How president-elect Trump will impact Gulf economies?

Dubai - Eibor may rise at least 2.5% in next 12 months.

Donald trump's shock win will have a profound impact on the GCC economic constellation via multiple feedback loops. His economic policies mean a much higher US dollar, anathema to GCC economies since it correlates with stock/property market crashes, banking stress and oil slumps. This is the macroeconomic linkage due to the GCC US dollar peg whose lessons the region learnt the hard way in 1999, 2008 and 2015-16.
This is the last thing the GCC's property, tourism, retail and bank funding markets need as a higher US dollar both imports deflation risk, pressures oil prices and sends a big chill into the regional business cycle. I expect the Federal Reserve will now be forced to hike interest rates at least three or even four times in 2017. This means the three month Emirates Interbank Offered Rate (Eibor) could rise to at least 2.5 per cent in the next 12 months. As bank funding costs rise, bank loan growth will decelerate - even as the cost of credit (loan pricing) surges. This is hugely negative for property markets in the GCC. Note that real estate shares have fallen 15-20 per cent in the US, Europe and Asia in the past three months. I have never seen such a draconian, swift tightening in the bond market in my career in the capital markets as I witnessed last week.
This "Trump tantrum" has raised the cost of capital for the leveraged economies of the GCC even as they experience epic budget deficits, fiscal austerity, a banking credit crunch and an economic slowdown. I did not buy the Saudi sovereign debt new issue because the pricing was too tight and I was not comfortable with the 10-year US Treasury note at 1.75 per cent. Now the 10-year US Treasury note yield has spiked to 2.13 per cent and owners of long duration bonds and property (the ultimate long duration, illiquid assets) will face horrific losses in the next year.
The rise in the US dollar also amplifies deflation risk in the GCC since its currencies are pegged to the greenback. This means a fall in tourism, retail sales, bank loan growth and investment in property. Modi's currency crackdown, the plunge in the Russian rouble, Euro and British pound have all hit offshore financial flows into the GCC property markets. It is entirely possible that higher interest rates push Europe into recession since EU inflation is so far below the ECB inflation target. With election risk in Germany and France, with Italy's referendum a potential game changer, I would not be surprised if the Old World slips into recession in 2017. This could mean the world is on the precipice of another oil crash since Trump's threat to reinstate economic sanctions on Iran could end an Opec oil deal in Vienna. In any case, Trump will repeal regulations that inhibit fracking in the US and trigger an oil drilling boom in the West Texan Permian Basin. This means the US could well add another two million barrels a day in shale output to glutted global markets by 2018.
As the Federal Reserve raises rates in December and in 2017, three month Libor could well rise to two per cent. This will mean a dramatic rise in the funding cost of UAE banks, which already face credit stress, a rise in non-performing loans and corporates with insufficient cash flow to service debt. The sharp rise in the cost of mortgages will eviscerate loan demand in a property market that cannot remotely absorb current supply. Offplan property developers will be the worst hit but capital values will contract dramatically as the cost of borrowing surges. Prices can well fall at least 20-25 per cent in 2017 in the third year of the property bear market as the credit cycle turns uglier once Trump takes office next January.
Trump's foreign policy could also have a seismic impact on the international relations, economies and the financial markets of the GCC. Trump's promise to roll back Obama's Iran nuclear deal and reinstate economic sanctions on Iran means no trading boom or "peace dividend" in the Gulf. Trump's plan to appease Putin and lift sanctions on the Kremlin will increase Russian dominance in Syria. Trump has no interest in nation building in the failed states of the Arab world, from Libya to Iraq to Yemen. The endgame? A more violent, unstable Middle East.

• MENA