Dubai: The world had a long period of historically low interest rates. That is not sustainable. As part of a normalisation of rates, leading central banks have either started hiking rates or are poised to do so, placing global rates on a rising trajectory.
“Higher rates are likely to take some steam out of the global growth, but it is not enough to stop the growth momentum. For banks, it is a good development as far their margins are concerned. For GCC economies, a gradual rise in interest rates [is] not going to have a major impact on growth as [an] improved fiscal situation and rising oil prices support expansion,” Timothy Adams, president and CEO of the Institute of International Finance (IIF), told Gulf News in an interview.
He believes that US Federal Reserve policy tightening will be more gradual in nature — looking at variables such as demand, supply, inflation, job, growth and the like linked to the real economy.
“The US is going through a time of incredibly high fiscal expansion along with tax cuts, these are going to have a major supply side impact, and on the demand side, the impact will be manifested with a lag and trade tensions are likely adversely impact demand. With all these things in the background, the Fed is likely to remain very cautious and is unlikely to go into a sharp hike of rates unless there is a visible pick up inflation,” Adams said.
Policy changes in the US and Europe are expected to have some spillover effects on the Middle East and Africa economies.
“The region appears to be currently underperforming the global growth trends. However, going forward it doesn’t have to be that way. The banking sector is going to do well with the rate hikes. Banks in general have low-cost sources of deposits, which gives [the] banking [industry] a cheap and stable funding source,” he said
The sizeable fiscal consolidation in some of the leading regional economies including the UAE during the past three years should put the fiscal stance on a more sustainable footing over the medium term. Moreover, with large financial buffers, countries like the UAE and Kuwait can afford a more gradual pace of fiscal adjustment to reduce the impact of lower oil prices on economic growth. The adjustment in the coming years focuses more on mobilisation of non-oil revenues.
Higher-than-budgeted oil prices for most economies should give policymakers room to pursue more gradual fiscal consolidation as they seek to diversify their hydrocarbon-centric economies over the medium term. An oil price of around $60 (Dh220.38) a barrel is widely seen as a ‘sweet spot’ for reform: not high enough to abandon difficult decisions, and not too low for sharp fiscal cuts.
The US economy is witnessing a pick-up in inward fund flows because of increased banking flows, corporate fund flows and trade volumes. Despite this, Adams expects emerging markets to continue to benefit from cross border fund flows.
“We expect the fund flows into the emerging markets to be pretty positive. There’s lots of good news out there. The US has great opportunities but we don’t think that should disrupt flows into the emerging markets. First, asset prices in the US are pretty expensive, if you are looking for bargains, you may not find as many as you might find in the emerging markets,” said Adams.
According to him, there are tremendous amounts of capital out there looking for the right opportunities. But a great deal of deployment concerning these funds is subject to policy frameworks in individual countries relating to investor protection, enforceability of contracts and ownership and protection of private property.
Pension funds and insurance companies, and to some extent private equity, are looking to deploy long-term capital.
While the US rising rates could have an adverse impact on capital flows into the GCC, regional central banks have been keeping interbank rates in tandem with US rates to keep the spreads between local interbank rates and the three-month London Interbank Offered Rates (Libor).
While several emerging economies could experience outflows, the IIF expects GCC economies to be less affected. The ‘pull’ factors of GCC countries are stronger than the global ‘push’ factors. Moreover, regional sovereigns, banks and corporates are expected to issue debt on the international market in the first half of the year due to a large refinancing need to meet upcoming maturities of loans and bonds in 2018.