recovery. Recent geo-political concerns have weighed on the power of the Euro. The economic performance of the Eurozone economy along with the uncertainty on the future of the UK within the Euro Area added some pressure on the Euro. The Euro continued to fall against the US Dollar reaching USD 1.039 on the interbank market in December 20th 2016. Since our June report, the British pound (GBP) depreciated against the US dollar. The exit from the Eurozone was the principle reason of this sharp depreciation. Financial and Non-Financial Sector Overview Bahrain’s banking sector represented 6.2 times of GDP in Q3 2016. Total retail banking assets continued growing reaching BD 31.5 billion in November 2016. Retail bank’s assets in the GCC represented 21.6% of total assets. The amount of credit provided by them reached BD 8,076 million in November 2016. Total deposits reached BD 16,473.2 million in November 2016, where 56.3% of them are domestic deposits. Money supply continued to grow were M2 stood at BD 10,286.1 million in end-November 2016. M3 was BD 12271.7 million in end-November 2016, 3.7% higher than in November 2015. The inflation rate in consumer prices has always been stable in Bahrain. The household sector plays an important role in financial stability and the overall economy. The construction and real estate sector plays a huge importance on economic developments and is a good indicator of macroeconomic conditions in the country. Banking Sector The Capital Adequacy Ratio (CAR) for the banking sector stood at 19.2% in September 2016. Non-performing loans (NPL) ratio increased to 5.5% in September 2016. Specific provisions showed a decrease to 54.1% in September 2016. Return-on-assets (ROA) reached 1.3% in September 2016. Return-on-equity (ROE) increased to 6.0% in September 2016. By September 2016, the overall loan-deposit ratio was 67.9% and Liquid assets stood at to 22.8%. Conventional Banks Executive Summary 3
12. Central Bank of Bahrain Financial Stability Report- February 2017 For Conventional Retail Banks , CAR increased to 19.6% in September 2016. Non-performing loans (NPL) ratio increased to 4.7% in September 2016 and the loan portfolio of retail banks remains concentrated. As at end-September 2016, return-on-assets (ROA) was at 1.1%. Return-on-equity (ROE) for locally-incorporated banks stood at 11.4% in September 2016. For Conventional Wholesale Banks, the CAR for locally-incorporated wholesale banks increased to 19.8% by September 2016. Loans classified as non-performing increased to 5.5% of total loans. ROA for the conventional wholesale banking sector was at 0.6% in September 2016. ROE for local wholesale banks increased from 2.5% to 3.6%. Liquid assets for wholesale banks as a proportion of total assets increased to 24.6% in September 2016 from 22.7% in March 2015. Islamic Banks The CAR of Islamic retail banks increased to 17.1% in September 2016. Non-performing facilities (NPF) ratio decreased to 12.1% and Specific Provisoining also decreased to 34.1%. The return on assets (ROA) for Islamic retail banks remained positive but decreased to reach 0.2% in September 2016 compared to Sept 2015. Return on equity (ROE) decreased to 1.6% for the same period. Liquid asset ratio increased to 12.3% in September 2016. The ratio of total facilities to deposits decreased to 82.9% in September 2016. The CAR for Islamic wholesale banks increased from 19.1% in March 2016 to 19.3% in September 2016. As of end-September 2016, NPF ratio for Islamic wholesale banks decreased to 2.9% and provisioning increased to 82.4% over the same period. Return on assets (ROA) increased to 0.2% in September 2016. Return on equity (ROE) increased as well to 1.6% in September 2016. As of end-September 2016, liquid assets of Islamic wholesale banks represented 18.9% of total assets and the facilities deposit ratio decreased from 62.1% to 61.6% in September 2016. Performance of Equity Markets As at December 2016, Bahrain Bourse recorded a total listing of 44 Companies, 19 Mutual funds and 14 Bonds and Sukuks. Year-on-year data demonstrates that the Bahrain All Share Index increased by 4.56 points (0.4%) between Dec 2015 and Dec 2016 closing at 1220.45 points by Dec 2016. Market capitalization of the Bahrain Bourse stood at BD 3.7 billion. As Dec 2016, the priceearnings ratio (P-E ratio) stood at 8.9, an increase from the 8.42 attained in June 2016 and the 8.85 in Dec 2015. The bulk of the value and the volume of shares traded in Dec 2016 was in the “Commercial Banks” sector whose traded shares by value represented 54.9% of total shares and by volume of shares represented 79.1%. The majority of the number of transactions in December 2016 (1,163 transactions and a 33.2% increase compared to June 2016) was also attained by the “Commercial Banks”. Executive Summary 4
