Fed hike hits Gulf stocks as well as price of food and property

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• US interest rate rise saw Abu Dhabi, Dubai and Qatar exchange down 
• Supermarkets trying to help customers “avoid the squeeze”
• Cash buyers of property sales less hit than those with mortgages
• Increase could affect Dubai millionaires if cost of financing goes up 

Gulf stock markets quickly reacted negatively this morning to the announcement that local central banks were to follow the US Federal Reserve and hike interest rates, in a bid to curb inflation and rising costs. 

AGBI spoke to experts across the business community to see how the move will impact everyone from property developers and grocery shoppers to bond investors and the thousands of millionaires set to migrate to the region in the coming months.

The US central bank increased interest rates on Wednesday by 75 basis points, its biggest raise since 1994. In early trading, the Abu Dhabi exchange was down 0.3 percent, Dubai was down 0.1 percent and Qatar fell 0.3 percent.

• Rates rise has come too late to curb inflation
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Saudi Arabia bucked the trend and rose 0.6 percent, mainly on the back of the cushioning effect of oil giant Saudi Aramco rising by the same percentage point on the back of the rising oil prices.

Less borrowing, more saving

James Swanston, a Middle East analyst with London-based Capital Economics, said the rising interest rates in the Gulf “will create a headwind for recoveries in non-oil sectors by disincentivising borrowing and making it more attractive to save. 

“However, we have tended to find that in periods when oil prices are high that it tends to be a stronger driver of credit growth than interest rates,” he added.

Emirati investor Sabah Al-Binali, executive chairman of OurCrowd Arabia, a subsidiary of the world’s largest global venture investing platform, agreed that the region would be cushioned by the rising oil price. 

“With oil prices where they are this will help mitigate any inflationary pressure as the Gulf economies expand due to government revenues / expenditures,” he said.

Jamil Naayem, principal economist for the Middle East at S&P Global Market Intelligence, agreed the GCC region could be cushioned by higher oil prices, but he believed the wider economic implications could be more severe.

“Higher interest rates might complicate the region’s economic diversification efforts and hence, somehow impact the non-hydrocarbon economy. We think that GCC-produced industrial goods would lose some competitiveness vis-à-vis some emerging market peers. Same goes for services sectors across the region, mostly tourism and hospitality, as a result of GCC currency strength versus emerging market peers,” he believed.

Cost of living concerns

Inflation and the rising cost of living is certainly a concern for business owners in the region. 

While the latest monthly S&P Global UAE Purchasing Managers’ Index (PMI) reported that non-oil business activity was at a five-month high in May, it found that costs for items such as fuel, metals, chemicals and energy were at their highest for three-and-a-half years.

Businesses have continued to absorb the rising costs and not pass them on to consumers, but David Owen, Economist at S&P Global Market Intelligence, said “this is unlikely to continue indefinitely”.

The Fed’s move is designed to reduce inflation, but Tom Harvey, general manager at UAE supermarket chain Spinney’s, said the impact on prices would be minimal.

“While there will be a short-term benefit on the back of a strengthening dollar, this is likely to wane as other major central banks follow suit with interest rate rises and their respective currencies strengthen again accordingly,” he said. 

“The inflationary pressures that are being felt on food goods right across the globe are a result of limited supplies caused by a reduction in agricultural output, freight delays and limited availability of labour.

“The interest rate rise will not have a notable influence on these factors. From a Spinneys perspective, we continue to work hard to challenge the inflationary pressures and ensure that we continue to offer customers affordable products.” 

Harvey added that, similar to the conclusion in the latest S&P PMI report, the supermarket chain was doing its best to help its customers “avoid the squeeze”.

Real estate response 

In addition to retail and oil, one of the other big pillars of Gulf economies is real estate. 

Dubai-based Imran A. Sheikh, founder of BlackOak Real Estate, said the impact of the rate hike would not have a massive impact on property buyers in the UAE.

“This is due to the fact that a large number of transactions are cash, as opposed to mortgages, and, furthermore, the momentum is largely driven by international cash buyers for off-plan and luxury properties,” said Sheikh.

This is reflected in the most recent weekly figures from the Dubai Land Department, which found that, of the 2,884 real estate and property transactions in the week ending May 27, 2022, only about a quarter were bought with mortgages. 

This is in contrast to more mature markets, such as the UK, where mortgages make up about two-thirds of transactions.

BlackOak Real Estate is currently advising on a development of 400 units in Dubai. 

Sheikh said he was lucky enough to sign terms for the financing before the Fed announcement, as the interest rate rise will make it harder for developers to raise finance going forward.

“We were lucky in the last few days that we managed to finalise our term sheet and anyone that has done so will continue developing. For anyone that’s going forward, and they’re not able to get preferable rates, [they] will start thinking twice about that,” he said.

While the squeeze may be felt by private developers, Sheikh said it would be easier for larger government owned or backed developers as “they usually do get slightly better rates and [are] probably not going to see that impact as much.”

Millionaires feel the pinch

It was reported this week that the UAE will record the largest net inflow of millionaires in 2022, with the latest Henley Global Citizens Report forecasting that 4,000 high-net-worth individuals, or HNWIs – those classed as having wealth of more than $1 million – will move to the emirates this year.

Inflation is also impacting HNWIs and Swiss bank Julius Baer found that wealthy individuals living in Dubai have seen the average cost-of-living increase by 19 percent in the last year.

Mark Matthews, head of research Asia Pacific, Bank Julius Baer, said the rise in the cost of living and increased interest rates by the central bank will have an impact on those HNWIs arriving in the UAE.

“When rates are high you would have a tendency to basically just keep your money on deposit in the bank and benefit from that. So, by rule of thumb, high interest rates do tend to suppress asset prices. The cost of financing goes up… [and] acts as suppressive on economic growth, which in turn tends to make asset prices less valuable,” he said.

However, for those still eager to invest, Matthews believed the bond market would be the likely benefactor for regional HNWIs. 

“When interest rates go up, typically the bond prices fall, which means that the bond deals are rising and become higher,” he said. 

“There’s been a massive sell off in the bond market globally. In fact, I think it’s the largest going back 100 years. In short, the collapse in bond prices has made some of their yields quite attractive.”

Looking to the future, the Fed is due to meet again in July.

Rabia Yasmeen, senior consultant at research company Euromonitor International, believed more rate hikes were likely: “Given, global uncertainty in geopolitical affairs, increase in commodity and energy prices, and supply chain disruption – adjustment of interest rates to balance local consumption is one way to curb economic imbalances.

“With so many factors, currently at play, further interest rate hikes can be expected. With US President’s visit scheduled to Saudi Arabia, we would expect further developments that would inform the US economic policy and therefore the region.”

Edward Bell, senior director, market economics at Emirates NBD, Dubai’s biggest lender, agreed: “A 75bps hike at the July meeting now looks likely given they used that size of a hike for June. The Fed’s inflation targets still appear to be too low as they would imply a steady and sizeable deceleration in inflation… essentially every month from here on to the end of the year.”