Rate cuts by GCC central banks to boost non-oil growth, IIF says

Monetary easing to speed pace of economic recovery in the Arabian Gulf bloc

DUBAI, UNITED ARAB EMIRATES- Burj Khalifa lit up with UAE flag at Dubai Mall, Dubai.  Leslie Pableo for The National
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Central banks in the Arabian Gulf cut lending rates last week, a move that is expected to stimulate non-oil growth, reduce the risk of further declines in the real estate market and attract foreign inflows, according to the Institute of International Finance .

Lower borrowing costs are expected to boost business activity, giving non-oil economic growth in the GCC a nudge up to 2.8 per cent in 2019 and 2.9 per cent in 2020, from 2.1 per cent in 2018, IIF said in a report.

"The latest cut in interest rates would help the economic recovery process," the IIF said. "Monetary easing would make borrowing cheaper for investors."

Banking regulators in the Gulf cut benchmark interest rates, following the US Federal Reserve's decision last week to reduce its key rates for the first time since 2008, indicating a willingness for further cuts. Most GCC central banks follow the Fed's moves on interest rates because their currencies are pegged to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies.

Reducing interest rates will make credit available more cheaply to the private sector and provide an opportunity for companies to refinance their loans at a lower cost.

"Despite lower oil prices, liquidity conditions in the region still look healthy except Oman," the IIF said.

The institute expects higher pressure on the net interest margins of GCC banks, especially those with a bigger focus on consumer lending.

With tighter margins, mergers and acquisitions in the banking sector are likely to continue, according to the IIF. The financial sector in the Gulf has seen a sharp rise in M&A in recent quarters as lenders consolidate to better compete in tougher market conditions. The latest of these was Emirates NBD's acquisition of Turkey's Denizbank, the country's fifth-largest bank, from Russia's Sberbank last week.

However, the IIF said benefits of monetary easing on the private sector may be limited by external factors such as oil price volatility.

Still, the move could be beneficial for the GCC real estate market, particularly in the UAE.

If the reduced interest rates coincide with a softening of the dollar, it will lead to lower risk of further declines in regional real estate prices, especially in the UAE, the IIF said.

"A cut in policy rates would lead to lower mortgage interest rates, making it more attractive for potential homebuyers while easing the debt burden on existing borrowers," it said.

The UAE property market has slowed in recent years on the back of a three-year oil slump that dampened demand and contracted sales and rental prices. Increasing supply is further softening real estate values, with analysts predicting the market will continue to decline in 2019, albeit at a slower rate, before bottoming out later this year.

Lower borrowing costs combined with a softer US dollar are also expected to boost inflows into emerging markets, including the GCC, the IIF said.

"With lower interest rates, both governments and private sectors will have an opportunity to tap capital markets at a lower cost, which could give new breath to large infrastructure projects," the report said.

Solid bond returns, capital markets upgrades and improving fundamentals provide the GCC with the opportunity to attract higher foreign inflows and refinance maturing debt at a lower cost, the IIF said.