Elevated interest rates could potentially dampen bank lending growth in the Sultanate of Oman, a report by Fitch Solutions – an affiliate of Fitch Ratings – has revealed.
The outlook accords with a recent assessment provided by the Central Bank of Oman (CBO) in its latest Financial Stability Report, warning that any further interest rate hike by the US Federal Reserve could “raise borrowing costs” in Oman.
To help tackle mounting inflationary trends, the US Fed had raised its benchmark interest rate thrice during the first half of this year. The Sultanate of Oman, which adheres to a fixed exchange rate regime, followed suit by raising interest rates in close alignment with the US target federal funds range. Consequently, the repo rate in Oman rose in conjunction with the Feds policy rate.
Commenting on the implications of the interest rate hike, CBO Executive President Tahir bin Salim al Amri noted in the Financial Stability Report: “Following the lead of the Fed, Oman also raised its repo rate to 2.25 per cent by mid-June 2022 in three successive rate revisions. Nevertheless, a recent Credit Conditions Survey reveals that in 2022 financial institutions foresee an increase in the demand for credit from households and businesses, and they anticipate easing of credit availability to both segments.”
The CBO report, nevertheless, went on to note that current changes in policy rate have not yet reflected in the retail rates of the Omani banking sector. “However, a further hike in interest rates may raise the borrowing costs in Oman. Nevertheless, based on the assessment conducted so far, the banking sector in Oman remains resilient to the moderate increase in interest rates,” the report stated.
Fitch Solutions, in its research paper published this week, cautioned that higher interest rates could constrict banking sector lending growth.
“At Fitch Solutions, we expect Oman’s bank lending growth will remain subdued at 2.8 per cent in 2022 and 3.0 per cent in 2023 due to persistently high interest rates,” Fitch Solutions said. “While lending rates have remained relatively stable despite tighter financial conditions, they linger at an elevated level of 5.5 per cent on average, exceeding pre-Covid levels. Lending rates have increased since the oil price shock of 2014 reflecting a weakening macroeconomic environment and have not decreased in 2020 despite the easing of monetary policy by the Central Bank of Oman (CBO).”
Following the series of interest rate hikes, Oman’s apex bank had cautioned banks not to increase lending rates, citing the ample liquidity in the banking system and wide interest rate margins. It allowed banks to absorb higher deposit rates.
Fitch Solutions stated: “We believe that the macroeconomic backdrop will remain supportive for the banks’ liquidity and thus contain upside pressures on already elevated lending rates. Indeed, with lending rates hovering around 5.5 per cent, client loans have expanded by just 3.5 per cent in the first seven months of 2022. We expect this trend to persist, which will keep credit growth in the low single digits.”
Significantly, the non-performing loan (NPL) ratio is expected to start decreasing by 2023 on the back of an improving macroeconomic environment, according to the research agency. “The NPL ratio remained stable at 4.3 per cent in Q2 2022, primarily due to the CBO’s decision to defer loan repayments until December 2022 for borrowers that were laid off during the Covid-19 pandemic,” it added.
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