IMF predicts economic slowdown in MENA region
ALBAWABA – Businesses and consumers alike, in the United Arab Emirates (UAE), can catch a breath from the sprint of consecutive interest rate hikes by the United States (US) Federal Reserve Board (Fed) and their repercussions on the economy, as reported by Dubai-based news outlet Gulf Times.
At least for now, the Fed announced there will be no more rate hikes until they reconvene in June.
The UAE Dirham (AED) is pegged to the U.S. dollar, as is the case for most countries in the Gulf Cooperation Council (GCC) region, including Saudi Arabia and Jordan.
Therefore, the central banks of these countries are obligated to match the Fed’s rate hikes, every single time.
Since March 2022, Jordan and the UAE, as well as the rest of the GCC countries, have all had to keep up, which means higher local interest rates, resulting in pressures on their local economies.
The reason why is because this latest “one-and-done” 0.25 percent interest rate, as described by Gulf Times, was a relief is because the Fed came across as hopeful for the near future.
US x local interest rates
Matching the federal interest rate has increased interest rates locally for borrowers.
For now, hitting pause on the rate hikes means a temporary stop to rising costs of living in most Arab countries, and a cap on the increased costs of borrowing for businesses and individuals.
This comes as a bit of good news as the International Monetary Fund (IMF) had already announced challenging forecasts, on May 3, for the Gulf and Middle East and North Africa (MENA) regions.
According to the IMF report, economic growth in the MENA region is expected to slow down as tighter policies to tackle inflation, reduce vulnerabilities, and rebuild buffers stifle economic activity.
This is in addition to oil production cuts, which will affect the inflow of oil revenues for various oil producing countries in the region.
More so, the ongoing decline in oil prices and expected drop in demand for oil, resulting from the recent and consecutive Fed rate hikes, will also affect oil exporting countries. The interest rate hikes increased the cost of importing oil for countries settling oil transactions in other currencies.
Promising growth, despite rate hikes
Nonetheless, business prospects remain bullish, according to Gulf Times, as the current state of the UAE market remains stable with opportunities for growth - if acted upon in time.
“Our business customers have been dealing with and managing the impact of increasing rates for the past 2 years,” said Dhiraj Kunwar, Managing Director of Business Banking at National Bank of Ras Al-Khaimah (RAKBank).
Customers appear ready to borrow despite increasing rates, as they see the potential for strong returns to be able to service their debt, Kunwar stated to the Dubai based news outlet.
In an article by Massoud Derhally, in The National News, chief economist at Riyad Bank Naif Al-Ghaith is quoted saying that “Long-term business expansion plans have made the rate of job creation slightly stronger than seen on average in the first quarter of 2023”.
According to Derhally, business activity in the non-oil private sectors of Saudi Arabia and the UAE continued to improve in April on higher output and new orders.
Despite the various aspects in which interest rate hikes have increased the costs of doing business and borrowing money, future expectations remain optimistic, the economist explains.
