US rate hike expected to have minimal impact on Gulf economies

Visible increase in raising funds expected

Traders work on the floor of the New York Stock Exchange April 10, 2014.

Traders work on the floor of the New York Stock Exchange April 10, 2014.

REUTERS/Brendan McDermid
Tuesday, Dec 13, 2016

Dollar set to strengthen even more despite expected increase to cost of funds, analysts say

Dubai: After a gap of 12 months, the United States may be staring at another rate hike, far different from the three to four hikes that analysts were anticipating at the start of 2016.

For a change, market participants have been 100 per cent certain of a rate hike — the first and probably the last one for the year — with uncertainty growing over the future rate hikes ahead of US President-elect Donald Trump assuming office in January 2017.

“This [rate hike] won’t be a surprise as a lot of this is embedded in today’s prices in terms of bank rates, or in terms of market movements,” Nadi Bargouti, managing director at Emirates Investment Bank, told Gulf News.

“We are not expecting [a] negative reaction to this, but on the contrary it may add stability in the market as this has been [the] elephant in the room,” Bargouti said.

A 25 basis point (bps) hike won’t be a significant increase, according to market experts. It is a move that has been forewarned by Federal Reserve chairman Janet Yellen and other members of the board.

On the back of this, the London Interbank Offered Rate (Libor), the Emirates Inter Bank Offered Rate (Eibor), the Saudi Arabia Interbank Offered Rate (Saibor) and other benchmark rates have been steadily increasing, reflecting the market’s anticipation of a rate hike.

Fearing this, many local banks have front-loaded their fund-raising during the course of this year. Despite the precautionary measures taken by lenders, an increase in the cost of borrowing is expected to apply pressure on bank’s margins next year.

Overall, analysts expect a visible increase in the cost of raising funds for the banks this year, while banks will potentially reflect this in their loans, meaning the cost of new loans to customers will also continue to increase.

“Banking sector liquidity has continued to tighten in 2016, with stronger credit growth of 6 per cent [in the] year to date than deposit growth [of] 2.1 per cent,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB). “This ongoing tightening in liquidity continues to be reflected in Emirates Interbank Offered rates [Eibor] rates rising further,”

A decline in loan growth and a higher cost of funds are expected to reflect on banking sector profitability. But the impact of a rate hike could vary on banks — depending on their funding profiles.

Lenders with a higher share of low-cost Current and Savings Account (Casa) deposits and Islamic deposits in their funding mix are less vulnerable.

Sharp rise

A rate hike tonight would also cause the dollar to rise.

The dollar has seen a sharp increase since the middle of the year, negatively impacting the competitiveness of local businesses — as would reduce the spending power of people coming from Europe in particular.

“We are encouraged by the return of Russian entrepreneurs and tourists. So the dollar’s strength is not putting people off, it’s just that the spending power when they are here is not as strong as it was in the past,” Gary Dugan, chief investment officer at Emirates NBD, said.

The dollar index has gained more than 3 per cent since the last hike in 2015.


Emirates NBD expects a further 50bps hike in rates next year.

“We expect those interest rate increases to go hand-in-hand with an improvement in growth in the US economy and globally,” Dugan said. “Japan, Europe and the US would be growing faster than 2016. As long we get good growth matched by increased interest rates, I think the market would absorb it without doing significant damage.”

By Babu Das Augustine Banking Editor Siddesh Suresh Mayenkar Senior Reporter Gulf News 2016. All rights reserved.