Oil prices keep non-oil economic growth in the GCC strong

IIF: impact of tightening US monetary conditions on Gulf banks limited
Oil prices keep non-oil economic growth in the GCC strong
Inflationary pressures remain relatively modest in the Gulf countries

The Institute of International Finance (IIF) announced that higher oil prices will limit the indirect impact of an interest rate increase by the Federal Reserve on non-oil economic growth in the Gulf Cooperation Council, which “will remain strong.”

The institute said in a report that the impact of the tightening of US monetary policy on the real non-oil GDP of the region also depends on the fiscal policies adopted by the six member states of the bloc.

The Washington-based institute expects non-oil economic growth in the region to remain strong at 4.5 percent this year, supported by increased public spending.

“In the past several decades, high global oil prices have offset the negative growth impact of monetary tightening in the GCC,” said Garbis Iradian, chief economist at the IIF, MENA.

“High oil prices lead to an improvement in the domestic liquidity position, relatively expansionary fiscal policies and an increase in credit available to the private sector. It also puts downward pressure on interbank interest rates, which leads to lower lending rates.”

The central banks of the GCC announced on the fifteenth of last June an increase in the standard borrowing rates, after the Federal Reserve moved to raise the main interest rate by 75 basis points  to control rising inflation and restore “price stability”.

The Federal Reserve increased the interest rate more than expected as a result of inflation rates reaching very high levels, reaching 8.6 percent in May. It indicated that more price increases are coming.

Iradian expects “interest rates in the GCC to rise to about 3.7 percent by the end of the year in line with the Fed’s policy rate.”

However, inflationary pressures remain relatively modest in the Gulf countries. In its report, the IIF said that the passing of high global food and energy prices to domestic prices was “limited due to ad hoc price mechanisms”.

The figures announced about two weeks ago indicated that the consumer price index (inflation rate) in Saudi Arabia rose by 2.2 percent during May 2022 compared to the same month last year. Inflation in the UAE is also relatively low, remaining at 3.3 percent in the first quarter and is expected to reach 2.7 percent on average for 2022, according to the UAE Central Bank.

According to the report, higher oil prices this year will provide a boost to economic activity through additional public spending and expanded liquidity in banking systems in the oil- and gas-rich economic bloc.

Yesterday, oil prices recorded the first monthly decline since November, after the “OPEC +” alliance agreed to commit to increasing oil production in August by 648,000 barrels per day.

Gulf Banks


“The impact of US monetary tightening on Gulf banks will also be limited, particularly in Saudi Arabia, where lenders enjoy low levels of wholesale funding and a high level of non-interest deposits,” Iradian said.

He noted that “further rate hikes in the GCC in line with increases in the US target range for the federal funds rate could have a positive impact on banks’ profitability.”