How UAE rate hike will affect biz, consumers
In other words, residents will have to pay more interest if they borrow while savers among them are going to earn more interest, analysts said.
In the tourism sector, the impact of the rate hike will be felt through a strong dirham that makes UAE less price attractive to holidaymakers, especially those from nations of weaker currency as they have to shell more of their nation’s currency to travel to the Gulf. Rising borrowing costs can also hurt the SME sector, which depend on bank or external funding for their business operations.
On Thursday, the UAE central bank announced that it would raise interest rates of Certificates of Deposits with immediate effect in line with the US Federal Reserve Board’s decision to increase the rate by 25 basis points. Central banks in Saudi Arabia, Kuwait, Qatar and Bahrain also followed suit by hiking rates by 25 basis points.
The Repo Rate for borrowing short-term liquidity from CBUAE against certificates of deposits has also been increased by 25 basis points to 2.25 per cent. Certificates of Deposit, which CBUAE issues to banks operating in the country, are the monetary policy instrument through which changes in interest
There will not be any major impact on the UAE real estate market
Atif Rahman, partner and director, Danube Properties
rates are transmitted to the UAE banking system.
Raju Menon, Chairman and Group Managing Partner, Morison Menon Chartered Accountants, said the increase in interest rate is going to affect both end consumers and business community alike.
“The mortgage loans and personal loans will be dearer which may reflect in the decrease in demand mainly for investments in property. Business in the UAE is operated with low liquidity and low margins. When interest rate is increased it may push further the margins down. The announcement to replace deposit for labor guarantee with insurance will boost the liquidity in business so that the impact due to the interest rate increase will substantially subsidise,” said Menon.
Pradeep Unni, Head of Strategic Business Development, Richcomm Global Services DMCC, said the immediate impact would be a slight escalation in borrowing costs across all financial sectors. “Economically speaking, this raise in rates could hurt liquidity in the economy. This ideally means that both governments and corporations will pay more to raise debt from bond market. A direct impact can also been seen in the tourism sector due to the strong dollar which follows a rate hike. Travellers from nations of weaker currency will have to shell more of their nation’s currency to travel to the gulf. Rising borrowing costs can also hurt the SME sector, which depend on bank or external funding for their business operations,” said Unni.
MAK Harid, managing director, Paradigm Financial Services, said for GCC governments and large corporates, such rate hikes would increase the cost of raising debt from bond markets, posing further headwinds to the already slow economic growth. “Monetary tightening in the wake of interest rate hike will have counter-productive impact in the GCC economies by compounding fiscal tightening unlike in the US where the economy is on an upswing. However, the good news for the expats who regularly transfer money to home countries is that a stronger dollar-pegged dirham will result in better exchange rates. But for investors from overseas, as well for resident buyers property purchases will become more expensive and less attractive,” said Harid.
Atif Rahman, partner and director, Danube Properties, said although the rate hike could make borrowing slightly expensive, it would not be having any major impact on the UAE real estate market.
Sudhakar R. Rao, chairman of Gemini Property Developers, said the rate hike could slightly affect the mortgage costs. “However, the market and the property buyers in the UAE have the capacity to absorb this increase. Moreover, the UAE’s recent reforms on visa, relaxation on fines and fees, elimination of the bank guarantees will make things much easier and convenient, so the 0.25 increase in interest rates will not impact on the consumers and business much,” said Rao.
“Anticipating such a rate hike and its impact the UAE Government has taken multiple measures to weather such an impact. 10-year visas for investors and professionals as well as a move to allow 100 per cent foreign business ownership, one-year freeze on school-fee hikes, waiver of some fees on aviation and real estate transactions, and cutting charges levied on businesses are only few in the list of government initiatives,” added Unni.
— issacjohn@khaleejtimes.com