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.”
jeverington@thenational.ae
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RESULTS
Bantamweight title:
Vinicius de Oliveira (BRA) bt Xavier Alaoui (MAR)
(KO round 2)
Catchweight 68kg:
Sean Soriano (USA) bt Noad Lahat (ISR)
(TKO round 1)
Middleweight:
Denis Tiuliulin (RUS) bt Juscelino Ferreira (BRA)
(TKO round 1)
Lightweight:
Anas Siraj Mounir (MAR) bt Joachim Tollefsen (DEN)
(Unanimous decision)
Catchweight 68kg:
Austin Arnett (USA) bt Daniel Vega (MEX)
(TKO round 3)
Lightweight:
Carrington Banks (USA) bt Marcio Andrade (BRA)
(Unanimous decision)
Catchweight 58kg:
Corinne Laframboise (CAN) bt Malin Hermansson (SWE)
(Submission round 2)
Bantamweight:
Jalal Al Daaja (CAN) bt Juares Dea (CMR)
(Split decision)
Middleweight:
Mohamad Osseili (LEB) bt Ivan Slynko (UKR)
(TKO round 1)
Featherweight:
Tarun Grigoryan (ARM) bt Islam Makhamadjanov (UZB)
(Unanimous decision)
Catchweight 54kg:
Mariagiovanna Vai (ITA) bt Daniella Shutov (ISR)
(Submission round 1)
Middleweight:
Joan Arastey (ESP) bt Omran Chaaban (LEB)
(Unanimous decision)
Welterweight:
Bruno Carvalho (POR) bt Souhil Tahiri (ALG)
(TKO)
RESULTS
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Company%20Profile
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
