DUBAI: A dramatic narrowing of spreads between interest rates in the United States and the Gulf cushioned the region’s economies last year, but the trend may be close to ending as demand for loans picks up and monetary policy tightens further.
Any move toward significantly higher regional rates — those in Saudi Arabia have actually fallen in the past year, against the US tide — could weigh on a modest acceleration of economic growth expected in 2018.
In theory, short-term money rates in the United States and the Gulf should move in similar ways as the region’s currencies are closely linked to the US dollar, leaving central banks little room to conduct independent monetary policies.
But in the last couple of years, theory has gone out the window and spreads have fluctuated wildly as Gulf economies struggle under the impact of low oil prices.
On Monday, the three-month Saudi interbank offered rate was just 8 basis points above its US dollar equivalent — the smallest gap since mid-2009, when rates were distorted by the global financial crisis — compared with 104 bps at the end of 2016.
Meanwhile, the spread of three-month money in the United Arab Emirates has shrunk on occasions to zero in the last several weeks, the lowest since late 2008. It stood at 6 bps on Monday.
Narrowing spreads have been good news for businessmen and consumers in the Gulf, shielding them from some of the pain of the Federal Reserve’s five increases in US rates since late 2015. In particular, slumping real estate markets in Dubai and elsewhere in the region, deflated by low oil prices, have been spared a significant rise in loan costs.
While the three-month US dollar London interbank offered rate has surged 82 bps in absolute terms since the end of 2016, the three-month Saudi rate is down slightly and the UAE rate has edged up only gradually.
That pattern may change in the coming months as the US central bank continues to raise rates. Markets expect between two and four more Fed hikes of 25 bps each in 2018, and this time, the conditions that insulated the Gulf from US policy may change.
“Spreads have narrowed so much that it’s difficult for them to narrow more. The feed-through from higher US rates might be more this year, more of a headwind for the economy,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank, said of the outlook in the UAE.
Economic growth in the Gulf oil exporters is expected to pick up a little this year; analysts predicted in a Reuters poll last month that Saudi gross domestic product would expand 1.5 percent, after contracting 0.5 percent in 2017.
But growth looks likely to stay far below the pace of around 5 percent early this decade, and real estate markets are in poor shape to cope with higher interest rates. Dubai property prices are estimated to be down as much as 16 to 19 percent from peaks hit several years ago.
LOAN GROWTH
Olivier Panis, senior regional credit officer at Moody’s Investors Service in Dubai, said Saudi spreads narrowed for two main reasons last year: less demand for loans due to the weak economy, and lower domestic borrowing by the government.
Bank lending to the Saudi private sector shrank 0.8 percent from a year earlier in December. However, Panis expects overall loan growth to pick up this year because of greater government spending and a slightly stronger economy.
Loan growth could reach 4-5 percent in 2018 and 8-10 percent in 2019. That would not be enough to tighten the money market significantly, Panis said, but it could prevent a further loosening and start to change the outlook for rates.
Similarly, annual bank lending growth in the UAE sank to 0.4 percent in December, the lowest in at least three years. Panis said growth could rebound to around 5 percent in 2018.
Another factor pushing down Gulf spreads, bankers say, is increased confidence about the stability of the region’s financial system after last year’s recovery in oil prices.
Governments now have more money to support banks if needed, so banks demand less of a risk premium in lending to each other. But that trend may have run its course; Brent crude has dropped back to around $63 a barrel from above $70 last month.
In Saudi Arabia the central bank, keen to protect the economy, kept money rates low last year by adjusting the way in which it responded to each US rate rise. It increased its reverse repo rate, at which commercial banks deposit money with the central bank, by 25 bps each time but did not move its repo rate, used to lend money to banks.
That strategy cannot continue much longer, however, because the corridor between the rates has narrowed to just 50 bps. Too narrow a corridor would remove the incentive among banks to lend among themselves, damaging the money market.
A Saudi commercial banker predicted the central bank would have to raise the repo rate after the next US rise, expected in March; Malik said the corridor might conceivably narrow to 25 bps. Either way, the repo rate looks set to begin climbing sometime in 2018, pulling the money market with it.
History shows it is not impossible for Gulf spreads to continue tightening into negative territory; the Saudi-US spread reached almost minus 100 bps in 2008.
But that was during the global crisis, when emergency measures by central banks and a freezing up of money markets influenced rates. In more normal times, banks are unlikely to lend more cheaply in the Gulf than in the United States.
