In this FAQ, S&P Global Ratings looks at the high-level effects of current events relating to Russia and Ukraine on banks in the Middle East and Africa (MEA). These findings are subject to change depending on how the conflict evolves.

S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. Potential effects could include dislocated commodities markets--notably for oil and gas--supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. As the situation evolves, we will update our assumptions and estimates accordingly. See our macroeconomic and credit updates here: Russia-Ukraine Macro, Market, & Credit Risks. Note that the timing of publication for rating decisions on European issuers is subject to European regulatory requirements.

Frequently Asked Questions

What is rated MEA banks' direct exposure to Russian and Ukrainian counterparties?

We understand that the overall exposure is very limited. For rated Gulf Cooperation Council (GCC) banks, exposure is minimal and not expected to meaningfully affect asset quality, cost of risk, or profitability. Those rated banks that are exposed to Russian or Ukrainian counterparties took a fairly conservative lending approach, for example, requiring additional collateralization compared with a similar local counterparty.

We also believe that rated banks in North Africa have limited exposure. Rated Tunisian and Egyptian banks have minimal activity outside their home countries, while for Morocco, most activity abroad is in sub-Saharan Africa. Rated sub-Saharan banks' (Nigeria and South Africa) exposure is concentrated in Africa, the U.K., or Asia. Some South African corporates have exposure to Russia but rated South African banks' loan exposures are well diversified. Therefore, we do not expect this to indirectly affect their financial profiles.

Overall, we forecast a limited direct impact on rated MEA banks' cost of risk from the Russia-Ukraine conflict, if the situation does not worsen.

How could MEA banks be hit by wider economic effects related to the Russia-Ukraine conflict?

In our view, the economy is one of two main channels for current events to potentially hit MEA banks, alongside refinancing. The conflict has triggered a significant increase in energy, transport, and food prices because of higher commodities prices, including oil and gas. As a result, S&P Global Ratings recently revised its Brent oil price assumption to $85 in 2022 compared with $75 previously (see related research). The impact on MEA countries and banks depends on their resilience to external shocks, notably via economic diversification and wealth levels. The increase in commodities prices is generally positive for GCC countries, given the structure of their economies, the dominance of hydrocarbons in their exports, and their strong financial profiles, which will help them absorb any increase in food prices.

For commodities importing countries, the effect is likely to be negative with higher imports and current account deficits, additional external financing requirements, increased government spending in the form of rising subsidies where they exist, higher inflation, and reduced repayment capacity of retail and corporate clients if price rises are fully passed on. It is unclear if the sharp increase in oil prices over the past few days--Brent reached $116 per barrel on March 3, 2022--is durable and how it will shape the overall macroeconomic picture. Turkey's energy imports are significant at 5.3% of GDP in 2021, and the economy is one of the most vulnerable on the external side, given its significant financing needs and low international reserves. The worsening of the trade account because of the higher energy bill may be mitigated by increased exports to the GCC.

The conflict could also hit tourism sectors in some countries at a time when they are recovering from the COVID-19 pandemic, especially those that depend on Russian or Ukrainian visitors, such as the United Arab Emirates (UAE), Turkey, Egypt, and Tunisia. In Turkey, for example, Russian and Ukrainian nationals accounted for 27.8% of visitors at year-end 2021. In Egypt, there are no official statistics by nationality but public information confirms that Russians are among the top three contributors to tourism. Similarly, Tunisia publishes no official numbers on Russians specifically, but those with undisclosed nationality accounted for 5% of visitors and 26.4% of nights spent at Tunisian hotels. Moreover, Russians were the second largest source market for Dubai's travel and tourism sector in 2021. We expect a decline in Russian visitors will potentially weigh on banks in Egypt, Morocco, Turkey, and Tunisia where tourism exposures and receipts are an important contributor to the economy and banks' exposures.

What refinancing risks does the conflict present for rated MEA banks?

The Russia-Ukraine conflict could result in a significant increase in risk aversion from investors. In MEA, we believe that Qatar, Turkey, and Tunisia would be the most vulnerable. The Qatari banking system's external debt has continued to increase over the past five years, reaching 39.2% of total assets at year-end 2021. Although we understand that banks in Qatar enhanced the quality of this debt (longer maturities and stronger relationships with external depositors) over the past few years, the current situation is fluid. Any further adverse developments could affect investors' appetite and trigger some outflows. However, Qatari banks continue to hold a relatively good cushion of external assets that can be used in case of outflows and there is strong government capacity and a track record of support in case of need. We have stress tested the actual external debt position of the Qatari banking system under different assumptions and the results show that it should be able to absorb a moderate shock without recourse to the authorities (see table 1).

Turkish banks' external debt has declined moderately over the past five years but remains a significant source of risk. Although banks have sufficient external assets to withstand moderate stress, whether they can access these assets under extreme stress remains uncertain, since most are placed with the central bank or held in government instruments. For Tunisia, the issue is at the sovereign level and relates to the government striking a deal with the IMF to finance its 2022 deficit. Given Tunisian banks' increasing exposure to the sovereign, any additional pressure at the sovereign level would likely hit their creditworthiness. Other MEA countries that we looked at either have a net external asset position or manageable net external debt.

Table 1

The table above shows Qatari banks' remaining external liquidity positions in U.S. dollars under different outflow assumptions for nonresident banks (horizontal axis) and depositors (vertical axis). It is based on Nov. 30, 2021, data and on an assumed haircut to external assets using the following figures: 0% for cash, 15% for interbank, 50% for lending, 20% for investment, and 100% for other assets. We also assume that dues to head offices and branches remain stable and 20% of capital market funding is maturing and not renewed. Based on this, Qatari banks had a net external liquidity position of $47 billion at Nov. 30, 2021.

What would wider cryptocurrency adoption mean for banks?

It is unclear if the conflict will increase use of cryptocurrencies as populations look at alternatives they could perceive as instruments to protect their savings and wealth in MEA. However, we note that five of the top 30 countries for crypto adoption are in MEA (based on percent of population; see table 2). At this stage, there is no indication of local funding outflows in MEA but the risk cannot be totally excluded if the conflict escalates. Some regulators may also restrict the use of cryptocurrencies to avoid potential adverse effects on their financial systems.

Table 2

Related Research

• S&P Global Ratings Raises Near-Term Oil And Gas Price Assumptions Following Russian Invasion Of Ukraine, Feb. 28, 2022
• Banks In Emerging Markets: 15 Countries, Three Main Risks (February 2022 Update), Feb. 17, 2022
• When Rates Rise: UAE Banks Will Benefit From Higher Interest Rates, Feb. 15, 2022
• GCC Banking Sector Outlook: On The Recovery Path In 2022, Jan. 11, 2022
• Crypto Assets | Evolution Or Revolution?, Dec. 1, 2021