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Al Mazaya: Expansive spending plans conducive to mitigating impact of rising interest rates, achieving developmental goals

UAE Federal Budget targets accelerating non-oil growth in 2019; real estate largest beneficiary

The recent interest rate hike has undoubtedly triggered substantial changes in the financial policies adopted by the Gulf countries since the beginning of this year, during which interest rates tripled following the US Federal Reserve’s decisions in this respect.

According to Al Mazaya Holding’s weekly real estate report, the rise in interest rates was counterproductive to the financial and economic stimulus plans and strategies; and it was not supportive at all as efforts are currently being made to survive the slowdowns that resulted from declining oil revenues and geopolitical instability.

The sectorial increases in interest rates have had a direct negative impact on the real estate sector in particular as they triggered a rise in the cost of loans due to be paid over the coming months at the government level. In addition, they reduced liquidity levels, while pushing up costs of borrowing for construction  and real estate development companies, therefore, negatively affecting the pace of activity in the real estate and tourism sectors as well as the commercial sector.

However, Al Mazaya Holding’s weekly real estate report indicates that raising interest rates is a contributing factor in the management and control of inflationary pressures and is increasing the volume of deposits in the banking sector.

Al Mazaya underlined the significant impact of the changes in interest rates on the economic sectors in the region, taking into account that the real estate is one of the largest active economic sectors affecting public performance.

Al Mazaya believes that pumping more medium- and long-term investments into essential sectors and moving towards aggressive expansive fiscal policies will help economies of the region overcome the overall impact of interest rate-related decision, specially that the year 2019 is forecasted to see more interest rate hikes.

With regards to the UAE, Al Mazaya Holding’s weekly real estate report highlighted the direct impact of the changes in interest rates on the UAE economy and its main sectors, particularly the real estate platform. The hikes led to a decline in credit growth in 2017 and to a rise in banking deposits, which contributed to overcoming aggregate liquidity shortages across UAE banks.

It is expected that the impact will be less demanding on economic activities in the UAE comparatively with other countries; it is not expected to affect borrowing costs as industry data indicated a YoY 7% increase in demand for bank loans at the end of August.

The report added that indicators of the UAE federal budget look encouraging and supportive of the real estate sector over the medium term, as a total of $ 16.4 billion has been approved to stimulate growth and investment in the non-oil sectors by 2019 in a fresh stimulus package that is expected to positively impact the performance of the real estate sector.

With regards to Saudi Arabia, Al Mazaya says that increasing interest rates at the moment is not a suitable decision for the Saudi economy and will pose significant negative challenges to the business sector, real estate prices and inflation. The Saudi economy currently needs low-interest rates to implement a large number of developmental plans and programmes based on getting large loans from Saudi banks. On the other hand, ensuring greater involvement of the private sector in growth and economic stimulus plans will face the challenges of high-interest rates on borrowing. Within this scenario, loaning activities are expected to decline should interest rates continue to further hike, which will ultimately impede the successes of the ongoing development and growth plans.

With regards to Bahrain, Al Mazaya Holding’s weekly real estate report indicated that Bahrain’s economy continues to grow at a rate consistent with its stimulus plans’ goals. The Bahraini economy is able to maintain its stability and strength through the support and encouragement packages that the Kingdom receives from neighbouring economies.

Current industry data indicate that the Bahraini economy has achieved economic growth rates of 8.25% during the Q2 of 2018 as compared to the same period of 2017.

Al Mazaya noted that rising interest rates will put more pressure on Bahrain’s economy like other economies in the region, and that the trend to adopt expansionary spending policies is the best solution to overcome these challenges that impede higher growth rates across non-oil sectors.

All analytical reports on the Fed’s raising interest rates concur on the decision’s significant impact on the economic performance of the countries whose currencies are pegged to the US dollar. The banking sector will be at the forefront of the sectors benefiting from the increase in interest rates, while the real estate sector will be the most negatively affected one.

The weekly real estate report of Al Mazaya Holding confirms that the Gulf real estate sector accounts for a significant share of growth in the tourism sector. Therefore, any rise in the exchange rates of local currencies will negatively affect the tourism industry in the region to the benefit of other less expensive destinations.

The Gulf region is set to pursue expansive spending plans on all activities and services, a trend which is likely to mitigate the overall impact of rising interest rates and enhance the ability of economic sectors to achieve future development goals.