Interest rate rise puts GCC in a tighter spot

The divergent interest rate policies between US and Asia, along with the plunging oil prices have put GCC countries in a spot of bother, according to a report from Asiya Capital Investments.

The US Fed has recently hiked its benchmark interest rates whereas Asian economies are cutting interest rates and Europe following a loose monetary policy.

Bahrain, along with other GCC currencies, follows a currency peg to the US Dollar. 

This implies that GCC nations’ monetary policies are dependent on US interest rates. “Follow the policy rates of the reference currency or risk capital outflows’, the investment company states.

GCC countries have already followed the US rate hike. The report says, “the Saudi Arabian Monetary Agency already hiked its reverse repo rate by 25 basis points to 0.5 pc and Kuwait, UAE and Bahrain also reacted to the Fed’s decision. At the same time, the GCC is highly exposed to the deteriorating energy market, which accounts for half of the economy and 85pc of public revenue. The combination of low oil prices and tighter credit conditions could be the perfect storm for the GCC.”

“Apart from the downside risk on growth, the whole currency system could face substantial pressure if current conditions persist as the Gulf continues to spend from its reserves,” it adds. 

The higher interest rates are believed to be a disadvantage for GCC exporters, as they have to compete with cheaper currencies of other exporting countries.