Gulf’s rate reprieve may end as US spreads stop narrowing
Gulf’s rate reprieve may end as US spreads stop narrowing
Any move toward significantly higher regional rates — those in Saudi Arabia have actually fallen in the past year, against the US tide — could weigh on a modest acceleration of economic growth expected in 2018.
In theory, short-term money rates in the United States and the Gulf should move in similar ways as the region’s currencies are closely linked to the US dollar, leaving central banks little room to conduct independent monetary policies.
But in the last couple of years, theory has gone out the window and spreads have fluctuated wildly as Gulf economies struggle under the impact of low oil prices.
On Monday, the three-month Saudi interbank offered rate was just 8 basis points above its US dollar equivalent — the smallest gap since mid-2009, when rates were distorted by the global financial crisis — compared with 104 bps at the end of 2016.
Meanwhile, the spread of three-month money in the United Arab Emirates has shrunk on occasions to zero in the last several weeks, the lowest since late 2008. It stood at 6 bps on Monday.
Narrowing spreads have been good news for businessmen and consumers in the Gulf, shielding them from some of the pain of the Federal Reserve’s five increases in US rates since late 2015. In particular, slumping real estate markets in Dubai and elsewhere in the region, deflated by low oil prices, have been spared a significant rise in loan costs.
While the three-month US dollar London interbank offered rate has surged 82 bps in absolute terms since the end of 2016, the three-month Saudi rate is down slightly and the UAE rate has edged up only gradually.
That pattern may change in the coming months as the US central bank continues to raise rates. Markets expect between two and four more Fed hikes of 25 bps each in 2018, and this time, the conditions that insulated the Gulf from US policy may change.
“Spreads have narrowed so much that it’s difficult for them to narrow more. The feed-through from higher US rates might be more this year, more of a headwind for the economy,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank, said of the outlook in the UAE.
Economic growth in the Gulf oil exporters is expected to pick up a little this year; analysts predicted in a Reuters poll last month that Saudi gross domestic product would expand 1.5 percent, after contracting 0.5 percent in 2017.
But growth looks likely to stay far below the pace of around 5 percent early this decade, and real estate markets are in poor shape to cope with higher interest rates. Dubai property prices are estimated to be down as much as 16 to 19 percent from peaks hit several years ago.
Olivier Panis, senior regional credit officer at Moody’s Investors Service in Dubai, said Saudi spreads narrowed for two main reasons last year: less demand for loans due to the weak economy, and lower domestic borrowing by the government.
Bank lending to the Saudi private sector shrank 0.8 percent from a year earlier in December. However, Panis expects overall loan growth to pick up this year because of greater government spending and a slightly stronger economy.
Loan growth could reach 4-5 percent in 2018 and 8-10 percent in 2019. That would not be enough to tighten the money market significantly, Panis said, but it could prevent a further loosening and start to change the outlook for rates.
Similarly, annual bank lending growth in the UAE sank to 0.4 percent in December, the lowest in at least three years. Panis said growth could rebound to around 5 percent in 2018.
Another factor pushing down Gulf spreads, bankers say, is increased confidence about the stability of the region’s financial system after last year’s recovery in oil prices.
Governments now have more money to support banks if needed, so banks demand less of a risk premium in lending to each other. But that trend may have run its course; Brent crude has dropped back to around $63 a barrel from above $70 last month.
In Saudi Arabia the central bank, keen to protect the economy, kept money rates low last year by adjusting the way in which it responded to each US rate rise. It increased its reverse repo rate, at which commercial banks deposit money with the central bank, by 25 bps each time but did not move its repo rate, used to lend money to banks.
That strategy cannot continue much longer, however, because the corridor between the rates has narrowed to just 50 bps. Too narrow a corridor would remove the incentive among banks to lend among themselves, damaging the money market.
A Saudi commercial banker predicted the central bank would have to raise the repo rate after the next US rise, expected in March; Malik said the corridor might conceivably narrow to 25 bps. Either way, the repo rate looks set to begin climbing sometime in 2018, pulling the money market with it.
History shows it is not impossible for Gulf spreads to continue tightening into negative territory; the Saudi-US spread reached almost minus 100 bps in 2008.
But that was during the global crisis, when emergency measures by central banks and a freezing up of money markets influenced rates. In more normal times, banks are unlikely to lend more cheaply in the Gulf than in the United States.
