The year 2023 witnessed a flurry of impactful events in the business and finance realm, including significant rate hikes and geopolitical tensions. As we enter 2024, investors remain on high alert, navigating a world that continues to be riddled with uncertainties.
Economic projections suggest a potential decline in global economic growth, with some economies flirting with contraction. Advanced economies face challenges that might exacerbate their struggles while emerging markets are anticipated to maintain their current momentum. However, amid these projections, gradually easing inflationary pressures might offer some respite.
In the Middle East, the key two risks faced by the banks in a normalised environment (i.e. an environment where there is no specific shock on a given economic sector) are the political/geopolitical risk and risks related to the oil price and production volatility. For the latter, S&P Global Ratings’ assumption for oil price is a stabilisation of the Brent price at around $85 per barrel, which is sufficient for Middle East oil exporters to sustain their oil-related economic activity.
“For geopolitical risk, we expect the Israel-Hamas war impact to remain contained to Israel/Gaza/Egypt and Jordan,” said Mohamed Damak, Managing Director, S&P Global Ratings. He doesn’t expect any escalation or spillover to the region at this stage. “We are watching the developments in the real estate sector in the UAE,” Damak explained. “This sector, specifically in Dubai, has performed strongly over the past three years.”
“However, given its inherent cyclicality, we expect the momentum to slow down or mildly reverse in the next 12-18 months,” he added. (On a positive note, real estate developers operate with adequate buffers and limited mortgage contribution to the demand.)
Elucidating how global economic conditions will impact the local financial market in 2024, Zeeshan Khwaja and Ather Marwat, Partners at Kearney Middle East & Africa, Financial Services Practice, explained that three factors would significantly impact the financial landscape of the GCC.
1. High interest rates coupled with liquidity challenges primarily to reduce inflationary pressures
2. Public sector spending, particularly in non-oil sectors such as tourism and construction, which will off-set the slowdown resulting from reduced oil output (based on OPEC as well as alliances)
3. Steady increase in private sector consumption driven by increasing expat populations, mainly in UAE and KSA, as they continue to invest in mega projects
Interest rates in 2024
The outlook on interest rates in 2024 is divided among experts. Rasha Badawi, CEO of Barclays Private Bank UAE, predicts a shift in central banks’ aggressive interest rate hikes due to expectations of declining inflation. “This would be driven by higher interest rates and tighter credit conditions taking their toll, eventually,” she said.
Conversely, Khwaja, Marwat, and S&P’s Mohamed Damak hold differing opinions, foreseeing either stabilised rates or a prolonged period of higher rates due to economic growth predictions and the Federal Reserve’s policy adjustments.
However, S&P’s Damak expects rates to be higher for longer. “For 2024, we continue to expect economic growth to come below trend and inflation to improve toward the Fed’s 2% target,” he said. “The Fed will hold the policy rate steady through most of the first half of the year, letting passive tightening of real rates continue through disinflation, after the assumed December hike.”
“It’s then likely to begin cutting rates in the second half of 2024 as unemployment starts to rise and inflation nears 2%,” he added.
Damak reckons that GCC central banks will follow the Fed to maintain the peg between their currencies and the US dollar. Higher for longer is not good news for MENA financially constrained countries.
In just a year and a half, the Federal Open Market Committee (FOMC) has lifted interest rates 11 times, bringing its key federal funds rate to a target range of 5.25-5.5%. That’s the highest since early 2001.
However, The Federal Reserve left interest rates unchanged on December 13. US central bank chief Jerome Powell said the historic tightening of monetary policy is likely over as inflation falls faster than expected, with a discussion of cuts in borrowing costs coming “into view.”
External impact on the local financial market
The GCC financial markets remain vulnerable to geopolitical unrest and commodity price fluctuations. Despite these challenges, analysts express confidence in the region’s adaptability to external forces, highlighting its resilience amidst stressful economic scenarios.
“GCC financial markets in 2024 will be influenced through channels of oil prices, foreign investments, and trade dynamics,” explain Khwaja and Marwat. “Global monetary policy has also proved pivotal in dictating the cost of borrowing in local economies, where currency pegs have meant most GCC members follow suit to rising interest rates across major economies.”
Despite uncertain trends, they explain that they have seen levels of adaptability and responsiveness to external forces and anticipate the growth of GCC financial markets to hold steadfast. “The region’s economy has proved highly resilient across stressed scenarios, reflecting its strategically central position in energy markets, accelerating diversification, and deepening economic reach into the broader MENA region,” they added.
Resonating with that sentiment, Barclays’ Badawi said: “The global conditions do not appear to be harming sentiment locally, which remains robust and across the GCC more broadly and appears to be more insulated from issues impacting wider markets.”
The UAE, in particular, is a global trading hub. The pace of decline of global trade has a direct impact on many of the companies listed on our local exchanges and the ability of Governments and Corporations to either issue/raise debt (via Bond issuance, for example) and in the interest in further local IPOs as we advance into 2024, according to an official from Saxo Bank.
“This applies across many sectors, from the Oil and petrol sector to multi-national trading companies and also into local Financials and Real-estate market momentum,” said Damian Hitchen, CEO MENA, Saxo Bank. “Whilst we have seen a relative boom across the UAE since Covid, and we continue to see strong inward migration to the country, if we do see a global “hard landing’ then we will not be immune in the medium-term.”
“So, whilst we continue to enjoy an unparalleled period of growth in the UAE, we should be mindful in our planning and business models of serious global headwinds going forward,” he added.
The financial landscape of 2024 is characterised by a delicate balance amid multifaceted challenges. It necessitates vigilant planning and adaptability to navigate geopolitical uncertainties, economic fluctuations, and global market volatility while leveraging the region’s strengths in strategic positioning and economic diversification for sustained resilience and growth.