GCC growth may tighten further while US is in rate-hike mode

The UAE, Saudi Arabia, Bahrain, Kuwait and Qatar all raised key interest rates yesterday in response.

Non-oil sources of growth for the UAE such as tourism, retail and exports will be pressured by the strengthening US dollar if rates continue to rise. Pawan Singh / The National

Rising interest rates threaten to significantly dampen economic growth next year across the Arabian Gulf region, economists warn.

The UAE raised rates on its certificates of deposits by 25 basis points, Saudi Arabia lifted its reverse repurchase rate to 0.75 per cent and Kuwait increased its discount rate by a quarter percentage point to 2.5 per cent.

Bahrain and Qatar also raised key interest rates yesterday, following the US Federal Reserve’s decision to raise short-term interest rates on Wednesday evening by 25bps to 0.75 per cent.

Janet Yellen, the US Federal Reserve chairwoman, signalled that the Fed may speed up its tightening regime next year, pencilling in three 25bps rate rises next year compared with its previous expectation of two, reflecting the growing strength of the US economy.

“The US is now in hiking mode because of the strength of its economy, while in the GCC growth is weak and trade imbalances are high,” said Simon Williams, the chief economist for the Middle East at HSBC. “The monetary tightening stemming from further rate rises will compound the impact of fiscal tightening, which is set to continue even after the recent Opec cuts.”

Further interest rate rises next year threaten to put significant pressure on economies in the Arabian Gulf.

“GCC economies currently need monetary easing to stimulate the economy, create investment, and reduce deflationary pressures,” said Alp Eke, senior economist for Mena at the National Bank of Abu Dhabi. “However, the new rate rises mean that they will have to apply higher interest rates for loans, and will make them more selective.”

The rate hike comes as regional governments prepare to raise billions of dollars in debt to plug deficits that have been swelled by two years of falling oil prices. It means that both governments and corporations will pay more to raise debt from bond market. Consumers tapping personal loans and mortgages are likely to pay more for their money as well.

Such increases in the cost of capital will “add to the growth complexity” across the Middle East region, said John Sfakianakis, the director of economic research at the Gulf Research Centre in Riyadh.

Exporters will also feel the effect of a stronger dollar while tourism-facing sectors such as hospitality and retail will also be hit as customers from countries with weaker currencies become more cost-conscious.

The region’s SME sector will be particularly affected. It has already experienced an increase in loan defaults in the UAE throughout this year, said Mr Eke.

The rising value of the US dollar, which most currencies in the Arabian Gulf are pegged to, is set to continue to put a squeeze on tourist numbers to the region, as well local exporters.

“Further gains in the dollar and by extension the dirham will impact the UAE, and Dubai in particular,” said Mr Williams. “Dubai is becoming an expensive place to go on holiday and do business, with an export-orientated service sector that’s very sensitive to gains in the currency right now.”

Gary Dugan, the chief investment officer at Emirates NBD, said the prospect of higher global growth will help economies across the region weather the impact of further interest rate rises.

“Higher interest rates, and with it a stronger dollar, provide headwinds for the GCC economy that has shown some good stability of late,” said Mr Dugan in an emailed statement.

“Industrial confidence has improved despite these headwinds. So as long as US Fed fund rate rises come in tandem with stronger global growth, GCC economies should be adequately equipped to deal with the challenge.”

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