Gulf stock markets rally as central banks hike rates
Dubai's benchmark DFm General Index advanced 2.9 per cent to the highest level in more than a week as traders exchanged more than 300 million shares, the most in a month. - KT file
Dubai - Dubai's benchmark DFM General Index advanced 2.9 per cent to the highest level in more than a week as traders exchanged more than 300 million shares, the most in a month.
The first US interest-rate increase in almost a decade prompted a rally across the GCC bourses on Thursday with Dubai shares driving the surge as central bankers in the region, where currencies are pegged to the green-back, raised rates that may eventually lead to higher loan costs and tighter liquidity.
Dubai's benchmark DFM General Index advanced 2.9 per cent to the highest level in more than a week as traders exchanged more than 300 million shares, the most in a month. The UAE Central Bank and central banks of three other GCC countries announced on Thursday their move to raise the interest rate to keep pace with the Fed hike even as the drop in oil prices puts pressure on their budgets and tests their resolve to maintain the peg.
The UAE Central Bank raised rate on its certificates of deposits by 25 basis points, effective immediately. The UAE rate hike follows interest rate rises of a quarter of a percentage point by the central banks of Saudi Arabia, Kuwait and Bahrain. Certificates of Deposit are the monetary policy instrument used by the UAE central bank through which changes in interest rates are transmitted. In Saudi Arabia, the Tadawul All Share Index, the region's biggest economy, headed for the steepest gain since August in Riyadh. The Bloomberg GCC 200 Index, which tracks the biggest publicly-traded companies in GCC, climbed the most in three months. Banking experts said GCC countries with dollar pegs enjoy an ad-vantage over other emerging markets and do not face any foreign exchange risks.
Analysts observed that weak oil prices and rising interest rates are unlikely to push the Gulf states to reconsider their dollar pegs as the benefits of keeping the link out-weigh any potential gains from de-valuation. The pegs have become an important pillar to policy credibility and investor confidence in the region, they argue.
While most experts expect the impact from a Fed rate increase on the GCC to be relatively muted, there are quite a few others who predict a further tightening of liquidity by banks on the backdrop of low oil prices, shrinking government revenues and increased drawdown on government depos-its. Liquidity has tightened in 2015 as government deposits had dropped 21 per cent year on year in September. Lower oil prices translate into lower liquidity flows largely in the form of deposits to the local banking systems and the local interest rates have been going up for the past few months for some of the key markets we follow.
"In addition to the changing liquidity conditions we expect the increasing fed rates to further contribute to the increasing interest rates in the region," an analyst at Standard & Poor's said. In the UAE, the three-month Emirates Interbank Offer Rate is at the highest in more than two years, while a similar rate in Saudi Arabia soared the most seven years in percentage terms on Thursday.
On Thursday, property-related companies Arabtec Holding Co and Drake & Scull International were most traded stocks on Dubai's index, with investors exchanging more than 130 million shares, almost half the index's total trading volume. Abu Dhabi's ADX General Index increased 2.1 per cent, led by First Gulf Bank's 4.7 per cent advance. Saudi Arabia's Tadawul rose 2.6 per cent.
Saudi Basic Industries Corp, which has the second-biggest weighting on the gauge, added 2.1 per cent to the highest level in a week after the company recommended paying a dividend of three riyals per share for the second half of this year. Saudi short-term borrowing costs moved higher on Thursday, though much less than the quarter percentage point rate move by the kingdom the previous day, reflecting that the move was partially factored in by the markets.
The three-month Saudi Inter-bank Offered Rate (Saibor), which hovered at a three-year low of 0.77 per cent between March and July, rose 10 basis points to hit 1.37 per cent on Thursday - its highest level since January 2009.