13. Central Bank of Bahrain Financial Stability Report- February 2017 Payments and Settlement System Payment and Settlement Systems are central to the smooth operations of the financial sector and the efficient functioning of the overall economy . The RTGS System provides for Payment and Settlement of Customer transactions as a value addition. The daily average volume of Bank transfers for the second half of 2016 decreased by 21.2% to 227 transfers. The value of those transfers have increased in the second half of 2016 was BD259.3 million. The CBB operates and oversees The Scripless Securities Settlement System (SSSS). The volume of issues in the second half of 2016 was 43. The average value of issues for the second half of 2016 was BD3.06 billion. As for ATM transactions, the daily average volume of ATM transactions for the second half of 2016 was 39,242 transactions per day. The daily average value of ATM transactions stood at BD3.8 million. With regards to use of cheques, the daily average volume of cheques for the second half of 2016 was 266,400 with a daily average value of BD793.7 million. Executive Summary 5
14. Central Bank of Bahrain Financial Stability Report- February 2017 Part I : Developments in the International and Domestic Financial Markets Part I: Developments in the International and Domestic Financial Markets 6
15. Central Bank of Bahrain Financial Stability Report- February 2017 1 . Developments in the International Financial Markets Key Points Chapter  Since the last Financial Stability Report (FSR), the global economy has faced new challenges following the Brexit and the US election. 1  Persistence of low inflation in many economies, low global demand and low interest rates have stopped the global path of recovery.  The ECB expressed its willingness to add more quantitative easing program to address concerns about low inflation and to support growth in the Eurozone.  The U.S. dollar continued to appreciate against many major and emerging market currencies amid divergent monetary policy expectations. 1.1 Overview Since lasts edition of the Financial Stability Report (FSR), the global economic and financial conditions have faced new challenges in the second half of 2016. Continuing low inflation in many economies, low global demand and low interest rates have added more uncertainty and stopped the global recovery. The exit of the UK from the EU followed by the US election also added uncertainty to the global financial markets. The overall environment showed some signs of resilience by the end of the year. During the second half of 2016, the global economy had some important events in advanced countries and emerging market economies, summarized as follows:  The United States growth was slow in the first half of year 2016, averaging just above 1%. The economy gained momentum in the third and fourth quarter growing by 3.5% and 1.4% respectively (source: the US Bureau of Economic Analysis). The US performance was mainly supported the retail sector, strong US dollar and increased export activities.  In the Euro Area, economic activity was improving since the first quarter of the year supported by stronger private consumption, low inflation rate and monetary policy Chapter 1: Developments in International Financial Market 7
16. Central Bank of Bahrain      Financial Stability Report- February 2017 by the European Central Bank. Furthermore, labor market improved slightly in many countries. In Japan, economic activity in the second half of 2016 was supported by higher industrial production and strong exports activity. The weakness of the Japanese Yen along with lower commodity and energy prices and financial conditions have helped the recovery of foreign trade balance and improved economic growth in the third and fourth quarters. The government continues supporting the local economy by various fiscal stimulus and quantitative easing programs. Employment and wages are continuing to improve. In the BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa), growth was the weakest marking the fifth consecutive decrease and the worst year since the global credit crisis. Falling global commodity prices have affected these emerging markets which rely heavily on export led growth. In 2016, China’s economic growth was slowing causing a decline in various equity and commodity markets. Increasing non-financial sector debt is also another issue that threats the Chinese economy. In the third quarter of 2016 net capital outflows from China increased to near-record levels and the Chinese currency has lost almost 3% of its value against the US dollar. The IMF expects a significant slowdown in China’s growth in the coming years. The overall