“Spreads have sometimes been negative in the past but this has been very rare and unsustainable,” said a Gulf banker. “Markets will tend to demand some kind of premium for the risk of lending in the Gulf versus the US“
Gulf’s rate reprieve may end as US spreads stop narrowing
Gulf’s rate reprieve may end as US spreads stop narrowing
Oil Updates – prices slip as investors eye Israel-Gaza truce talks, US Fed policy review
SINGAPORE: Oil edged down on Tuesday after Israel-Hamas ceasefire talks in Cairo helped quell market fears of an expanding conflict in the Middle East, while worries about the outlook for US interest rates dragged on the market, according to Reuters.
Brent crude futures dipped 19 cents, or 0.21 percent, to $88.21 a barrel at 9:30 a.m. Saudi time, while US West Texas Intermediate crude futures slipped 20 cents, or 0.24 percent, to $82.43 a barrel.
The front-month contract of both benchmarks lost more than 1 percent on Monday.
“The ongoing negotiation for a potential ceasefire between Israel and Hamas has led market participants to further unwind the geopolitical risk premium in oil prices, while the upcoming Fed meeting also drives some near-term reservations,” said Yeap Jun Rong, market strategist at IG.
“Rates being kept at elevated levels for longer could trigger a further rise in the US dollar, while also putting some risks to oil demand outlook.”
Hamas negotiators left Cairo late on Monday to consult with the group’s leadership after talks with Qatari and Egyptian mediators on a response to a phased truce proposal that Israel presented on the weekend.
The delegation was expected to report back within two days, two Egyptian security sources said.
While Hamas leaders visited Cairo, Israeli airstrikes killed dozens of Palestinians on Monday, with more than half the dead in the southern Gaza city of Rafah, which foreign leaders have urged Israel not to invade.
Continued attacks by Yemen’s Houthis on maritime traffic south of the key Suez Canal trading route have kept a floor under oil prices and could prompt higher risk premiums if players anticipate crude supply disruptions.
Houthis targeted two US destroyers and the vessel Cyclades in the Red Sea as well as the MSC Orion in the Indian Ocean, the Iran-aligned group’s military spokesman Yahya Sarea said in a televised speech early on Tuesday.
On the economic front, investors are on watch this week for the US Federal Reserve’s May 1 policy review, with stubborn inflation pushing out market expectations for any rate cuts, which could bolster the US dollar and hamper oil demand.
Some investors are cautiously pricing a higher probability that the Fed could hike interest rates by a quarter percentage point this year and next as inflation and the labor market remain resilient.
Additionally, concerns over demand have also weighed on sentiment, ANZ analysts said in a research note, as premiums for diesel and heating oil over crude oil have fallen to their lowest level in months.
“The four-week average consumption in the US is near the average seasonal low of the past five years,” said ANZ, citing data from the Energy Information Administration.
Global collaborations crucial to address global challenges, says Saudi official
- Ammar Nagadi, vice minister of economy and planning, talks to Arab News on the sidelines of World Economic Forum Special Meeting in Riyadh
RIYADH: Global collaborations are a crucial element in efforts to tackle economic and social challenges, especially given the current state of the world, a leading Saudi official said.
In an interview with Arab News on the sidelines of the two-day World Economic Forum Special Meeting on Global Collaboration, Growth and Energy for Development, which concluded on Monday in Riyadh, the Kingdom’s vice minister of economy and planning, Ammar Nagadi, spoke about the important role such gatherings can play in advancing economic cooperation to address global challenges.
He believes the world is going through a “unique” time, with economic and social challenges worldwide and human development at a critical stage.
“Because of this, global collaboration and the world convening together becomes more and more important,” Nagadi said.
“We have seen that over the last few years Saudi Arabia is becoming a platform that brings together different people from different parts of the world to discuss challenges and to address these challenges” and the World Economic Forum special meeting is a continuation of that process, he added.
“We have more than 1,000 leaders today from different sectors (attending the meeting). We have heads of states, private sector and public sector leaders, and entrepreneurs from more than 70 countries across the globe.
“I think this diverse group, coming together to discuss and address global challenges is a unique opportunity and we are very happy to have it here in Riyadh today.”
Describing the economic landscape in the Kingdom, Nagadi said the Saudi economy is going through a very strong period of transformation that is reflected in the progress the country has made in terms of growth and diversification.
“Last year, Saudi Arabia’s non-oil activities grew by 4.4 per cent but I think the most important thing to realize is that non-oil activities, as a percentage of total gross domestic product, have reached, for the first time in history, 50 percent of the total GDP,” he added.
This represents a significant milestone that reaffirms the progress made in efforts to diversify the national economy, he added, which have created numerous benefits, including investment opportunities and improved job prospects for Saudis.
“If I take one example, you will see that unemployment last year in the last quarter has reached an all-time low of 7.7 per cent and we hope to see that momentum continuing,” Nagadi said.
