Muscat: The GCC countries have been able to maintain strong economic growth despite the deteriorating environment globally with high inflation and increasing interest rates, according to an industry expert.
“High oil prices have also played a strong role in improving public finances and company performance,” Ahmed Negm, Head of Market Research MENA at XS.com, said.
India too has similarly shown resilience compared to many economies but it could be negatively exposed to the rising interest rates in the US and Europe and the resulting slowdown in the global economy. “However, the GCC and India could continue to perform better than the rest of the world,” he added.
The content of the Federal Reserve’s minutes has emphasised the central bank’s goal to fight inflation and its intent to use the necessary tools at its disposal to bring it down to its 2 per cent goal. As a result, expectations have shifted more towards the possibility of seeing interest rates go higher for longer. This in turn has affected sentiment in financial markets in the Gulf Cooperation Council (GCC) and elsewhere.
Higher interest rates could subdue economic activity worldwide and by extension in the GCC. Additionally, local central banks follow their US counterpart in setting monetary policy, which could also have a more direct impact on local companies, their bottom lines and their stock prices.
Similar to other economies, GCC countries could record a slowdown as interest rates could keep climbing this year. The effect of a tighter monetary policy could be softer than in other regions of the world thanks to the strong local fundamentals. With Chinese economic activity improving after China’s reopening, oil prices could move to higher levels which could be beneficial to the economies in the Middle East.
“At the same, countries like the UAE and Saudi Arabia are putting several economic programmes in place to boost activity which could alleviate the impact of a global slowdown,” Ahmed Negm said.
The war in Ukraine has had strong effects on the global economy and has created serious disruptions in various commodities including agricultural and energy products. Oil prices have reacted strongly to the developments in Eastern Europe and rose to high levels in the middle of last year before declining gradually. This rise has put significant strain on several economies like India, while inflation increased and company earnings were squeezed. At the same time, high crude prices have alleviated the effects of the global economic slowdown in oil-exporting countries.
Elaborating further regarding the expectations of GCC and India after Fed and ECB interest rates hikes, Ahmed Negm said that the stock markets in India and the GCC could come under pressure as the ECB and the Federal Reserve continue raising interest rates. Investors’ appetite for risk could decline and see more capital heading toward safer assets like treasury bonds in the US at the expense of riskier equities. In India, interest rate hikes could also have effects on the national currency and the strength of the economy. In the GCC, the peg to the US dollar could lead to higher financing costs and slower economic growth.
Despite strong volatility Indian rupee seen stabilising
Like many currencies, the Indian rupee has declined against the dollar in reaction to the tightening of the US monetary policy, according to an industry expert.
“The Federal Reserve’s fight against inflation has led to a continuous slide in the value of the rupee against the dollar,” Ahmed Negm, Head of Market Research MENA at XS.com, said.
“However, the Indian currency has stabilised to a certain extent since the last quarter of 2022 despite strong volatility while hopes of a softer monetary policy took over the market. As a result, the rupee could see new losses if the US central bank maintains its hawkish stance,” he added.
The rupee could continue to oscillate around current levels while doubts about US monetary policy could drive expectations. The trading range could narrow while the Federal Reserve’s meeting approaches.
“At that point, the behaviour of the currency pair could depend on the outcome of the meeting and a surprise could fuel strong volatility,” he said.
Crypto-currencies in GCC
Crypto-currencies are finding a welcoming home in some GCC countries, which have put in place appropriate legal frameworks and have taken initiatives to develop the industry locally and attract large players, Ahmed Negm said. The UAE in particular has been quite successful in drawing global crypto exchanges and other market participants by creating the necessary regulation at a time when the attitude toward cryptocurrencies remains hostile in many jurisdictions.