situation in the Middle East and North Africa (MENA) seems to have taken a turn for the worse since the beginning of 2016 by situations in Libya, Syria, Yemen and Iraq. Oil prices are still and affecting hurting oil-producing countries reserves. Geopolitical risks, subdued global demand and challenging domestic conditions are affecting the MENA’s growth. GCC countries have recorded economic growth from large infrastructure projects and improvement in non-oil sector growth. GCC banks remain well capitalized and profitable. The challenge for GCC countries faced to find more channels to well manage their public finances and to diversify their economy with persistent low oil prices traded in the end of 2016 at around USD 50 a barrel. In Bahrain, banks remain profitable and well capitalized. However, the recent sharp drop in the prices of oil and some other commodities, should it become persistent, will weigh on the economy. In the following section, we analyze recent trends in the global economy and look at the evolution of major financial and economic indicators during the previous six months. 1.2 Global Macro-financial Environment Overall, 2016 was a year where the global economic and financial conditions were weak and risks associated to this environment increased drastically in the second half of the year. The Brexit and the US election were the main reason of the deterioration of the global economy and the increase of market uncertainty. Chapter 1: Developments in International Financial Market 8
17. Central Bank of Bahrain Financial Stability Report- February 2017 1 .3 Recent Trends in the Global Economy A. Economic Performance The global economic activity had slow growth mainly due to: slow growth in advanced economies notably in the United States, sharp decline in commodity and energy prices, decreasing trade flows, and diminishing capital flow. At its last monetary policy meeting of 2016, the Fed announced its decision to raise interest rates, while the accompanying projection materials included an increase in the median estimate for rate hikes for 2017. Recovery in Europe remains slow following the Brexit which amplified volatility and raised new concerns in the global financial markets. Recent OECD’s data shows that since 2013, the Euro Area (19 countries) have experienced positive growth. In the fourth quarter of 2016, Euro Area has achieved a growth by 1.7%. Similarly, the Eurozone (28 countries) had achieved 1.8% of growth in the same period a bit lower than the previous quarter where the growth rate was 2.0%. Chart 1-1: Real GDP Growth in Selected Europeans countries (Quaterly%) Seasonally Adjusted* 8 6 4 2 0 -2 -4 -6 France Germany Ireland Italy Portugal Spain Euro area (19 countries) European Union (28 countries) Growth rate compared to the same quarter of previous year, seasonally adjusted Source: OECD Quarterly National Accounts At a country level, Ireland achieved the highest best performance as GDP growth reached 6.6% in the fourth quarter of 2016. Spain achieved a high economic growth throughout 2016 and growth was 3.2% in the fourth quarter of 2016. Italy and France showed economic growth. Germany; the largest economy in the Eurozone has experienced better economic activities in the second half of 2016 where GDP growth was 1.6 % in the first quarter of 2016 and 1.7% in the last quarter of 2016. Regarding non-European countries (Chart 1-2), Australia recorded a slowing GDP growth from 3.1% in the first quarter of 2016 to 1.8% in the fourth quarter of 2016. In the UK, GDP grew Chapter 1: Developments in International Financial Market 9
18. Central Bank of Bahrain Financial Stability Report- February 2017 by 2 .0% in the first quarter of 2016, supported by The Bank of England quantitative easing programs and despite the exit from the European monetary union (EuroZone), growth rate of the GDP remained stable and its level of the beginning of the year. For Japan, the country’s economic performance was weak in the beginning of the year but economic growth improved during the remaining quarters moving from 0% in Q1/2016 to 1% in Q4/2016. Chart 1-2: Real GDP Growth in Advanced Economies (Quaterly%)* 5 4 3 2 1 0 -1 -2 Australia Canada Japan UK *Growth rate compared to the same quarter of previous year, seasonally adjusted Source: OECD Quarterly National Accounts USA As for emerging economies, Chart 1-3 shows that in the fourth quarter of 2016, the BRICS countries’ growth was positive (3.37%- excluding Russia). While India’s economy continues to perform well, Brazil’s economic performance slowed since the second quarter of 2014 and the country fell into recession for the eleventh consecutive quarter. In China, economic growth increased in the fourth quarter of 2016 (+6.7%). Indonesia has also shown very encouraging economic performance and the country kept a growth rate above 5% during the four quarters of 2016. Chart 1-3: Quaterly Real GDP Growth in BRIICS (Quaterly%)* 10 5 0 -5 -10 BRIICS India Brazil China Indonesia Russian Federation *Growth rate compared to the same quarter of previous year, seasonally adjusted. *Data on Russia is not available since the 4th quarter of 2015. Source: OECD Quarterly National Accounts. Chapter 1: Developments in International Financial Market 10
