«Central» raise interest rates on the price of DirhamTruth Consultancy
The biggest challenges facing the «Property» and «SME»
Posted: Friday, December 16, 2016
Joseph Bustnge (Abu Dhabi)
UAE Central Bank lifted yesterday, the interest rate applicable to the certificates of deposit issued by, and in line with the rise in interest rates on the US dollar, following the Federal Reserve’s decision to raise the interest rate on federal funds by 25 basis points at its meeting on December 14, 2016, and represents the certificates of deposit that issued by the Central bank for banks operating in the country’s monetary policy by which the transfer of the effects of changing interest rates to the banking system in the state tool.
Rose yesterday as well, the interest rate on transactions in dirhams between banks operating in the state «Alaepor» for the year to exceed 2.19% at its highest level since June 2011, according to raise interest rates on certificates of deposit rate, with an indication on the direction of interest rates on bank loans and finance the state rate upward.
Financial experts and economists stressed that the rise in interest rates on UAE dirham price, will raise the price of the dirham against the currencies of countries other than the dollar, and will raise the cost of funding provided to the state of the private sector, to levels that may reach 7.5%, and constitutes a further challenge to real estate companies, small and medium.
Experts pointed out that the possible movement of the banks, the margin will be limited to raising interest rates to a great extent, due to the level of supply and demand growth rates in the domestic market, arguing that raising the interest rate on the dirham is the result of a link the dirham to the dollar and not the result of the needs of the local market, and the national economy, and therefore, banks are required to fulfill the balance between the imperatives of raising interest and the needs of local businesses price.
Hamad Al Awadhi member of the Chamber of Commerce and Industry of Abu Dhabi, Chairman of Al-Awadhi group: «The monetary policy is pegged to the dollar and therefore a fringe movement is limited to the monetary policy makers».
He added: «The high interest rate positive impact, if the local market inflation rates are high, so as to mitigate inflation, as well as monetary policy move will be positive if the local market needs and the movement of general national economy in parallel with the US economy movement, but when the two economies trends opposite, this is a challenge to the state business sector, due to the need for a different monetary policy. »
Al-Awadi said: «It is for the national economy as businesses are still hungry for funding, and there are challenges facing the private sector in the local market in terms of access to funding on the one hand and in terms of the cost of funding on the other hand».
He stressed that these challenges unclear greater among small and medium enterprises, which pay high financing cost Currently, pointing out that most of the financing contracts for this sector is subject to conditions allow banks to change interest rates for decades, the old funding, depending on market prices, and therefore this sector will have the biggest challenge compared with other sectors.
He said: «Here the role of national banks comes to do a national role in dealing with the local market requirements in accordance with national economic interest of public, which ultimately aims to a healthy environment for the national economy to support, which will benefit the banking sector at the end of the day».
He pointed Awadi, that the country’s banking sector enjoyed good levels of liquidity available for financing and there is no crisis in this area, but is required in the banking sector that is in line with the new variables to achieve a balance between dealing with the rise in interest and needs of the local market price requirements.
Furthermore, Wadah Al Taha, a member of the Advisory Board of the Institute of Securities and Investments British said the UAE: «Raising the interest rate on certificates of deposit, will be followed by raising interest rates on loans and bank financing prices», but he pointed out that the leverage ratio will remain marginal at most, in general, as for the financing of the real estate sector was expected to provide the banks to raise interest rates much higher degree, has more than 25 basis points, and is expected to be uploaded in its borders.
He said Taha, the real estate sector remains under pressure from rising supply versus demand in the local market, but the rate hike on the dirham also lead to a rise in the price of the dirham against other currencies linked to the US dollar, which affects the decisions and directions of some international investors in the market of UAE.
He continued: «However, the lifting of dollar interest rates, a sign of the initial recovery of the US economy signals, as part of the movement of natural economic cycle, and that raising interest rates could raise the cost of investment in part, but the projected figure for the impact of a marginal and very limited, so the impact on the cost of funding will remain limited, currently, at which time it is expected that growing demand in the global markets for goods and services, as a result of the expected decline in prices due to the high price of the dollar ».
For his part, the Director of Reda MosallamTruth Corporation for Economic Consultancy, said: «The Dirham is linked to the US dollar, which is an ongoing monetary policy, so we deal set a fixed and stable, but all the effects that occur to the dollar move to the UAE dirham».
He said that the anticipated effects of raising the interest rate by 25 basis points, on deposit or a little more degrees, but will lead to higher interest on bank deposit rate of 2% to 3% for the year in some almost banks (displayed prices differ between the bank and the last) and then it results in higher interest on loans and financing rate from an average rate of approximation between the level of 5-6% rise to 6- 7.5%.
And that this will raise the price of the cost of funding, and will impact on the value of projects, so the feasibility of new investments feasibility studies will be less compared with the new interest rate, and thus will affect the reduction of the share of the profit or return on Alasttm