Dubai: For a second time since June, borrowers – individuals and businesses – in the UAE will not have to rework their budget plans after the US Federal Reserve decided not to raise interest rates. In these four months, the Fed hiked the rate by 0.25 per cent in July (and matched by the UAE Central Bank), while deciding not to do so at its June meeting. (In August, there was no Fed meeting because of the summer break.)
But this could well be a short respite. The Fed chief Jerome Powell has given no indication that he is putting a full stop to more rate increases in a constant battle to bring US inflation close to around 2 per cent levels.
For homeowners in the UAE with mortgages to pay off, it all adds up to more calculations on how to meet their commitments. Those who are on fixed-rates – extending up to 5 years – will not feel the pinch, but anyone who’s mortgage EMIs have gotten into the variable rate territory has to work on solutions. And keep doing so…
“Until a few months ago I was paying between Dh9,000-Dh11,000 monthly on the mortgage, most of which my rental income was able to cover,” said the owner of a property in Jumeirah Village Triangle. “Suddenly, without any formal communication from my bank, that jumped to Dh16,000 a month.
“Of course, my rental income still remains the same because RERA index hasn’t matched the rental value in the market. Now, I am financing my mortgage from savings – and It's like I am buying a new house all over again.
“I’m not sure how long I can keep doing it, before I decide to sell the property.”
Since March 2022, there have been 11 interest rate hikes.
Another buyer with a mortgage to pay off has seen the rate rise to more than 9 per cent on the balance. “It was at 3 per cent fixed for the first 5 years of taking out the loan (from 2012), and now, the EMI keeps adding up to a substantial payout. It’s probably time to be thinking of a refinancing (and go back into fixed-rate mode).”
Banks are watching closely
Banks in the UAE are keeping close track of their loan books. Sources in the industry say they have not seen any major cases of their mortgage or other borrowers facing difficulty in meeting their payment commitments.
So far, banks say their loan processing – including new mortgage approvals – is proceeding ‘smoothly’ despite the higher interest rates.
When it comes to the property market in Dubai, it’s offplan sales that are leading the way – and which has been given one ‘island’-sized boost through the relaunch of the Palm Jebel Ali. Offplan sales mean a substantial portion is being done through cash purchases or developer-supported financing. If mortgages enter the picture, it does so at a relatively later stage in the project development.
What should businesses be doing?
Businesses in the UAE have by and large taken in their stride the US Fed rate hikes and its mirroring in the UAE lending rates. The higher cost of capital has been cushioned by a strong inflow of new orders, and businesses being able to charge higher on their products and services.
But caution has to be their watchword.
“Given the business mechanism of the UAE, there is no option but to extend credit to customers,” said James Mathew, CEO and Managing Partner at UHY James Chartered Accountants.
If businesses do not take that route, they risk losing clients to competitors waiting to capture their share of the pie. Hence, businesses that give credit in the market end up requiring more working capital.
“There have been instances of large number of businesses setting up new projects funded by banks like Emirates Development Bank. The current dynamics require businesses to be aligned with the interest rate increase to progress with their projects.
“While it is expected that the rates may not rise significantly going forward, it is imperative UAE businesses remain poised to navigate through the ebbs and flows.”
Mathews reckons businesses should be taking these steps under these circumstances:
- Streamline the procurement process. Keep watch on the inventory holding, which is an effective approach towards optimising working capital needs.
- Bring down the average credit period extended to customers through better credit controls. This can significantly reduce accounts receivable, which then reduces working capital requirements.
- Manage supplier credit limits and make effective use of bank facilities can go a long way in bringing down working capital requirements.
Monthly rates on balances have gone up from 2.5-3 per cent in 2022 to 3.25-3.85 per cent.
“Banks may go slow with rate increases when it comes to credit cards (compared to other debt instruments)," said Anita. "That said, they could revisit their credit policy and may start reducing the credit limits offered to customers.
"The qualifying criteria for getting credit cards are also far more stringent. Nowadays, many get a rejection when they apply for credit cards."
Emirates NBD said it evaluates credit card charges from time-to-time influenced by factors including market competitiveness. However, the bank spokesperson said they have not made any changes in the last 18 months since the US Federal Reserve rates started to go up.
Another banker based in Dubai emphasized the significance of settling outstanding credit card fees before the due date to avoid the hefty interest charges.
- Dhanusha Gokulan, Chief Reporter
Done with rate hikes?
The US and Asian markets have dropped since the Fed announcement late Wednesday about holding rate steady for now.
“We believe the Fed isn't done yet (with rate increases),” said Nigel Green, CEO of the consultancy deVere Group. “We expect it will resume its hiking programme in November. This, we believe, would be an error of judgement and could leave scars on the US economy.”
For now, though, borrowers will welcome any pause to rate increases, even if it’s a stopgap one.