19. Central Bank of Bahrain Financial Stability Report- February 2017 The drop of energy prices followed by the continuing uncertainty in the global economy have affected the growth of GCC economies in 2016 as their growth rate moved from 3 .3% in 2015 to 1.8% in 2016. Projections for 2017 show that the regional economy will grow at a moderate rate of growth of 2.3%. Chart 1-4: Real GDP Growth in GCC Countries (Annual percent change) 15 10 5 0 Avg.2000–12 Bahrain 2013 Kuwait Oman 2014 Qatar 2015 Saudi Arabia 2016* United Arab Emirates 2017* GCC *Denotes forecast. Source: IMF MENAP Regional Economic Outlook, October 2016 B. Financial Markets Chart 1-5 highlights the change in Yields on ten-year sovereign bonds in some European countries and the US. The graph shows volatility of the sovereign bond yields during the past six months which in turn has triggered market volatility and caused depreciation of some currencies. After a decrease of ten-year maturity, yields on many European bonds increased slightly in 2016. Similarly, the yield on the 10-year bonds in the US increased in the last quarter of 2016, as expectations that the new US administration’s plans for tax cuts and causing inflation worries for bond investors. However, the yield on the 10-year benchmark German bond fell into negative zone for the first time in June 2016 and the beginning of October 216 following fears of the Brexit. Chart 1-5: Yields on 10 Year Sovereign Bonds 16 14 12 10 8 6 4 0 -2 1/4/2010 3/4/2010 5/4/2010 7/4/2010 9/4/2010 11/4/2010 1/4/2011 3/4/2011 5/4/2011 7/4/2011 9/4/2011 11/4/2011 1/4/2012 3/4/2012 5/4/2012 7/4/2012 9/4/2012 11/4/2012 1/4/2013 3/4/2013 5/4/2013 7/4/2013 9/4/2013 11/4/2013 1/4/2014 3/4/2014 5/4/2014 7/4/2014 9/4/2014 11/4/2014 1/4/2015 3/4/2015 5/4/2015 7/4/2015 9/4/2015 11/4/2015 1/4/2016 3/4/2016 5/4/2016 7/4/2016 9/4/2016 11/4/2016 2 US Germany UK Italy France Spain Netherland Portugal Source: Bloomberg Chapter 1: Developments in International Financial Market 11
20. Central Bank of Bahrain Financial Stability Report- February 2017 CDS spreads are a fundamental metric of default risk . Broadly, a higher spread on the CDS implies a greater risk of default for the reference entity. Chart 1-6 provides information as to how financial markets perceive the risk of default on corporate and sovereign debt. It illustrates spreads on five-year CDS in some European countries and the US since 2009. Prior to the crisis, CDS spreads were low for all of the referenced countries, showing that investors placed low probabilities on these countries defaulting on their debt. The policy measures launched by the European Central Bank have declined the financing cost and increased liquidity and profitability of banks. In the second half of 2016, the average five-years CDS spreads declined (Chart 1-6) in most advanced economies. In the US, UK, Germany and France spreads on Credit Default Swaps remained low since 2009 despite public debt levels that are comparable to or above those of southern Euro area member states. However, during the last quarter of 2016, CDS spread default swaps increased slightly in Portugal and Italy reflecting growing investor anxiety about the health of both countries’ banking sectors. Currently, the CDS market is also suffering from a pro-cyclical effect. As bank debt comes under pressure, investors seek to protect positions by buying CDS. Chart 1-6: Five Year Spreads on Credit Default Swaps 1600 1400 1200 1000 800 600 400 200 0 9/17/2009 9/17/2010 Ireland 9/17/2011 9/17/2012 Portugal 9/17/2013 Spain 9/17/2014 9/17/2015 9/17/2016 Italy Source: Bloomberg Regarding global equity markets, following a period of uncertain sentiments during the summer 2013; optimism returned to global equity markets. This was due to policy measures and quantitative easing programs undertaken in some advanced economies that had an immediate impact on equity markets (chart 1-7). Since the last FSR, equity prices have risen across a range of advanced economies. As chart 1-7 shows, equity prices in the Euro area have increased by 5.5% after volatility in the beginning of 2016. Similarly, the S&P 500 has risen by 4.1%, reaching a high record since 2007. Chapter 1: Developments in International Financial Market 12