Analysis Economy Gulf rate hike: Good for gold and bonds, bad for credit By Melissa Hancock November 3, 2022 Reuters/Elizabeth Frantz Federal Reserve board chairman Jerome Powell announces the latest rise in interest rates Saudi, UAE, Bahrain and Qatar raised rates in line with USIncreasing rates may deter credit card useMortgage rates of new loans will go upGold is safe bet and corporate bonds offer good returns Gulf companies have been able to absorb rising interest rates but as regional central banks follow the US Federal Reserve’s latest hike, borrowing appetite is likely to be subdued. It may, however, be good for gold, bank deposits and fixed income. Four of the Gulf states announced on Wednesday that they would increase their key interest rates after the Fed raised its key policy rate by three-quarters of a percentage point for the fourth consecutive time. The US central bank’s decision was motivated by its desire to lower stubbornly high inflation. Gulf central banks typically move in lockstep, given all the GCC countries have their currencies pegged to the US dollar, except Kuwait. US Fed set for big rate hike to test resilience of world’s central banksMena debt market slumps in year of Fed hikes and high oil pricesBank of England readies for biggest rate rise since 1989 Saudi Arabia and the UAE both increased rates by 75 basis points. The Saudi Central Bank (SAMA) lifted its repo – the interest rate at which the central bank of a country lends money to commercial banks – and reverse repo rates to 4.5 percent and 4 percent, respectively. The UAE’s base rate has gone up to 3.9 percent. Bahrain also raised its main rate by 75 basis points while Qatar increased rates by between 50 and 75 basis points. Kuwait and Oman did not immediately announce any rate changes. While the Gulf economies remain on a positive growth trajectory – buoyed by the high oil and gas prices this year – the impact of the rate increases is being fed through into various consumer segments of the respective economies. “US inflation which has continued to trade near the highs seen in June this year, is forcing the Fed to maintain its hawkish stance,” Vijay Valecha, chief investment officer at Century Financial, said. “The latest decision means more pain for UAE and Saudi customers. “The increasing rates will force the customer to think twice before purchasing discretionary goods, especially credit cards. “UAE credit card interest rates have gone up from 2.50-3.00 percent per month at the beginning of the year to 3.25-3.50 percent per month currently. “Fixed interest rates in mortgages for existing clients are generally for a period of five years and they tend to be variable after that. The mortgage rates of new loans will certainly go up by 75 basis points at least. “On the other hand, saving bank deposits might not go up much, as banks don’t increase those rates by a proportionate amount, since that will impact their net interest margins (NIMs). Nevertheless, we could see a 25-basis point hike across all the banks.” Bahrain, as well as Saudi Arabia and the UAE, raised their main rates by 75 basis points. Picture: Reuters The interest rate hikes have proved favourable for banks, with a growth in deposits providing a boost to their NIMs and net interest income (NII). “We will be releasing our UAE Pulse Q3 report next week which will show that the NII of the UAE’s 10 largest bank grew by an average 12.2 percent between Q2 and Q3,” said Asad Ahmed, managing director and head of Middle East financial services at global professional services firm Alvarez & Marsal (A&M). “This is largely the result of the interest hikes during this period.” Ahmed noted that while loan growth remains lower than deposit growth, the healthy macroeconomic outlook helped to maintain overall borrowing appetite during Q2 and Q3. “During the same period, loan growth was 0.7 percent while deposits grew at 5.2 percent,” he said. “On balance, while the positive impact for banks, because of the interest rate increases, has come through in Q3, the impact on borrowing is more subdued, given that the economic activity environment in the GCC continues to be positive. “The IMF has in October 2022 revised its UAE GDP forecast upwards from 4.2 percent to 5.1 percent. We expect the picture to be more granular at the end of Q4.” Ratings agency Moody’s published a report at the end of last month in which it said that rated companies in the GCC are well placed to absorb the effects of higher interest rates given some key differences in the type and nature of these companies. The “predominance of investment-grade ratings and strong support from governments” are beneficial, it noted. “High oil prices are also beneficial for the economies in the region, in contrast to other countries that face slower economic growth because of higher energy costs.” Sixty-seven percent of the companies that Moody’s rates in the region are investment grade. The rapid rise in interest rates so far this year is also leading to much more attractive opportunities in the fixed income segment of the financial sector. “With areas such as corporate bonds, money market funds and fixed deposits are now offering levels of returns not seen since before 2008,” Iain Ramsay, chief investment officer at AHR Private Wealth, said. “If the forecasted path of interest rate rises is to be believed, it may also suggest that these levels of returns may not be available for an extended period of time.” Generally regarded as a safe haven in turbulent times, gold is likely to continue to attract investment. “Gold is seen as a safe bet by some sections of society,” Keren Bobker, senior partner at Holborn Assets, said. “If you look at gold prices over the past 10 years, they are still relatively high.” Bobker also highlights income producing equity funds as a place to invest. “My clients are seeing positive returns, even in the current bumpy markets,” she said.