(MENAFN - Muscat Daily) Muscat -
Funding and liquidity for Omani banks will stay tight for more than a year as robust private sector credit growth and government borrowing exceed banks' deposit growth, Moody's Investors Service has said.
The ratings agency in a report on Tuesday said that deposits, primarily from the government, will lag behind as oil prices below breakeven constrain the government finances in Oman.
'Omani banks' funding and liquidity is expected to remain tight over the next 12 to 18 months as the price of oil stays below breakeven, restraining deposits from the government', Moody's said.
Mik Kabeya, AVP-analyst at Moody's said, 'Project financing, corporate expansion and strong mortgage demand are driving lending growth, but deposits - primarily from the government - will lag. The smallest banks will feel the impact most in higher funding costs and reduced profits.'
Moody's expects the funding squeeze to continue, given the Omani government's high breakeven point for oil, at US$85 a barrel. It said Omani banks are likely to respond by paying more for local currency deposits, increasing their lending rates, lending more selectively, and raising foreign-currency funding.
'Liquidity conditions are tighter in Oman than other Gulf countries because of higher government dependence on oil, Omani banks' heavier dependence on government deposits and the banks' faster credit growth', the ratings agency said.
The sultanate's public sector accounted for 35 per cent of bank deposits in February, or 28 per cent of GDP, the highest in the Gulf region.
Moody's expects the sultanate's government to maintain its large stock of deposits in the banking system.
'However, the risk of a slow and progressive erosion in the large government deposits balances is increasing, amid constrained government finances. The government's rising debt leaves it increasingly vulnerable to changes in the risk appetite of foreign investors', the ratings agency added.