Most developed markets have pursued monetary policies with near-zero and negative interest rates, many of which are still adhering to them.
Of course, there was a clear need for US, European, and other administrations to pursue expansionary monetary and fiscal policies following the global credit crunch. After that, the US markets started to recover, while our markets also got a good share, especially in 2013 and 2014.
Inflation in the United States is now well above its target, unemployment has fallen to its lowest level, retail sales have recovered, corporate profitability has recovered, and stock markets have boomed.
Therefore, the need to keep interest rates near zero has been eliminated.It started its upward trajectory since the end of 2015, rising nine times to between 2.25 and 2.5% at the end of 2018.
Now, with signs of slowing growth, weak manufacturing, as well as risks surrounding international trade, the Fed has begun to cut interest rates. More than 30 central banks, most of them from emerging markets, have cut interest rates this year.
Continued income growth
Continued income growth alleviates the burden of rising interest expense, but the picture becomes different when interest increases at a time when income is not growing and the cost of living is growing.
Here is an example of someone who is able to take a 1 million dirham mortgage over a period of 15 years at an interest rate of 3%. This means that the monthly installment will be about AED 6906, and the total interest paid during the length of the loan will be about 243 thousand dirhams.
But within two years, interest rose by 200 basis points, hence the interest on the same person became 5% (unless the interest on it is fixed, which is rare), and his monthly premium after re-pricing interest becomes 7910 dirhams, and the total interest burden of 423 thousand dirhams, ie Its monthly income has been eroded by AED 1000 and total interest expense has increased by 180 thousand over 15 years.
In other words, if there is no growth in per capita income, the monthly income is actually eroded by more than 5%, a phenomenon that is due to consumer reluctance to spend and deterioration of morale. As well as the situation for companies operating and trends towards expansion and employment.
Interest rate weapon
We believe that the interest rate weapon may be more lethal to economic conditions than other risks, when it contradicts the requirements of the economic situation, a scenario we have seen in the countries that peg their currencies to the US dollar. The dollar index rose during the period from May 2014 until shortly before the end of 2016, by about 30%, an annual increase of about 10%, which contributed to the decline in the competitiveness of several sectors, most notably tourism, real estate and commodity exports, with observation By coinciding with other factors and the introduction of VAT, it has created an environment that requires more flexible economic policies, although we understand that the general trend is governed by the exchange rate correlation.
But what has happened is higher interest, and therefore higher costs of money to individuals and businesses at a time when vital sectors such as real estate and retail, weak demand curve, and increased supply, amid the rigidity of employment.
Of course, there are other noteworthy factors regarding the impact of the “participatory economy” in its modern concept and e-commerce on business models, and thus the weakness of the old and current ones, and the changing patterns of consumption and investment.
National economy
Here we return to the UAE's national economy, which is characterized by the finest pillars of economic and investment development, as well as social, which provides the elements of an integrated business environment capable of embracing the finest economic events, and keep up with the best international standards.
We are confident that the economic stimulus packages announced in the last few months, and the decision-makers' plans, will keep the national economy on track, and the improvement is coming, albeit gradual, but we just want to stress the importance of giving more flexibility to economic policy through prices. the benefits.
Lower interest rates may have negative consequences for inflationary countries and / or remain in a recovery phase for fear of price bubbles, but according to our position within the economic cycle, we believe that interest rate cuts will play a key role in driving growth and balancing.
Study for companies
We have also analyzed the financial statements of companies listed in the UAE stock markets, excluding banks, investment and insurance companies, due to their special nature and hedging ability, the study was based on 52 companies with a total market value of approximately 425 billion dirhams, representing about 53% of the total market value of Dubai and Abu Dhabi Together.
The value of long-term loans to these companies amounted to 214.1 billion, representing 63.6% of the total equity. During the past year, these companies incurred interest expenses of AED 12.4 billion, with an average interest rate of 5.78%.
Most corporate bank loans are linked to interbank lending rates or barter contracts. Here, for example, we have seen the three-month UAE interbank lending rate drop from about 2.9% at the end of the first quarter to about 2.3% at the end of last month. A drop of about 60 basis points. In other words, on the assumption of re-pricing of the loans of the same companies from 5.78% to 5.18%, expenses will fall from AED 12.4 billion to AED 11.1 billion, which is a savings of approximately AED 1.3 billion annually, and may enjoy savings of approximately AED 2 billion annually, in the event of a decline Benefits to a full percentage point.
Benefits Lower interest rates
Lower interest rates revitalize investment outlets in stock and real estate markets by increasing the attractiveness of their returns (cash dividend yield and rental income of real estate), compared with interest on bank deposits and other savings instruments, and reduce the cost of restructuring companies that have accumulated losses, Given the economic situation.
Talal Asaad Touqan: Head of Investment - BH Mubasher