Gulf’s rate reprieve may end soon

dubai — A dramatic narrowing of spreads between interest rates in the United States and the Gulf cushioned the region’s economies last year, but the trend may be close to ending as demand for loans picks up and monetary policy tightens further.

Any move towards significantly higher regional rates — those in Saudi Arabia have actually fallen in the past year, against the US tide — could weigh on a modest acceleration of economic growth expected in 2018.

In theory, short-term money rates in the United States and the Gulf should move in similar ways as the region’s currencies are closely linked to the US dollar, leaving central banks little room

The feed-through from higher us rates might be more this year Monica Malik, chief economist at Abu Dhabi Commercial Bank

to conduct independent monetary policies.

But in the last couple of years, theory has gone out the window and spreads have fluctuated wildly as Gulf economies struggle under the impact of low oil prices.

On Monday, the three-month Saudi interbank offered rate was just 8 basis points above its US dollar equivalent — the smallest gap since mid-2009, when rates were distorted by the global financial crisis — compared with 104 bps at the end of 2016.

Meanwhile, the spread of threemonth money in the UAE has shrunk on occasions to zero in the last several weeks, the lowest since late 2008. It stood at 6 bps on Monday.

Narrowing spreads have been good news for businessmen and consumers in the Gulf, shielding them from some of the pain of the Federal Reserve’s five increases in US rates since late 2015. In particular, real estate markets in Dubai and elsewhere in the region have been spared a significant rise in loan costs.

While the three-month US dollar London interbank offered rate has surged 82 bps in absolute terms since the end of 2016, the three-month Saudi rate is down slightly and the UAE rate has edged up only gradually.

That pattern may change in the coming months as the US central bank continues to raise rates. Markets expect between two and four more Fed hikes of 25 bps each in 2018, and this time, the conditions that insulated the Gulf from US policy may change.

“Spreads have narrowed so much that it’s difficult for them to narrow more. The feed-through from higher US rates might be more this year, more of a headwind for the economy,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank, said of the outlook in the UAE.

Economic growth in the Gulf oil exporters is expected to pick up a little this year; analysts predicted in a Reuters poll last month that Saudi gross domestic product would expand 1.5 per cent, after contracting 0.5 per cent in 2017. — Reuters