Dubai: A tighter monetary stance in Saudi Arabia resulting from rising US interest rates could offset some of the gains from the expansionary fiscal stance, according to economists at Institute of International Finance (IIF)
Monetary tightening is coinciding with a sharp slowdown in bank lending due to weak domestic demand. “We expect a cumulative increase of 100 basis points (bps) in key policy rates in Saudi Arabia in 2018, in line with the four Fed hikes of 25 bps each,” said Garbis Iradian, Garbis Iradian, Head of MENA research, IIF.
The increase in the cost of borrowing is likely to constrain the expected modest recovery in credit growth and weigh on economic activity. Regression results at the IMF show that spillovers in the GCC from US monetary policy are larger when real oil prices are lower, and vice versa.
Using IMF regression results, the IIF analysts say that if the real oil price falls to $50 (Dh183) a barrel, a 100 bps increase in US real interest rate would decrease the annual non-oil real GDP growth rate in Saudi Arabia by 0.3 percentage points. In contrast, an increase in the real oil price to $60 a barrel would decrease annual non-oil growth by only 0.1 percentage point.
A negative spread between Saudi and US rates could increase pressure for Saudi investors to seek higher returns overseas, exerting downward pressure on the Saudi riyal. In the short-term, US and Saudi interest rates usually move together as the kingdom’s currency is pegged to the dollar, however, in the recent months the spreads have narrowed. The narrowing of the spread between the deposit rates in Saudi Arabia and the US dollar LIBOR rate has contributed to the acceleration in resident capital outflow in 2017.
