Saudi Market Prepares for Recovery

An investor monitors a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia January 18, 2016. REUTERS/Faisal Al Nasser
An investor monitors a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia January 18, 2016. REUTERS/Faisal Al Nasser
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Saudi Market Prepares for Recovery

An investor monitors a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia January 18, 2016. REUTERS/Faisal Al Nasser
An investor monitors a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia January 18, 2016. REUTERS/Faisal Al Nasser

Investors and financial markets are closely watching the US Federal Reserve’s upcoming decision on interest rates, which will be announced after the Federal Open Market Committee meeting on Wednesday. Debate is focused on whether the cut will be 25 or 50 basis points, with polls favoring a 50-basis point reduction.

With this decision looming, questions arise about its impact on Gulf markets, particularly Saudi Arabia. Asharq Al-Awsat spoke with financial experts who predicted positive effects on market liquidity, especially in key sectors.

Attracting Investments

Mohammed Al-Farraj, Senior Head of Asset Management at Arbah Capital, told Asharq Al-Awsat that the chances of the US Federal Reserve cutting rates by 50 basis points have risen to 68%. This would attract more foreign investment into the Saudi market, increasing cash flows and boosting trading volumes and liquidity in the Saudi stock exchange. Al-Farraj also noted that lower interest rates would have a positive impact on corporate revenues in the fourth quarter of this year and the first quarter of 2025, driving economic growth, reducing financing costs, and enhancing profit margins, which would raise the overall market value of the Saudi stock market.

Key Benefiting Sectors

Ibrahim Al-Nuwaibet, CEO of Qima Capital, stated that stock prices are unlikely to see a major change as markets tend to react to interest rate changes before they are officially announced. He explained that the market had already absorbed the potential rate cut, especially since a 25-basis-point reduction would have had more impact if it had occurred in July. Al-Nuwaibet noted that the sectors most likely to benefit include finance companies, which have been hurt by high interest rates, as well as sectors dependent on long-term contracts requiring bank financing. Additionally, the petrochemical sector, including companies like SABIC, Yansab, and Aramco, could benefit, though it may take longer for the global market to respond.

Gulf Central Banks

Gulf countries are expected to follow the US Federal Reserve with their own monetary easing once the rate cut is announced. Gulf central banks have closely tracked the Fed’s rate hikes since 2022 to manage inflation, given their currencies’ peg to the US dollar. Saudi Arabia’s central bank (SAMA) is expected to reduce interest rates in line with the Fed.

In July 2023, SAMA raised its reverse repo rate by 25 basis points from 5.25% to 5.50% and its repo rate from 5.75% to 6%, aligning with the Fed’s increase to a range of 5.25% to 5.50%. Similarly, the UAE and Qatar raised their rates to 5.4% and 6%, respectively.

Despite this, Gulf banks may face reduced profitability as interest rates fall, with Standard & Poor’s forecasting a 12% decline in profits for Gulf banks following the cut.

Inflation and Market Outlook

Abdullah Al-Jubaili, a member of the Saudi and International Analysts Union, told Asharq Al-Awsat that inflation in the US has significantly declined after two years of elevated interest rates, which has impacted both the US and global economies. He noted that a single rate cut of 50 basis points may not be sufficient to fully stimulate economic recovery.



Bank of Israel Keeps Rates on Hold as Inflation Stays Just Above Target Range

The Bank of Israel building in Jerusalem - Reuters
The Bank of Israel building in Jerusalem - Reuters
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Bank of Israel Keeps Rates on Hold as Inflation Stays Just Above Target Range

The Bank of Israel building in Jerusalem - Reuters
The Bank of Israel building in Jerusalem - Reuters

The Bank of Israel left short-term interest rates unchanged on Monday citing "geopolitical uncertainty" and saying inflation remained above the target range despite it easing in May.

The central bank left its benchmark rate at 4.50% for the 12th meeting in a row.

"In view of the geopolitical uncertainty, the interest rate path will be determined in accordance with the convergence of inflation to its target range, stability in the financial markets, economic activity, and fiscal policy," the bank said in a statement announcing the decision, Reuters reported.

Its last move was to reduce the rate by 25 basis points in January 2024 after inflation eased and economic growth slowed in the early days of the Gaza war. It has kept policy steady since then and said it is in no rush to ease again while inflation remains above target.

Ten of 11 analysts polled by Reuters had expected no rate move on Monday. One predicted a 25 bps rate cut due to the end of a 12 day Israel-Iran war that saw Israel's risk premium slide and the shekel appreciate sharply.

The annual inflation rate eased to 3.1% in May from 3.6% in April but remained above the government's 1-3% annual target.

The bank said that it forecast inflation would ease to within its target range in coming months and be around the midpoint of that range in a year's time.

However, it noted that risks remained that could affect the inflation outlook.

"In the Committee’s assessment, there are several risks for a possible acceleration of inflation or for it not converging to the target range: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and worsening global terms of trade," the bank said.

The economy grew by an annualised 3.7% in the first quarter after a 1% expansion for all of 2024 due to the war.

Economic uncertainty has lingered due to the 21-month-old conflict between Israel and Palestinian group Hamas in Gaza.

Israeli Prime Minister Benjamin Netanyahu is due to meet with US President Donald Trump at the White House on Monday, while Israeli officials hold indirect talks with Hamas, aimed at a US-brokered Gaza hostage-release and ceasefire deal.