How the world economy is weighing on people’s financial well-being

A combination of factors has brought new levels of financial fragility to the fore, experts say at Arab Household Savings Conference 2022

• 

  Federal Reserve Chairman Jerome Powell holds a news conference following the announcement that the Fed raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, US. Reuters

• 

  The Central Bank of the UAE also increased its base rate for the overnight deposit facility (ODF) by half a percentage point point. Photo: Central Bank of the UAE

• 

  Residents with variable rate mortgages will feel the change as soon as their next monthly payment is due. Antonie Robertson / The National

• 

  Changes to credit card interest rates are expected within a billing cycle or two. Antonie Robertson / The National

• 

  Monthly instalments on personal loans and car financing are also set to rise. Razan Alzayani / The National

RELATED: What does the US Fed rate rise mean for UAE residents?

The Covid-19 pandemic, high inflation, rising interest rates and the conflict between Russia and Ukraine are taking a toll on people’s financial well-being globally, experts speaking at the Arab Household Savings Conference 2022 said.

Combined, they have brought new levels of financial fragility to the fore, Imane Benzarouel, deputy executive director of the Morocco Foundation for Financial Literacy, said during a panel discussion at the event hosted by FinTech Robos in Bahrain on Tuesday.

“There is a need for financial skills to help achieve financial resilience,” she added.

Meanwhile, rising interest rates and high inflation are beginning to be felt in the Middle East region, Ramzi Khleif, general manager at digital wealth manager StashAway Mena, told a separate panel.

“Inflation is something real and I think the average person is starting to see it creep in everywhere,” Mr Khleif said.

“You're starting to see an increase in the cost of almost everything and household incomes are not keeping up.”

The Covid-19 pandemic era of near-zero interest rates and fiscal and monetary stimulus came to an end earlier this month, with rising inflation forcing the US Federal Reserve to tighten its monetary policies and increase the benchmark interest rate by 0.25 per cent.

The central banks of the UAE, Saudi Arabia, Bahrain and Kuwait also increased their benchmark interest rates in line with the US. Most GCC central banks follow the Fed's moves on key interest rates due to their currency peg to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies.

The Fed's rate increase from near zero comes amid an uncertain global economic outlook fuelled by record-high inflation and Russia’s military assault on Ukraine that has affected commodities markets.

Higher rates mean a range of personal finance products — from loans to credit cards, mortgages, savings and remittances — will become more costly and affect consumers' monthly debt repayments.

However, inflation could drop next year as the supply chain crunch begins to ease, said Anthony Scaramucci, founder of US hedge fund Skybridge.

“The general consensus now is that we're going to have systemic, large-scale inflation,” Mr Scaramucci, who served an 11-day stint as former US president Donald Trump’s communications director, told a panel at the conference.

“But I think that goes against a 30-year trend of major deflationary forces that are impacting the world as a result of technology.

“I think that the supply chain, inside of the next year, will get straightened out … and predict that there'll be a greater-than-expected drop in inflation data, which will put some ease in the central banking community.”

However, the monetary effect on household budgets means that financial literacy skills, such as budgeting and having an emergency fund, are important to protect against rising prices, job loss, salary reduction or financial shock, panellists said.

“Financial literacy is too important a topic to be overlooked by stakeholders such as governments, international organisations, the private sector and the wider society,” said Elena Miteva, a senior economist at the Organisation for Economic Co-operation and Development (OECD).

Financial education content needs to be personalised, focused and easy to understand to help people take action, such as commit to a savings or investment plan, she added.

It is also important to combine financial literacy with experience in financial markets and investment, said William Tohme, senior regional head of Middle East and North Africa at the CFAI Institute.

“Financial literacy is a risk management tool for a household to proceed with financial planning or deploy savings in the financial market. It also helps you to have meaningful conversations with your financial adviser,” he said.

Foreign workers in the GCC also need to create an investment plan that will help them to compensate for a lack of state-sponsored pensions during their retirement, Mr Tohme said.

“Although locals have a publicly sponsored pension plan, it may not be enough because we have higher life expectancy and tend to outlive our savings. They need to have a private pension as an extra source of income to sustain themselves during old age,” he added.