“Spreads have sometimes been negative in the past but this has been very rare and unsustainable,” said a Gulf banker. “Markets will tend to demand some kind of premium for the risk of lending in the Gulf versus the US“
German carmakers dismayed as US weighs auto tariffs
- US Commerce Department mulls tariffs on car imports
- “One-sided protectionism has never helped anyone in the long term," says Volkswagen
FRANKFURT: German automakers reacted with dismay Thursday as the US Commerce Department said tariffs on car imports could be on the horizon, potentially opening a new front in a burgeoning transatlantic trade conflict.
“One-sided protectionism has never helped anyone in the long term. Only free and fair trade secures increased prosperity,” a spokesman for industry behemoth Volkswagen told AFP.
American Commerce Secretary Wilbur Ross had announced Wednesday he had initiated a so-called Section 232 investigation on auto trade — which would provide the legal basis to impose tariffs, if his department finds imports threaten US national security — after speaking with President Donald Trump on the matter.
Ross promised “a thorough, fair, and transparent investigation into whether (auto) imports are weakening our internal economy and may impair the national security.”
The move comes as a June 1 deadline approaches for the White House to decide whether imports from the EU will remain exempt from border taxes slapped on steel and aluminum.
Trump’s recourse to national security arguments for potential tariffs echoes his justification for the metals duties.
In a separate statement released by the White House, the president said “core industries such as automobiles and automotive parts are critical to our strength as a nation.”
Germany’s Federation of the Automotive Industry (VDA) noted that German carmakers employ some 36,500 people in the US and car parts producers 80,000 more.
And it highlighted German firms’ “significant contribution to the American balance of trade in cars” with their exports to third countries.
“An increase in tariff barriers should be avoided,” the body said, saying it had “always spoken out in favor of mutual reductions in tariffs and for free-trade agreements.”
German carmakers exported 494,000 vehicles to the US last year, the VDA said, while the Chambers of Commerce and Industry (DIHK) calculated autos and parts accounted for €28.6 billion ($33.6 billion) of Germany’s €111.5 billion in exports to the US.
Shares in Volkswagen, high-end BMW and Mercedes-Benz maker Daimler were among the worst performers in the DAX index of blue-chip German shares just before midday (1100 GMT) Thursday.
Imposing car tariffs would open yet another front in the Republican president’s confrontational rows over trade that have drawn global outcry from allies and partners.
“Evidence of significant economic damage due to the trade conflict is mounting,” tweeted economist Marcel Fratzscher of the DIW think-tank in Berlin.
“The Trump administration now adding new threats with tariffs on European cars could make things a lot worse.”
The latest announcement comes as negotiations with Canada and Mexico over revamping the continent-wide North American Free Trade Agreement (NAFTA) have stalled over auto demands.
Trump had earlier blamed the US neighbors to the north and south for being “difficult” in talks to renegotiate the pact.
The contrast with a Thursday visit by German Chancellor Angela Merkel to Chinese premier Li Qeqiang could not have been starker.
“China and Germany are on the path of promoting multilateralism and bolstering free trade,” Merkel said in Beijing.
Meanwhile Japan’s trade minister Hiroshige Seko said Thursday that car tariffs would “plunge the world market into confusion” and be “extremely regrettable.”
Passenger cars make up around 30 percent of Japan’s total exports to the United States and Tokyo has already threatened Washington with retaliation at the World Trade Organization for the steel tariffs.
The Wall Street Journal reported earlier Wednesday that Trump was asking for vehicle import tariffs as high as 25 percent.
That would move US policy in the opposite direction from China, where President Xi Jinping recently offered to cut border taxes to 15 percent from 25 percent.
In its statement announcing the inquiry, the Commerce Department cited figures showing that US employment in automobile manufacturing had dropped by 22 percent from 1990 to 2017.
“After many decades of losing your jobs to other countries, you have waited long enough!” Trump wrote in a tweet addressed to “our great American autoworkers.”
Trump — whose protectionist platform helped launch him to the White House — has repeatedly floated the notion of steep tariffs that would shield the US auto industry.
He has specifically targeted Germany, and argued that American cars are slapped with higher tariffs than those imposed on European autos.
US cars sold in the EU are hit with 10 percent duties, while the US imposes just 2.5 percent on cars from the EU.
But Washington imposes 25 percent tariffs on European pick-ups and trucks — which the EU taxes at a much lower 14 percent on average.