Mixed reaction across the UAE economy to US Federal Reserve rate hike

For tourism and property, the rate rise seems like bad news. For banks it looks good. For a handful of others it is simply too early to tell.

The Fed’s rate hike this week is a fact as well as a signal.

While businesses in the UAE by and large are not enthused about it as a fact – nobody is happy when loan rates rise (well, except banks) – many say the signal is positive because the move means the Fed believes the world’s biggest economy is in good enough health to deal with a slight jolt.

In this view, the hike might have its drawbacks but it is nothing worse than a rock thrown into a rising tide.

Also it helps that the Fed had given clear hints to markets that the hike was coming, so there is no surprise factor to contend with.

One key variable, on which opinion is divided, is whether the rate increase will contribute to price inflation in the UAE.

The National’s business reporters file their briefs from across the UAE economy:


SMEs, already struggling with uncertain buying patterns and a strong dollar making the country an expensive destination for some key visitors, believe the rate hike will not help an already soft economy.

“Given the dollar peg I think we will import more inflation into our regional economies,” said Omar Kassim, the founder of the e-commerce site JadoPado.com. “Parts of the economy, such as SMEs, will see their borrowing costs rise, making it more difficult for them to grow their businesses efficiently in an environment with a number of headwinds. For JadoPado, as long as we can offer an efficient set of solutions against physical retailers I think our business will remain buoyant. However, I do not think the rate hike helps in an already challenged trading environment.”

At the same time, Ulugbek Yuldashev, the founder of the e-commerce site awok.com, thinks the hike will have a negligible effect on his business as he does not rely on borrowing from banks and expects the dollar peg to mitigate any rising prices.

"If prices rise because of the strengthening dollar then the dirham will rise with it, because of the peg, giving it an equal purchasing power. I really don't believe it will affect our business that much, people still need to live their lives and buy necessary goods." – Andy Scott


One industry that stands to benefit from the rate hike is banking. That’s because when rates go up, lenders charge customers more money for loans and their margins go up. At the same time a lot will depend on the appetite of companies to borrow more money to fund expansion.

"For banks in general I think it is good for them," said Sachin Mohindra, a stock portfolio manager at Invest AD, an Abu Dhabi-based asset manager. "Banks will now be able to reprice their loan books to reflect the new reality and therefore loan yields trend higher. The banks that will benefit most are the ones that are sitting on the most liquidity."​ – Mahmoud Kassem


In the construction sector, opinion is divided.

In general, there has been hardly any movement in construction costs over the past two years as commodity price drops have kept building materials prices fairly cheap, while contractors’ margins have remained low as firms have been keen to compete for the fewer projects that have launched.

Rob Edgecombe, the head of the Gulf states region for cost consultancy Rider Levett Bucknall, said: “I really don’t think it will have any effect whatsoever in the short term. Long term, there may be price fluctuations on materials sourced from the USA but these won’t be major.”

David Clifton, the regional development director at Faithful + Gould, said that in a market where bank liquidity is already tight, the increased cost of borrowing could affect the viability of certain projects.

“The cost of borrowing is going up, so you’ve got to be really sure when you go to market for funding your scheme that you are going to get the return on investment that you think you are. Because we’re seeing inflationary prices coming through. Commodity prices, which have taken a bit of a battering, are starting to come back a bit, you have VAT coming through and the cost of running that.

"So when you're looking at development analysis, the cost of building is going up and if you're looking at real estate prices continuing to go down, or bouncing along the bottom, the feasibility in some instances might start to wane." – Michael Fahy


While rising Fed rates have firmed the US dollar versus most other currencies, that puts downward pressure on oil and other dollar-priced commodities, but only at the margin, says Jason Tuvey, Middle East economist at Capital Economics.

“Much more important are the fundamentals, which will drive oil prices particularly over the coming months,” he says. “There is likely to be a healthy demand increase for oil globally this year – about 1.4 million barrels per day – and if producers can maintain discipline there should be a gradual erosion of the glut. But the dollar impact will be mainly in terms of its effect on the broader economy and growth.”

There is no strong correlation between the dollar and oil prices. Last year, the dollar index hit a 14-year high by the end of the year, a rise that corresponded to a recovery in oil prices from a 12-year low at the start of the year of around $30 a barrel to about $55 per barrel by year end. More recently, though, oil fell to a three-month low while the dollar has been firming. – Anthony McAuley


The rate hike is more important for the financing of the ships that enable global trade than it is for overall shipping demand, said James Frew, the director of consultancy at London-based Maritime Strategies International.

“We essentially regard the Fed rate hike as neutral for shipping demand, but more important for vessel financing,” said Mr Frew.

“An upwards trend in interest rates generally is going to have a negative impact for vessel owners, particularly in the dry bulk, container shipping and offshore sectors who are already struggling to make interest payments on their loans and in most cases are unable to make principal payments.”

The UAE is home to representative offices of global shipping companies, which will be affected by the rate action.

The rate hike, though, could be a positive factor for increasing global trade, which has languished in the past few years.

"The US rate rise is an indication that the world's largest economy is growing steadily, which is positive for global trade," said a spokesperson for the Dubai-based port operator DP World. "The increase in rate is designed to manage inflation so the economy grows in a steady manner, which once again is positive for everyone involved."​ – Dania Saadi


"A stronger dollar/dirham against currencies of major tourism source markets such as Europe and the UK will negatively affect tourism demand here as the UAE will become more expensive for these tourists, potentially impacting performance levels of the existing and upcoming hotels in the UAE," said Rashid Aboobacker, the associate director at TRI Consulting in Dubai. "On the positive side, though, a stronger US economic growth outlook, which triggered the Fed rate hike, may have some positive impact on the business and investor confidence across the region." – Sananda Sahoo


The UAE’s major airlines have solid credit ratings that will insulate them from the effects of the rate hike, an analyst says.

“Despite the Fed moving rates up a quarter point, current interest rates are still at historic lows, so airlines with good credit ratings such as Emirates and flydubai probably won’t see too much impact since much of what they would have borrowed would be fixed at lower rates on longer-term products,” said Saj Ahmad, an analyst at StrategicAero Research in London.

He said Emirates, Etihad and flydubai have robust cash balance sheets for near-term cash needs and are unlikely to seek short-term loans from UAE banks.

Moreover, “many of the [Gulf] airlines often look to multiple sources and instruments for cash needs”, Mr Ahmad said. “When many airplanes are bought, then sold with leaseback deals, leasing firms arrange highly competitive rates that even banks can’t offer.”

Emirates Group's cash position as of September 30 was at Dh14.9 billion, down from Dh23.5bn as of March 31. "This is due to ongoing investments mainly into new aircraft, airline related infrastructure projects, business acquisitions and the repayments of bonds totalling Dh4.1bn, loans and lease liabilities," the company said. – Sananda Sahoo


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