Gulf Gets ‘Gift From Fed’ But Fiscal Stimulus Can Be Gamechanger

(Bloomberg) -- Policy makers in the Gulf followed the U.S. Federal Reserve's emergency move on Tuesday, lowering interest rates in response to the coronavirus outbreak as the focus shifts to the need for fiscal stimulus to offset the damage to regional economies.

Central banks in Saudi Arabia, the United Arab Emirates, Qatar and Bahrain all matched the Fed's half-percentage point cut, after Chairman Jerome Powell said the fallout from the virus had increased risks to the U.S. economic outlook. Kuwait, which maintains a peg to a basket of currencies, reduced its benchmark by 25 basis points.

The question now is whether regional governments will also move to enact fiscal policies to give their economies an extra kick. While a looser monetary stance will provide some relief, spending can pack a more powerful punch in the Gulf, where central banks largely move in lockstep with the U.S. to protect their currencies' pegs to the dollar.

Before the jolt from the outbreak began to spread outside China, Saudi Arabia embarked on three years of spending cuts, while Kuwait planned to keep expenditure unchanged in 2020. Economies in Asia have already responded with fiscal measures to counter the health emergency as the fallout deepened.

Read more: Fed Triggers Flurry of New Stimulus Pledges Across Asia-Pacific

The Fed's decision came hours after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

Disruptions to trade, tourism and supply chains are blindsiding the oil-rich Gulf, which already faces the prospect of lower crude prices if the health emergency continues to pummel energy demand.

Commodity exporters are especially exposed to trade with China, where the outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed.

Business conditions in the U.A.E. and Saudi Arabia have already taken a turn for the worse. The spillovers resulted in “a sharp loss of momentum since the start of 2020” for Saudi Arabia's non-oil private sector, according to IHS Markit.

Bank stocks led a sell-off in the Gulf on Wednesday, as lower rates put pressure on margins. In Dubai, Emirates NBD PJSC was down 2.5% and Abu Dhabi Commercial Bank finished 2.8% lower. Major lenders listed in Riyadh, including Al Rajhi Bank, National Commercial Bank and Saudi British Bank retreated between 1% and 3.9% as of 2:20 p.m. local time.

The gauges in the U.A.E. fell the most in the world, dragged down by lenders and after the government announced that all schools will be shut for four weeks as the outbreak spreads.

A 50-basis point cut to short-term rates could mean at least 2 billion riyals ($533 million) less in interest income this year for Saudi banks, according to Bloomberg Intelligence. Lenders in the U.A.E., however, may perform better since they can pass bigger reductions to customers.

Bank margins in the region will probably react to the latest cut before the second half of the year, said BI analyst Edmond Christou. “This has a bigger impact in 2020, as 2019 cuts were spread out over time,” Christou said.

--With assistance from Zaid Sabah and Filipe Pacheco.

To contact the reporter on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Constantine Courcoulas

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