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

By Adrian Alter, Bashar Hlayhel, Thomas Kroen, Thomas Piontek

April 5, 2024

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Format: Chicago

Adrian Alter, Bashar Hlayhel, Thomas Kroen, and Thomas Piontek. Financial Stability in a Higher-for-Longer Interest Rate Environment The Case of the Middle East and North Africa, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Capital adequacy requirements, Commercial banks, Corporate sector, Credit, Economic sectors, Financial crises, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, Money, Stress testing

Keywords: Bank capital, Bank funding profile, Bank interest rate risk, Bank Summary statistics, Banking sector stress test, Banking stress test result, Capital adequacy requirements, Commercial banks, Corporate sector, Credit, East Africa, Financial stability, Global, Middle East, North Africa, Stress testing, Zombie credit

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/080
Stock No:

WPIEA2024080
ISBN:

9798400270017
ISSN:

1018-5941

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