He believes this momentum will also continue in terms of growth and diversification.
“We target to grow around 5 per cent for non-oil activities this year but we have seen recent forecasts by the IMF (International Monetary Fund) where they’re expecting Saudi Arabia to further grow in 2025 by around 6 per cent,” he added.
Saudi Arabia is also making progress toward achieving sustainability goals, which Nagadi said is another important topic.
“What we have today is Vision 2030, which is very ambitious, and sustainability is an integral part of that vision,” he added.
“We have economic goals, social goals, environmental goals. If I were just to take the environmental part of the sustainable development goals, you will see that Saudi has put in a lot of efforts as part of Vision 2030.”
The Saudi Green Initiative, announced in March 2021, is a great example of what the Kingdom is doing not only to drive economic growth but also protect the planet, Nagadi said.
“The aim is to achieve net-zero emissions by 2060, and the goals are to increase the renewable energy mix to 50 percent of the total energy mix and plant 10 billion trees by 2030 as well as protecting land and sea,” he said, adding that 50 million trees have already been planted.
Saudi-UK economic symphony hits high note with Vision 2030, Lord Mayor of City of London tells Arab News
- Michael Mainelli: ‘With the amazing changes under Vision 2030, we’re anticipating yet more investment both ways’
RIYADH: Business and investment between Saudi Arabia and the UK are flourishing under the “amazing” Vision 2030 reform plan, with expectations for further collaborations on the horizon, the Lord Mayor of the City of London told Arab News in Riyadh.
Michael Mainelli said of the business and investment connections between Saudi Arabia and the City of London: “The Gulf is our fourth-largest trading partner with about £65 billion ($81.47 billion) in trade every year, and Saudi is the largest chunk of that to well over £17 billion, so trade is very good.”
Saudi investment in the City of London has always been “very, very strong, and British investment in Saudi has also been strong. I don’t think there’s anything other than growth, and with the amazing changes under Vision 2030, we’re anticipating yet more investment both ways,” he added.
“The great thing about Vision 2030 is that it’s almost like a pyramid, with the entire nation working together towards a whole series of goals.”
The UK is “the world’s premier professional financial services sector, so there will always be opportunities for us to collaborate with Saudi Arabia” in this field, Mainelli said. “I think less appreciated is our recognition of Saudi intellect.”
He said he is “trying to make connections” in Riyadh, adding that Saudi academia, science, technology and research “are growing very well.”
Mainelli outlined three main avenues of Saudi investment in the City of London: property development, operational businesses, and science and technology. He added that Saudis are also investing in areas such as media distribution and packaging.
“I’m looking forward to a tremendous amount of Saudi investment in science and technology, particularly in areas like hydrogen, where Saudi Arabia is very strong, as well as in desalination and biotech,” he said.
Emphasizing initiatives aimed at bolstering economic cooperation between Saudi Arabia and the UK, he said: “The British government is hosting a two-day conference here in Riyadh from May 14 to 15. We’re bringing over about 400 to 500 British firms to look at areas where they’re looking at technology.
“Equally, in June we have our Net Zero Delivery Summit, where Saudi Arabia will be present, and on June 24 the UK-Saudi infrastructure meeting, where we’ll discuss infrastructure projects both ways.”
Providing insight on how the UK can further strengthen economic relations with Saudi Arabia, especially after having left the EU, Mainelli said: “The Brexit vote was over eight years ago, and in the City of London we’ve grown from 525,000 workers to 615,000 workers — a net gain of 90,000.
“Also, assets under management globally have increased from just over 12 percent to about 15 percent of global assets. So the City of London has been doing very well post-Brexit.”
Mainelli highlighted the value of conferences such as the World Economic Forum in Riyadh, which he attended, as catalysts for business deals, often beginning with conversations between individuals.
“It’s great to have this event. It focuses very much on cooperation, particularly in the energy sphere, which is fundamental to economic growth,” he said.
“Britain is a petrostate in its own right, not as strong as Saudi Arabia. Both countries have to work on what’s their energy transition going to be in a net zero world.”
Besides geopolitical tensions, trade restrictions pose significant barriers to global collaboration, Mainelli said.
“These are present in both goods and services, particularly in professional services, and the way to address them … is through standards. These are ISO (International Organization for Standardization) standards, which I’m promoting for artificial intelligence and space sustainability, for example,” he added.
“These are mutual recognition standards for professionals working, so a Saudi accountant could work in Britain and vice versa, and similarly for lawyers etc.
“The third area concerns governance standards and how organizations are managed. So I believe probably the biggest thing to constantly work at is standards.”
