ABU DHABI // Rising borrowing costs in the UAE and across the Gulf are unlikely to rattle the region's high-flying property markets, experts say - as long as prices continue to climb. Funding costs are rising around the region thanks to a confluence of factors. Corporate borrowers are competing for funds with companies abroad as banks around the world pull in credit to avoid the meltdown spreading outward from the US housing market. The dwindling supply of global cash and rising perceptions of risk are sending bond yields around the region higher and pushing up rates regional banks charge each other for loans.
Bankers and economists say that Gulf lenders and borrowers are well-positioned to absorb the higher price of money, and that the kind of bank failures and borrower defaults buffeting the West remain unlikely here. Higher interest rates may in fact be a welcome development in markets where high oil prices have fuelled double-digit inflation, they say. The only reason to worry would be if prices for property started to wobble, experts say. "That would be like a double hit on borrowers," said Hany Genena, a senior economist at Gulf Finance House Investment Bank in Manama. "Definitely not a pleasant experience."
So far, rising interest rates have yet to put a dent in the case for buying property. The UAE's own benchmark bank lending rate, the Emirates Interbank Offering Rate, or Eibor, has climbed to 2.59 per cent from 2.02 per cent at the beginning of June. While that represents a significant increase on its own, analysts said it remains relatively low compared with global lending rates. And while Eibor may have risen recently, it remains low compared with where it was a year ago. Because the Gulf pegs its currencies to the US dollar, their interest rates have been moving down as the US Federal Reserve has lowered rates to stave off recession.
Here in the Gulf, however, low rates have helped to stoke rampant inflation. Policy makers around the region have been struggling to rein in money supply and cool speculation in the property markets as the cost of housing spirals beyond the reach of many people. Those efforts are in part behind the higher market lending rates, analysts say. Both the UAE and Oman, for example, have raised reserve requirements for banks, obliging them to keep a greater percentage of their deposits on hand instead of lending them out. To build up their deposits, they are raising the amount they pay depositors and charge other banks.
But with interest rates still below inflation, the real cost of borrowing is negative, which encourages investors to buy assets like stocks and property to protect themselves from the dwindling purchasing power of cash. "Cash is eroding in value," said Jayesh Shah, head of brokerage operations at Bank Muscat SAOG in Muscat. "These are paradoxical times. I've never seen anything like this." Demand for loans is so strong as a result that banks are able to charge mortgage rates well above what they pay depositors or other banks to borrow. These spreads are so much higher in the Gulf than elsewhere that analysts say the banks can afford to absorb the rising cost of funds rather than pass them on to borrowers in the form of higher mortgage rates.
Whether banks will do so, however, remains an open question. Analysts agree that the mortgage market remains so hot that banks could probably raise interest rates without denting demand. At the same time, competition for market share between banks is also high, so many banks may choose not to charge homebuyers more. What is happening, according to bankers, is a growing division between banks with strong deposit bases and those that raise more of their funds in the interbank market.
"Banks don't trust each other as much as before," said Jeremy Parrish, chief executive of Standard Chartered's operations in Abu Dhabi. "Any bank that relies fairly heavily on the wholesale market is going to be squeezed." While that may cut into some banks' bottom line, analysts and bankers said there were still few concerns that rising borrowing costs could hurt demand for property, or translate into a higher number of nonperforming loans and defaults. "When you have capital gains, very few people are going to default," said Mr Parrish. "Where this will be tested is if there were a genuine decline in property values."
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