Growth prospects remain robust as the Gulf Cooperation Council (GCC) embraces rate hikes, following the US Fed's 0.25% hike in the key rate, according to Oxford Economics.
"The GCC currency dollar pegs require regional central banks to move in tandem (although Kuwait has a bit more flexibility) and indeed regional central banks have already matched the latest rate rise," Oxford Economics said in the latest report.
The combination of stronger growth – the GCC will be one of only two regions globally to grow faster in 2022 than in 2021 – and elevated inflation, means moderate tightening in the region seems timely, unlike during the previous cycle.
"The resulting rise in financing costs should not pose an immediate risk to growth, but it may dampen the non-oil recovery beyond 2022 even though the region should continue to expand," it said.
Oxford’s assessment, which ranks the GCC countries on ten metrics, shows Bahrain, Oman and, to some extent Qatar, may face some headwinds, with Saudi Arabia the least affected.
"The rise in short-term rates will lift the cost of credit and reduce lending volumes to businesses and households, but the impact will probably only be felt in 2023," the report said, adding this will probably lead to softer spending, while also cooling regional housing markets.
The ascent from historically low levels comes at an opportune time given high oil prices and improving financial positions, which underpin strong demand outlook in the near-term, but also against the backdrop of rising inflation.
The underlying strength of the GCC economies implies higher rates are timely as the region braces for more inflation.
Although dollar pegs have shielded the GCC region from rising import costs to some extent, the spike in energy and food prices (the two main drivers of price pressures over the past year) will result in a higher near-term peak as it feeds through to regional prices, Oxford Economics said.
"We see upside risks to our current 2022 forecast for the GCC inflation of 2.7%, though we believe it should still fall back below 2% in 2023," Oxford Economics said.
Crucially, interest rates will remain below 2019 levels into 2023 and they will settle below historical peaks, it said. Additionally, regional sovereign balance sheets are stronger today than they were entering the last tightening cycle, which should contain funding pressures for the regional borrowers.
Fiscal deficits are turning into surpluses (except in Bahrain), reducing financing needs and facilitating rebuilding of forex reserves.
And all GCC countries will run external surpluses (in double-digits as proportion of GDP except Bahrain and Oman), sustaining appetite for regional assets.
"This supports our view that rate hikes should not cloud the growth outlook too much," the report said.
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