If any further proof were needed that this is not 2009 all over again in the Gulf’s financial markets, it came in the regional reaction to last week’s hike in the US Federal Reserve’s basic interest rate and indications there could be further rate rises next year.
All the Gulf central banks immediately followed the US example, as they are monetarily obliged to do under the dollar peg, and the likelihood is that the region can look forward to at least three, maybe four rises next year.
This is not especially good for the economies of the Gulf, buffeted by lower oil prices and revenues, fiscal constraints and the inflationary pressures of a strong dollar. However, given the wider array of financial techniques available to region’s policymakers and the lessons learned in 2009, it need no longer turn a drama into a crisis.
Back at the height of what economists now acronymize to the GFC — global financial crisis — the Gulf banking system reacted violently to each twitch in the US financial system. The main worry for the region back then was not interest rates but liquidity: There was a distinct danger that Gulf banks would run out of dollars (and, by pegged extension, riyals, dirhams, dinars and the rest.)
Last week, when Fed Chairman Janet Yellen made her move, the region’s banking system took it in its stride. The key indicators of liquidity, interbank money rates, barely flickered. This is in contrast not just to 2009, but also to the mini-liquidity crisis the Gulf weathered in 2014-15, when collapsing oil prices again threatened to stop the ATMs working, and to the “taper tantrum” of last year when equity markets dived under threat of an end to the Fed’s quantitative easing (QE) policy.
The reason for the market’s comparatively benign response is two-fold: The oil price outlook is significantly better, and regional policymakers have developed a powerful new array of weapons to fight against economic shocks. In particular, the bond-raising exercises of virtually all Gulf states, but especially Saudi Arabia, have demonstrated the financial resilience of the region.
This does not mean that rising interest rates will have no effect on the Gulf. Soon after the Fed hiked, I met with Chris Probyn, chief economist with State Street Global Advisers, the Boston-based investor with a gigantic $4.2 trillion worth of funds under management.
He was on the Middle East leg of the firm’s annual world tour, and had just come from Riyadh, where he had been intensely interrogated by Saudi investors about what the US rate rise meant for regional economies.
“I told them that this rise was not good for the Gulf. Their monetary authorities would have to follow suit, which against the background of low oils prices, fiscal pressures and sluggish economies was a bad combination,” he said.
More expensive capital will do nothing to help the Gulf economies counter recessionary pressures, which have seen the International Monetary Fund (IMF) cut growth forecasts. It will make it more costly to raise debt on the international markets. It will increase inflationary pressures at home, and make it more difficult for Gulf exporters.
Because of a historic correlation between the oil price and the strength of the dollar, it might weaken crude’s recovery.
Higher rates could also affect those parts of the region anticipating imminent debt restructurings (such as Dubai), though because most are in dollars or dollar-pegged currencies, these higher costs should not be deal-breakers.
The Gulf, because of oil and the dollar peg, is not really to be counted among the emerging markets, even though some of its equity markets now have that ranking by MSCI. However, for the fast-growing economies of Asia and Africa, the rate rise is a mixed blessing. Their power to export in local currencies is enhanced by the rising dollar, but loans and debts will become more expensive to service. Asian markets took the rate rise news badly.
So Gulf markets came through a major test quite easily, but there are others ahead. The background to the Yellen rise is the looming presidency of Donald Trump. Thanks to the policies of outgoing President Barack Obama, Trump inherits an economy stronger than at any time since the GFC.
Employment is at near capacity, and GDP growth threatens to break through the 2 percent level that has been its ceiling since 2009. US markets have soared too on Trump’s promises of fiscal and infrastructure stimulus. As ever, the US economy dominates the world, and the Gulf should benefit long-term from a booming America. But how long that lasts, and how the Gulf reacts if the “Trump boom” ever turns into the “Trump bust,” is a matter for another day.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai
