The end of the longest period of zero interest rates in 100 years is finally looming, with analysts predicting that the Federal Reserve chairwoman Janet Yellen will lift the discount rate in either September or December.
This could affect companies and individuals across the UAE, as the country’s banks, sovereign wealth funds, property developers and shoppers adjust to higher borrowing costs and a likely stronger dirham.
But Mrs Yellen insists that the forthcoming interest rate increase will be slower and less aggressive than previous rises, meaning that any impact on the region is not likely to be dramatic, economists said.
“The Fed has continually repeated that it will be a very gradual rate hike and cycle,” said Monica Malik, the chief economist at Abu Dhabi Commercial Bank (ADCB). “That interest rates will rise gradually – and that the end point will be lower – will have a positive impact on the private sector in the Gulf.”
Gulf central banks have not cut interest rates to the same extent as the Fed.
The UAE Central Bank’s lending rate remains at 1 per cent – 75 to 100 basis points higher than the US Federal Reserve funds rate.
This means that central bank lending rates could remain static in the medium term, which would “keep investment costs low and mortgage rates low and support economic activity”, Ms Malik said.
Analysts expect that higher interest rates will eventually be a boon to banks’ bottom lines.
Higher rates tend to benefit banks because they make it easier for them to lend funds at wider spreads, said Shabbir Malik, vice president of research at Egyptian investment bank EFG-Hermes.
Some UAE banks have already reported strong second-quarter results, and higher interest rates are likely to provide a further boost.
Higher lending rates may also have an impact on the country’s real estate market.
Housing purchases tend to slow as the cost of taking out a mortgage rises, while the higher dollar increases foreigners’ willingness to sell.
“The stronger dollar has also slowed the property market in Dubai, because it reduces the spending power of overseas buyers,” said Ms Malik.
So long as the dollar remains strong against foreign currencies, property owners in Dubai are keen to sell, because the money they earn will go further in their home countries, she said.
Inflation, which stands at record highs in Abu Dhabi as the emirate’s housing market holds up, may also attenuate as the currency strengthens, and interest rates rise.
As the price of domestic credit – credit cards, car loans, personal loans – rises, consumer spending is likely to fall, further slowing growth in the non-oil sector, and pushing down prices.
But the UAE is already importing deflation, points out Alp Eke, senior economist at National Bank of Abu Dhabi. That means the prices of goods that UAE consumers import have been falling – and that rising prices have been driven by education, health care and housing.
How the country’s slowing growth rate and falling oil revenues affect planned capital spending is less certain.
Despite optimistic statements from government officials, it is not yet clear whether the government, or government-related entities will slow the pace of project execution.
"When it comes to infrastructure such as hospitals, schools, roads, wherever that is needed, we have the capacity to finance it," Sultan Al Mansouri, the UAE's Minister of Economy, told The National in June. "None of that is going to be affected in the next four to five years."
But the minister’s comments left open the possibility that infrastructure projects could be delayed, or non-essential projects cut. Infrastructure spending plans were a matter for the Federal Supreme Council, he said. The country’s senior legislative body was yet to decide exactly how it would respond to the IMF’s advice to cut public spending.
“We are likely to see a more gradual approach to project activity, because of the low oil price and the need for governments to maintain their fiscal positions,” said Ms Malik.
The fall of real estate prices is leading property developers to take a more conservative view on building new projects. But core projects, in key master-planned developments regarded as of significant importance – such as the Jebel Ali-Dubai World Central logistics corridor – seem to be continuing apace, she said.
As an indirect effect of the oil price slump – in which the price of a barrel of Brent crude sank from $110 at its peak to about $57 per barrel – tourism and interest in real estate have fallen in Dubai. A series of government policy measures to slow Dubai’s housing market, including increased transaction fees, and limits on the loan-to-value ratio of mortgages, have induced a “deliberate” slowdown in the emirate’s property market, according to analysts at Dubai bank Emirates NBD.
Since last December, the IMF has cut its forecast for the UAE’s growth three times. First, it predicted that the country would grow at 4.5 per cent per year. This was then cut to 3.5 per cent in December, then 3.2 per cent in April, and finally, 3 per cent last month.
Informal measures of growth in the non-oil economy also point to a slowdown. Manufacturing output in Abu Dhabi fell in the first quarter of the year, according to data from the Statistics Centre-Abu Dhabi (Scad), while the Dubai purchasing managers’ index, which surveys Dubai-based managers’ output decisions and is often highly correlated with the actual growth rate, has also slowed.
The consensus view appears to be that the UAE continued to grow in the first six months, but not as quickly as last year, when the country’s economy expanded by 3.4 per cent.
abouyamourn@thenational.ae
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