From Feast to Famine
Conquering Non-Performing Loans in The New Era of Rising Debt Burdens
March 2020 witnessed the dramatic end of the longest bull market run in stock market history. From many investors being sanguine about the prospects for 2020 – especially in the UAE where Dubai was due to host the Expo in October (now postponed to 2021) – most companies’ revenue streams have been reduced to all but a trickle, with lockdown restrictions only just starting to be eased.
One of the defining characteristics of the last decade, mainly thanks to central banks’ ultra-loose monetary policy, has been the cheap access to credit enjoyed by individuals and businesses. Both have taken full advantage. The former to indulge in profligate consumer spending and the latter to fund expensive ventures or share buyback programs (Boeing’s USD 11.7bn debt-funded share buybacks being one of the most infamous examples).
As such cycles inevitably draws to a close, the implications for banks are obvious. Companies teetering on the brink before COVID-19 now risk being tipped over the edge. Consequently, banks face the risk of holding a substantial book of non-performing loans, especially those exposed to highly cyclical industries or industries directly impacted by the global lockdown measures, such as aviation, tourism, logistics and real estate.
The situation is even more acute in the Gulf where a global pandemic has coincided with an oil price war and regional political stagnation. Banks in the Gulf are heavily reliant on state company oil sales to provide liquidity, but oil is now trading at less than half its value compared to the start of the year. This makes accessing reasonably priced finance for companies even tougher at a time when holding cash has never been more important.