Economists anticipate that the GCC’s close ties to the US dollar will play a significant role in how these economies react to changes in US monetary policy. Central banks in the region, including those in the UAE and Qatar, generally align their interest rate decisions with the Federal Reserve due to their currency pegs. This synchronization creates a ripple effect in the economic landscape of the Gulf states, particularly in areas like startup investment and venture capital activity.
Gulf startups, especially in sectors like fintech, logistics, and green energy, are poised to benefit from increased access to affordable capital. As borrowing costs lower, investors may be more inclined to fund early-stage ventures, while entrepreneurs will face less pressure from debt servicing. Additionally, government-backed initiatives designed to support innovation and entrepreneurship may see heightened interest from both local and international investors.
The Fed’s tightening cycle, which saw 11 rate hikes since March 2022, had made borrowing considerably more expensive, dampening enthusiasm for riskier investments, including startups. However, with the possibility of lower rates, the economic outlook for the region's private sector could shift significantly. As highlighted by analysts, an eventual rate cut could open the floodgates for financial support, fostering a more conducive environment for innovation and business growth across the GCC.
Lower interest rates are likely to spur credit growth and encourage banks and financial institutions to expand lending portfolios. The non-oil sector in the GCC, which is expected to grow at 4.6% in 2023, could receive a substantial boost from this development. This growth, driven by private consumption, infrastructure investments, and favorable fiscal policies, stands to gain from the reduced cost of capital.
Startups in the UAE and Saudi Arabia, in particular, could benefit from the impending shift in US monetary policy. The UAE has positioned itself as a regional hub for technology and innovation, offering a fertile ground for venture capital investment. Similarly, Saudi Arabia, through its Vision 2030 initiative, has committed to bolstering the private sector and reducing its dependence on oil. Startups in both countries could find themselves in an advantageous position to tap into a more liquid market.
Despite the optimism, there are cautionary voices within the financial sector. Some experts argue that the potential for future rate hikes remains, particularly if inflation persists above target levels in the US. The Federal Reserve has signaled that while rate cuts may begin in 2024, they will likely be gradual. Policymakers remain highly attentive to inflation risks, suggesting that economic conditions may still fluctuate over the next year.
Moreover, while lower rates may stimulate investment, inflationary pressures and global uncertainties could present challenges for Gulf startups. The price of oil, which surged past $95 a barrel in September 2023, adds another layer of complexity to the region’s economic outlook. Rising energy prices, while beneficial to government revenues, could exacerbate inflationary trends and complicate the macroeconomic environment.