Bank lending conditions in emerging economies tightened abruptly to their weakest level in three years in the first quarter of 2015, according to the latest Emerging Markets Bank Lending Conditions Survey from the Institute of International Finance (IIF).

"The sharp tightening of EM bank lending conditions is further evidence that emerging market economies are struggling," said Charles Collyns, Chief Economist at the IIF. "In addition to a demand slowdown, supply conditions continued to deteriorate. Banks reported a continued tightening in funding conditions, likely reflecting the cautious tone in EM financial markets, at least until the March FOMC (Federal Open Market Committee) meeting."

The composite index of the IIF's Bank Lending Survey dropped 1.7 points to 48.1 in Q1 2015, the lowest since Q4 2011. An index reading below 50 reflects a tightening in bank lending conditions. This tightening in lending conditions was driven by a sharp decline in loan demand, whose index fell to the lowest level in the series starting Q4 2009.

The index for domestic funding conditions edged up 1.5 points to reach 50.7 in the first quarter of 2015. This was primarily driven by a substantial improvement in funding conditions in EM Asia, even as funding conditions in other regions tightened.

By region, EM Asia and Latin America drove the overall tightening in bank lending conditions. Lending conditions in EM Europe also entered tightening territory after easing in 2014. The improvement in bank lending conditions in the MENA region continued to moderate, probably reflecting the impact of weaker commodity prices since the second half of 2014.

The survey covered 130 EM banks and was conducted between March 12 and April 23, 2015.

The recent fall in oil prices will present challenges and opportunities for the Middle East and North Africa (MENA), according to the latest regional report by the Institute of International Finance (IIF).

"While overall growth in the oil exporting countries will moderate and their large fiscal surpluses will decline or shift to significant deficits, low oil prices may encourage these countries to accelerate and deepen structural reform efforts to improve energy efficiency and diversify their economies," said George Abed, Senior Counsellor and Director for Africa and the Middle East." Non-oil exporting countries in the region will benefit from the fall in oil prices through reduced oil import bills and lower fuel subsidies."

The IIF said that the 40% oil price drop from 2014 prices implies a massive shift in external and fiscal accounts. Exports from the MENA oil exporters will be reduced by $300 billion (€280 billion) in 2015. For the Gulf Cooperation Council countries (GCC), the aggregated current account surplus will shrink from $266 billion (€250 billion) in 2014 to about $40 billion (€38 billion) in 2015, and the fiscal position will shift from a surplus of 4.6% of GDP to a deficit of 7.4%.

The IIF projected average growth in the Middle East and North Africa (MENA) region will pick up slightly from 2.8% in 2014 to 3.2% this year, driven by the recovery in Egypt, Morocco, and Iran.

The IIF reduced their growth forecast for the GCC by 0.4 to 3.4% in 2015. However, growth outside the oil sector will remain strong at 4.5%, only slightly lower than last year.

For more on the oil price debate, read our Energy Economics roundtable here