Global Insight Perspective | |
Significance | Bahrain, Kuwait, and Saudi Arabia tracked the Fed and lowered interest rates for the second time in October as part of ongoing efforts to shore up confidence and ease liquidity conditions in their banking systems. The United Arab Emirates (U.A.E.) opted to leave its interest rate unchanged. |
Implications | Although prior to the credit crisis GCC policymakers had moved to soak up the excess liquidity which was feeding the surge in inflation, their priority now has turned to strengthening conditions in the domestic banking systems in order to free up credit and keep the economic expansion going. The rate cuts were positive for the Gulf stock markets, which posted gains after the announcements |
Outlook | Alarmed by the worsening conditions in the global capital markets, GCC authorities have taken several emergency steps—reducing interest rates, guaranteeing bank deposits and interbank lending, and injecting cash into banks—to ease credit conditions and support economic activity amid the ongoing financial crisis. The Gulf countries have the financial means to ride out the current turmoil, and we expect growth in the region to continue in the near term, albeit at a much slower pace than the previous five years. |
Bahrain, Kuwait, and Saudi Arabia followed the recent move by the Fed and other central banks (see World - United States - China: 30 October 2008: Markets Boosted as Rates Cut in U.S., Asia), reducing interest rates for the second time in October as part of ongoing efforts to shore up confidence and ease liquidity conditions in their banking systems. The Central Bank of Bahrain (CBB) lowered its key policy rate by 25 basis points, to 1.5%, while also reducing its overnight deposit rate from 1.25% to 1%. Additionally, the CBB's repurchase (repo) rate was cut by 125 basis points, to 3.5%, following a 50-basis point cut earlier this month. The Saudi Arabian Monetary Agency (SAMA) lowered its benchmark lending rate by 100 basis points, with the repo rate falling to 4%. The monetary agency’s reverse repo rate, which is the interest rate on bank deposits, was left unchanged at 2%.
While GCC countries with dollar pegs like Bahrain and Saudi Arabia have typically tracked rate cuts by the Fed, Kuwait also took a cue from the Fed and stepped in to reduce interest rates. Kuwait is the only GCC member to not fix its currency to the dollar, after dropping its peg in May 2007 in favor of a currency basket. Nonetheless, tight liquidity conditions and a slumping stock market prompted the Central Bank of Kuwait (CBK) to lower its repo rate by 50 basis points, to 2%, and to reduce its benchmark discount rate from 4.5% to 4.25%.
The Central Bank of the U.A.E. (CBU), meanwhile, decided to hold its overnight repo rate steady at 1.5%, after reducing it by 50 basis points on 8 October. An official told Reuters that cutting the interest rate "is not meaningful at this point". The Qatar Central Bank (QCB) also did not make an immediate announcement regarding its interest rate. The QCB bucked the trend earlier this month and opted not to cut its interest rates, despite the worsening global financial crisis. Qatar’s overnight deposit rate currently stands at 2%, while its overnight lending and repurchase rates remain at 5.5% and 5.55%, respectively, as well. The sixth and final member of the GCC, Oman, sets its interest rate at weekly auctions that are held on Mondays. On 28 October, the Central Bank of Oman (CBO) reduced its repo rate to 4.24% for the week of 29 October to 4 November, from 5.17% the previous week.
The Gulf stock markets responded favorably to the interest rate cuts, much like the markets in the United States, Europe, and Asia. The Bahrain Stock Exchange posted the largest gain yesterday, closing up 2.7%, while Qatar’s Doha Securities Market advanced 2.4% for the day as well. Additionally, the Muscat Securities Market climbed 1.5%, the Kuwait Stock Exchange rose 1.2%, and the Dubai Financial Market gained 0.9%. The only market in the Gulf to close lower on the day was the Abu Dhabi Securities Exchange, which edged down 0.7%. The Saudi bourse was closed.
Outlook and Implications
Alarmed by the worsening conditions in the global capital markets, GCC authorities have taken several emergency steps—reducing interest rates, guaranteeing bank deposits and interbank lending, injecting cash into banks—to ease credit conditions and support economic activity amid the ongoing financial crisis. Although prior to the credit crisis GCC policymakers had moved to soak up the excess liquidity which was feeding the surge in inflation, their priority now has turned to strengthening conditions in the domestic banking systems in order to free up credit and keep the economic expansion going. Inter-bank rates, which have risen sharply in the wake of the credit crisis, have begun to stabilise around the region. However, the effects of the credit squeeze will impact business and investment activities more significantly over the coming quarters. We expect the growth in the region to continue in the near term, albeit at a much slower pace than the previous five years. GCC countries have the financial means to ride out the current turmoil, given their substantial internal and external financial surpluses, including strong foreign asset positions, and they should fare much better than most in 2009 in our view.