Real interest rates rocket in Saudi Arabia, Dubai
Posted on 14 February 2010 with no comments from readers
The rates of interest that business actually has to pay for loans are soaring in the Gulf of Arabia as the Greek financial crisis further undermines confidence in financial markets.
Credit default swaps linked to Dubai debt jumped 43 basis points to close at 627 points last week, while the kingdom’s biggest property developer Dar Al Arkan saw its Islamic bond sale fall short at $450 million despite a 10.75 per cent annual profit, which in practice is the same thing as yield on a conventional bond.
Loan sharks
Bank loans are harder to obtain and carry high interest rates. ArabianMoney learned last week of a Cyprus based bank that is planning to offer loans in the Gulf at 10 per cent but only with absolute surety over the same amount of money.
This makes it very difficult for some businesses that are short of cash to continue in business as the cost of interest is squeezing already tight profits. For property developers it often makes it impossible to borrow to finish their buildings.
However, interest rates are a function of a market economy and work to direct the allocation of capital to where it will get the best return. So high interest rates are also a sign of over-capacity and the fact that there is more property than occupants in places like Dubai right now.
In theory high interest rates will help to keep the property supply down and support rents and prices to allow the market to recover rather earlier than if everybody got a loan and carried on constructing buildings that have no immediate economic purpose.
Pressure on profits
That said high interest rates are a pressure on the local economy that it can ill afford in the aftermath of the global financial crisis, a slump in trade and the real estate crash. Specific action to create low-cost home loans would be useful, for example.
For savers on the other hand these are better times. Inflation is not currently a problem. Prices are actually deflating, particularly for housing and office rents. Therefore higher rates of interest are actually worth something to savers.
UAE local and foreign banks also carry an explicit guarantee from the federal government, and that has to count for a great deal in this uncertain world. For the credit worthiness of the UAE government is beyond doubt with its huge oil reserves and sovereign wealth funds.
