Impact of a lift-off on Gulf economies expected to remain minimal
Economists see marginal effect but credit growth could face further pressure
The much-anticipated rate hike by the Federal Reserve of the US is expected to have marginal impact on the GCC economies, equity markets and currencies, according to economists and analysts.
However, combined with factors such as low oil prices, shrinking government revenues and increased drawdown on government deposits with banks to meet fiscal shortfalls are expected to tighten liquidity across the region.
“Monetary conditions in the GCC are set to tighten on the back of external and domestic factors. Liquidity has tightened in 2015 as government deposits have dropped 21 per cent year on year in September. This could be exacerbated by a US Fed rate hike in December.
“A similar move from the UAE Central Bank, in the context of the dollar dirham peg, could potentially add to the liquidity squeeze,” said Carla Slim, an economist at Mena, Standard Chartered.
“Tightening liquidity
and slower demand for credit is already reflected in credit growth across the region. In the UAE bank credit growth is projected to average between 3 per cent to 5 per cent annually for 2015 and 2016 from around 9 per cent for 2014,” said Nitish Bhojnagarwala, an Assistant Vice President at Moody’s.
On the back of increased deposit drawdown by governments and government related entities, GCC banks will be forced to seek external funding from more expensive and confidence-sensitive debt and sukuk markets.
However the stable dollar peg of GCC currencies will continue to allow the banks to tap the more liquid global capital markets with limited foreign exchange risk.
But exchange rate risks arising from appreciating dollar could work against more diversified and open economic model followed by Dubai. “The retail sector has been particularly affected by broad-based dollar strength, a weak euro and a weak Russian rouble. These factors make Dubai relatively — a negative for the luxury retail segment,” said Slim.
The retail sector is projected to grow at 2.5 per cent in 2016 compared to Standard Chartered’s own estimate of 4 per cent growth in 2015 and actual growth of 5.6 per cent in 2014.