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UAE businesses will need to factor in another 0.25% increase this year - and ninth since March 2022. Some are already taking control through lower spending and going slow on hiring. Others are shedding jobs. Image Credit: AP

Dubai: The US Federal Reserve went ahead with its second interest rate hike of 2023, by another 0.25 per cent, and it was soon reflected on lending rates in the UAE and other Gulf markets. This is now the ninth rate increase by the Fed since March 2022 as global economies try to slow down inflationary gains.

Until about 48 hours ago, there were some who believed that the Fed would avoid a rate increase this month given the shake up the global banking sector has been through after the troubles at Silicon Valley Bank and the subsequent turmoil at Credit Suisse. But the forceful intervention by the other Swiss bank UBS, which bought Credit Suisse last Sunday (March 19), and coordinated actions by central banks managed to hold off further alarms.

Qatar became the first of the Gulf economies to match the US rate hike - raising the key lending rate to 5.5 per cent. Bahrain joined in, and from tomorrow, the key rate will be 5.75 per cent.

Saudi Arabia's central bank too opted for a hike, taking the lending rate to 5.5 per cent.

The UAE Central Bank, too, hiked its rate by 25 basis points.

"The Central Bank of the UAE (CBUAE) has decided to raise the base rate applicable to the Overnight Deposit Facility (ODF) by 25 basis points – from 4.65% to 4.90%, effective from Thursday, 23 March 2023," news agency WAM said.

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Still more to come

And the Fed has repeated what it had said after each of the past 8 increases - that there is more to come if US inflation is to be beaten back.

For UAE businesses, the latest hike would mean being extra watchful on their expenses through the coming months – and keep waiting for the Fed to bring to a halt more rate hikes. Just as important, they need to see when the Fed will start on bringing down rates. (These actions will then be repeated by the UAE central bank and its peers in the Gulf.)

Lower or more competitive options may be available depending on individual bank’s strategy – with this in mind, the advice to UAE corporates is to shop around

- Kareem Refaay at LIBF MENA

Keep cutting costs

Some businesses here are already taking pre-emptive actions on cost control through freezes on new hiring, and in cases, even letting go of staff on their rolls. Market sources talk about some banks having started on the process despite pulling in record profit numbers in 2022.

“UAE banks are taking proactive measures to mitigate risk from sectors like trade and from some SMEs,” said a source in the financial services sector. “While the slowing of the non-oil sector may lower demand for credit, banks are adopting a more cautious approach to capital spending.

“They are also digitizing some roles to eliminate redundancy and reduce expenses. With rising probability of global cyclical downturn, banks are intensifying cost-cutting and rationalizing to drive efficiencies.”

The first quarter UAE bank results, which will be available from late April onwards, would give some idea of credit offtake and demand for loans.

The Fed’s dilemma of taming stubbornly high inflation without setting light to the banking system and causing financial instability has been dubbed as ‘The Big Decision’. We are of the opinion there was not rally a Big Decision here. If they did more than 25bps, it could trigger more instability and to do nothing could be seen as negligent

- Nigel Green of deVere Group

UAE businesses need a relook at funds

Whether a full-scale global recession happens or not, businesses in the UAE need to work on ways to conserve cash – or seek alternate financing to meet their needs. “It is essential to consider the interest rate, repayment period, and other terms and conditions of the loan before deciding,” said Bal Krishen Rathore, Chairman and CEO of Dubai-based Century Financial.

“The UAE being an epicentre of trade and finance, the repercussion of a slowdown in the West would be felt in the region too. The 40-foot Container Freight benchmark from Shanghai to New York has fallen from its $12,000 highs in mid-2021 to $1,900 in March 2023, a 85 per cent fall from the peak.

As a global trade hub, UAE businesses could anticipate the impact of slowing demand and prompt them to reduce their variable spending and save money for a rainy day.

- Bal Krishen Rathore of Dubai-based Century Financial.
Gold powers back
Immediately after the US Fed announcement, gold gained as much as $30 to be $1,973 an ounce. The expectation was gold could remain subdued for the moment, at least, as markets factored in the new rate hike. But that's not how it is turning out to be.
Gold had momentarily shot past $2,000 an ounce as the Credit Suisse saga was boiling over.
The US markets are in the green following the announcement. But will the crisis in the global banking sector settle down long enough?

‘Shop around’

Banks in the UAE would still have the appetite to finance clients that fit all the credentials. Sure, interest rates are yet to see the peak of this cycle, but “Refinancing is one of the options available for corporates to fund balance-sheets and ongoing operations,” said Kareem Refaay, Managing Director at LIBF MENA.

But in the current high-rate situation, go in for a refinance only if it’s ‘completely essential to your ongoing operations and cashflow requirements’, added Refaay.

"The demand from corporates is on banks to provide more cost-effective funds and lending options. To fulfil these demands, banks must be proactive in finding different - and innovative solutions - for their corporate clients to support them through the challenge of interest hikes."

Recent developments (in US banking sector) are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain

- US Federal Reserve statement after new rate increase