DOHA: The marginal increase in the Federal Reserve’s interest rates is expected to have minimal impact on Gulf economies in the near term. However, its second round of rate hike expected in 2016, would result in higher financing costs for corporates and therefore would in turn affect corporate profitability and performance in the long-run in the regional economies. It would also keep oil and commodity prices under pressure, KAMCO Investment Company noted.
The Fed Reserve raised interest rates for the first time in almost eight years to a new target range of 0.25 percent to 0.5 percent, up from zero to 0.25 percent recently. According to the official forecast, a rate of 1.375 percent is expected at the end of 2016, implying four 25 bps increase in the target range next year.
In the event of a further hike, the apparent flow of higher interest earnings (higher NIM) to banks would fade as demand for financing declines amid higher borrowing costs.
Consequently, the spread between the yield on investment and the benchmark rate will narrow. Higher rates would affect capital expenditure and will slow down the pace of growth which in turn will spill over to the economy and stock market causing less attractive prices.
Lack of growth in the business along with higher financing cost will affect corporates’ topline and bottom-line results which will lead to sell-offs and therefore drive stock prices down, the KAMCO research note said.
In October, Qatar Central Bank (QCB) Governor H E Sheikh Abdulla bin Saud Al Thani, said that the country would not raise interest rates in response to a Fed rate hike. However, following the US Fed rate hike announcement, Saudi Arabia, Kuwait and Bahrain raised their benchmark rates. Saudi Arabia raised its overnight reverse repo rate by 25 bps to 50 bps but left its benchmark repo rate unchanged at 2.0 percent.
Meanwhile, the Central Bank of Kuwait (CBK) raised its benchmark discount rate by 25 bps to 2.25 percent, whereas Bahrain, while keeping the repo rate unchanged at 2.25 percent, raised its overnight interest rate by 25 bps to 0.5 percent and its rate for one week also by 25 bps to 0.75 percent. The move by the three gulf countries was expected since the GCC countries have pegged their respective currencies against the USD (with the exception of Kuwaiti Dinar which is pegged against a basket of currency dominated by the USD).
The decline in oil revenues has affected the flow of oil money flowing in the form of bank deposits. Moreover, higher interest rates on bank loans would act as a deterrent for borrowers in the region. Clearly, changes in the benchmark rate affect the behaviour of consumers and businesses, as well as the stock market, although the impact on the latter is not immediate.
The Peninsula