Mainelli stressed the need to address geopolitical tensions, “but as a business community we’re not deeply involved in those negotiations, decisions or military actions, so it’s important for us to understand how we should be reacting to and how we can support peace through trade.”
Global ‘Center for Space Futures’ announced at World Economic Forum
- The center aims to facilitate public-private discussions on space collaboration, incorporating best practices from the WEF and its communities into the global space sector
RIYADH: The World Economic Forum and the Saudi Space Agency signed an agreement to establish the Center for Space Futures, a Centre for the Fourth Industrial Revolution.
Hosted by the SSA, the center is expected to open later this year and will be the first in the C4IR network to focus exclusively on space. It will operate alongside the existing national center, C4IR Saudi Arabia, to advance Saudi Vision 2030.
Jeremy Jurgens, the WEF managing director, told Arab News: “Historically, many people assume that space is the exclusive domain of a few countries that have a fully integrated space technology stack. What we’ve seen over the last few years is that space is something that should be available to the whole globe.
“By launching the Center for Space Futures here in Saudi Arabia, we’re actually demonstrating that space is something for all humanity, and that we can actually unlock those benefits and use them anywhere and everywhere.”
The center aims to facilitate public-private discussions on space collaboration, incorporating best practices from the WEF and its communities into the global space sector, and generating contributions to accelerate space technologies.
Dr. Mohammed Al-Tamimi, CEO of the SSA, told Arab News: “This center is part of a global platform that will engage everyone to make sure that we’ll be activating public and private discussions, especially in this era.” As the world experiences a shift from a government-centered space sector to a private-centric sector, Al-Tamimi said that the center offers “great potential to collaborate and engage more with the private sector and government initiatives.”
The officials said they are committed to harnessing the vast opportunities of the space industry and creating a sustainable economy globally through best practices, governance, policies, innovation and valuable technologies to encourage further cross-sector engagement.
Mishaal Ashemimry, managing director of the Center for Space Futures, told Arab News: “Space generally has seen no boundaries when it comes to development, and you need the input of international countries with their expertise, their backgrounds, their achievements in space, to work together, whether it’s towards a mission or achieving governance policies … Space cannot move forward without international collaboration.”
The center will join 19 others that make up the C4IR network, a platform for multistakeholder collaboration, bringing together public and private sectors to maximize technological benefits to society while minimizing the risks.
The WEF launched the first C4IR in San Francisco in 2017, followed soon after by others in Japan and India. The network now includes the Centre for Trustworthy Technology, in Austin, the US Centre for Advanced Manufacturing, in Detroit, Germany’s Global Government Technology Centre, Norway’s HUB Ocean, and others in Rwanda, Saudi Arabia, Serbia, South Africa, India, Turkiye and the UAE.
Saudi Arabia likely to meet tourism targets ahead of 2030, says top official
RIYADH: Based on Saudi Arabia’s extraordinary achievements in the tourism sector, the Kingdom is likely to achieve its targets ahead of 2030, said a top tourism official.
During a panel at the Future Hospitality Summit held in Riyadh, Gloria Manzo, chief special adviser at the Ministry of Tourism, likened Saudi Arabia’s approach toward the development of the sector to the private sector with clear goals with key performance indicators reviewed quarterly.
She added: “We have goals, we have quarterly meetings that review our KPIs quarterly. You better be on the plan and if not, you have to explain why, so most likely it will achieve those numbers, before 2030. Absolutely!.”
Manzo noted that increasing the target indicates that Saudi Arabia is progressing faster than expected, which reflects a positive momentum in achieving tourism goals.
She said for Saudi Arabia “the sky is the limit.” The development process in the Kingdom, she added, is supported by unprecedented levels of government investment.
“What the government is doing in this country, there’s no other example in the world. I have never seen something like this in my 30 years of career,” the official said.
She also highlighted challenges facing the tourism sector such as geopolitical issues and weather-related crises, which can disrupt operations.
The official identified the development of human resources for the sector as a challenge for which the government is taking several measures.
“We wish we could do that faster. The ministry is training Saudis abroad. We announced a (training) academy. We’re partnering with universities here. That is very important, but it will be wonderful if we can train them faster. The private sector is also helping us to train these Saudis,” she said.
Manzo also expressed optimism about more Saudi women joining the tourism industry.
The official said interestingly the Saudi government “moves faster than the private sector” unlike any other country in the world where the latter tends to act quicker. She said small and medium enterprises require more support to keep pace with the ongoing development in the sector.
“I would say the SMEs need more support, and of course, we wish we can support them so that they can accelerate in this transition,” Manzo added.
“We’re working with them. We have a plan and the ecosystem is very structured,” the tourism official said.
