Financial Stability in a Higher-for-Longer Interest Rate Environment The Case of the Middle East and North Africa

Adrian Alter, Bashar Hlayhel, Thomas Kroen and Thomas Piontek

No 2024/080, IMF Working Papers from International Monetary Fund

Abstract: This paper assesses the state and resilience of corporate and banking sectors in the Middle East and North Africa (MENA) in a “higher-for-longer” interest rate environment using granular micro data to conduct the first cross-country corporate and banking sector stress tests for the MENA region. The results suggest that corporate sector debt at risk may increase sizably from 12 to 30 percent of total corporate debt. Banking systems would be broadly resilient in an adverse scenario featuring higher interest rates, corporate sector stress, and rising liquidity pressures with Tier-1 capital ratios declining by 2.3 percentage points in the Gulf Cooperation Council (GCC) countries and 4.0 percentage points in non-GCC MENA countries. In the cross-section of banks, there are pockets of vulnerabilities as banks with higher ex-ante vulnerabilities and state-owned banks suffer greater losses. While manageable, the capital losses in the adverse scenario could limit lending and adversely impact growth.

Keywords: Bank capital; stress testing; financial stability; zombie credit; bank funding profile; banking sector stress test; bank interest rate risk; bank Summary statistics; banking stress test result; Commercial banks; Corporate sector; Credit; Capital adequacy requirements; Middle East; North Africa; East Africa; Global (search for similar items in EconPapers)
Pages: 44
Date: 2024-04-05
New Economics Papers: this item is included in nep-ara, nep-ban and nep-fdg
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