Australia leaves rates on hold at 3.25%
Australia leaves rates on hold at 3.25%
The Reserve Bank of Australia last month sliced 25 basis points off the cash rate, taking it to lows not seen since October 2009 when it first resumed hiking rates following the global downturn.
Economists had widely tipped a further 25 basis point cut, but central bank Gov. Glenn Stevens said the RBA "judged that the stance of monetary policy was appropriate for the time being".
Stevens said while commodity prices were lower and employment was softening, growth has been running close to trend over the past year in mining-powered Australia and inflation was in the RBA's preferred 2-3 percent zone.
"Looking ahead, the peak in resource investment is likely to occur next year, at a lower level than expected six months ago," he said.
"As this peak approaches, the board will be monitoring the strength of other components of demand."
The Aussie dollar rose above 104 US cents on the decision, while the share market closed up 0.24 percent at 4,484.8 points.
Stevens said global growth was forecast to be a little below average for a time, and risks to the outlook were on the downside, largely as a result of euro zone woes. But he said risks elsewhere "seem more balanced".
"The United States is recording moderate growth, while recent data from China suggest growth there has stabilized," he said.
Australia was one of the first developed economies to begin raising rates after the global financial crisis rattled markets worldwide, first lifting them in October 2009.
It began pulling back again in November 2011 when the central bank slashed the cash rate for the first time in more than two years to bring it down to 4.50 percent. The rate has been declining ever since.
Finance Minister Penny Wong said Australia stood out against its peers when it came to a strong economy, and mortgage-holders had benefited from a total cut of 150 basis points in the past year.
"We've got solid growth, low unemployment and low interest rates," she said.
The decision to keep rates on hold, which breaks a six-year trend of changing the cash rate on the same day as the nation's most famous horse race, the Melbourne Cup, was questioned by retailers.
"We believe there is still time for the RBA to deliver a Christmas gift to business owners, workers and consumers, by cutting rates in December," National Retail Association Chief Executive Trevor Evans said.
But Stevens said the impact of earlier decisions were still filtering into the economy and the RBA would be monitoring the situation carefully.
"Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns," he said in his statement.
"Further effects of actions already taken to ease monetary policy can be expected over time."
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”