Learn about the repercussions of raising US interest rates on Arab economies
Video duration 03 minutes 01 seconds
Global markets are awaiting the results of the US Federal Reserve’s meetings, which start today Tuesday and conclude tomorrow.
There are fears that the board will raise interest rates; What may adversely affect the stock markets. How will any decision in this regard affect Arab economies? How can its economic risks be avoided?
Usually, an interest rate hike causes the dollar to rise against major currencies, thus affecting interest rates, foreign trade, and debt around the world. But how does this affect the Arab economic system in particular?
The answer is that raising the US interest rate has many repercussions on Arab economies, most notably:
- First: The possibility of a decline in oil prices because it is inversely related to the value of the dollar. The higher the exchange rate of the US currency, the lower the world oil prices.
- Second: Weak demand for Arab dollar bonds, as raising the US interest rate will make US Treasury bonds more attractive to foreign investment in the global market than their Arab counterparts.
- Third: The possibility of an exacerbation of inflation rates and an increase in the cost of imports in the Arab countries, as raising the US interest rate will lead to an increase in the dollar exchange rate against most Arab currencies, and therefore the countries of the region that suffer from a trade deficit deficit will suffer from the aggravation of this deficit due to the increase in the cost of import.
- Fourth: The high cost of Arab debts, as the high dollar increases the burden of foreign debts, which may place a new burden on the public budgets of the borrowing countries, and push them to more austerity measures.
- Fifth: Some Arab central banks may tend to raise local interest rates in an effort to enhance their competitive ability to invest in debt instruments.
Gulf countries may be negatively affected by raising US interest rates, as most of their currencies are linked to the dollar
What about the Gulf countries?
Moreover, the Gulf countries may be negatively affected by raising US interest rates, as the majority of their currencies are linked to the dollar, and then the Gulf central banks will have to raise interest rates to maintain the stability of their local currencies, which may become a pressure factor on lending operations.
However, there are those who believe that Arab countries in general can contain the impact of this global monetary shock through proactive monetary plans, in which they announce their future monetary policies regarding domestic interest rates and their mechanisms to control all these repercussions.
A scenario that economists believe is the most effective if that monetary plan is integrated with economic and financial plans to drive economic growth locally, and stimulate domestic and foreign investment.