Walking on the White House’s South Lawn on June 5, President Donald Trump is in a typically ebullient mood. He stops to talk to reporters before boarding his Marine One helicopter for a weekend away at his New Jersey golf resort with his wife Melania.
“Our country continues to do really well, really, really well. So we’re very happy about it. I think we’re going to be breaking records,” he says to the waiting press. But, in equally typical form, he picks a target for scorn and this time it’s his ongoing battle with the Federal Reserve and interest rates.
We are seeing investments in aviation and logistics continue, that is not being held back
“If we had a Fed that would lower interest rates, we’d be like a rocket ship, but we’re paying a lot of interest and it’s unnecessary. But we don’t have a Fed that knows what they’re doing.”
Markets are betting on the fact the Fed will make its first rate cut since the financial crisis a decade ago, but, at the time of going to press, Trump’s nemesis, Fed chairman Jerome Powell, doesn’t seem too convinced.
Someone who is certainly cheerleading Trump’s bravado and push for the Fed to lower interest rates is Sunil Kaushal, Standard Chartered bank’s regional CEO for Africa and the Middle East.
“The view is now that interest rates are going to come down in the US and the cycle has turned. We have taken the brunt of it and now the cycle is turning and the view is, as early as July, you may see interest rates coming in, which will put a semblance of more balance between the economic reality and the interest rates,” he believes.
You cannot have a banking sector which is, for any reasonable period of time, working in an uncorrelated manner to the underlying economy
While we don’t know his opinion on Washington politics, Kaushal is a veteran of Standard Chartered for more than two decades, arriving in the UAE in October 2015, having previously worked as regional CEO for India and South Asia. When he landed in Dubai in 2015, things were very different and there was a serious disconnect between what was happening with the economies in the Gulf and the direction the Fed was sending interest rates.
“The US was on a roll and continues to be pretty solid, interest rates were going up as a result, and interest rates had to go up in this part of the world too. But, the underlying economies were not growing at the same pace, or not in the same situation, as the US. So, you had a monetary policy, which was determined by what happened in the US, not in sync with the economic reality. That had an impact.”
Looking back, Kaushal admits that things were difficult in 2015 when he arrived, not least because of the tumbling oil prices and government austerity measures.
“2015 was a tough year, with oil prices coming off the end of 2014. And the issue just got compounded at the beginning of 2016, when oil prices went down to $26, $28 and there were a lot of leading research houses saying it’s going to hit $10.
The view is now that interest rates are going to come down in the US and the cycle has turned
“Given that backdrop, there was a natural pull back across the region and across all resource-based economies, in terms of the spending that the government was doing. It is also important to remember the government spending forms a large portion of the economic activity in many of these markets... But, the fact is, that a lot of the government spend was pulled back.”
Now that Kaushal has got his feet under the table in the UAE, where does he see things going moving forward? “We are seeing now, I would say 2017 was okay, second half 2018 there was a semblance of calm and government spend on infrastructure on core sectors is coming back and that is helping the economy.  I think this has been a pretty good year, in the relative sense of where we came from.”
The reason he believes things are improving is because companies in the region were expecting the worst and were smart enough to rein in their spending, were more sensible in how they managed their business and, therefore, deserve some relief in 2019.
“Clearly people worked very hard on their own business models, pulled back on core efficiencies quite hard and were able to maintain, or reduce, their costs quite significantly, in a bid to maintain the margins. Most businesses came in with a background, or a mind-set, that the environment was going to be tough and positioned themselves for that.”
Most businesses came in with a mind-set that the environment was going to be tough and positioned themselves for that
Kaushal believes that the banking sector is a mirror image of the overall economy. “You cannot have a banking sector which is, for any reasonable period of time, working in an uncorrelated manner to the underlying economy. It is very important that you understand that bit.”
Therefore, when the local economy is slowing, Standard Chartered feels the strain, but when things are going well, the bank sees a boost too. “If you look at the 2018 numbers, the first half was very strong, in the second half, when we faced challenges, we took some steps in terms of managing our own portfolios, with some corrective actions that we took.”
Sources told Reuters that these corrective actions included job cuts in late 2018 and Kaushal acknowledges that the slowdown in the property sector in the UAE presented some challenges, but he is upbeat that the outlook for the bank going forward is very positive.
“If we look at our first quarter results they have been very strong, we have not recovered but we have done very well… and it is sustainable… This is not a market where growth is coming very easy, so double digit growth in constant currency is pretty good. I think we have done reasonably well.”
Kaushal is perhaps downplaying it somewhat. First quarter results announced at the end of April saw the bank’s global operations post a 10 percent rise in pre-tax profits to $1.38bn. In a geographical breakdown of Q1 results, operating profit was up 13 percent in the Middle East and North Africa, compared to Q4 2018. By comparison, it was down 12 percent in Europe and the Americas and up just 1 percent in China and North Asia.
If we look at our first quarter results they have been very strong, we have not recovered but we have done very well
In a review of the quarterly results, the bank said the strong sectors were financial markets and corporate finance, which offset lower income from the wealth management and retail sectors. In terms of regional breakdown, it also said “higher contributions from Nigeria and Pakistan more than offset lower income in UAE”.
The latest Purchasing Managers’ Index (PMI), released by rival bank Emirates NBD in early July, found growth in the UAE’s non-oil private sector rose to its highest quarterly level for nearly five years during the second quarter of 2019, demonstrating a high degree of optimism among local businesses.
However, Kaushal says one area that could determine levels of optimism going forward is the ongoing geopolitical tensions in the region, especially the tanker and drone attacks and increased unease between Iran and the United States.
“The geopolitics in the region have been tough. But I think they’ve just come out more openly to the fore…. So you are seeing a manifestation of that,” Kaushal says.
“While it is still early days, it cannot be positive in any form. Even if the oil prices go up, the uncertainty really dampens investment flows. We are hoping it can get resolved as there are huge opportunities in the region in terms of investment in the core sectors, but also the downstream and the diversification agenda that every country in the GCC have embarked on. But, if the geopolitical situation persists, it will have an effect on sentiment.”
Being a global organisation, if things are challenging in one market, they can be offset by growth in another part of the world, something Kaushal says the bank works to its benefit.
For us, diversity helps. As our business is diversified there is a natural cushion built in
“For us, diversity helps. As our business is diversified there is a natural cushion built in. So, if you look at our bank, being in nearly 70 markets, yes of course there is a natural portfolio balance that comes in. But, this is a big market for us, the UAE, and clearly our desire is, as I’m sure it is of everyone else doing business here, is that we have the right environment for investment.”
And, for Kaushal, the right environment at the moment would be a peaceful resolution to tensions with Iran, beneficial oil prices and lower interest rates. So, over to you Mr Trump.
Sunil Kaushal on...
The impact of oil prices on the real economy
“I think it has a lag effect. You need to see a price level, but you need to see stability in the price of oil. And, secondly, you need expectation of the price level to be in sync with your ability to spend higher. So, if prices hit a high… but the expectation, it is going to go down, or is likely to settle at a lower level in the medium term, you are not going to pull out your cheque books and start spending.”
The UAE dirham peg to the US dollar
“We believe in the peg. I don’t think the peg is going to go away. We have been through, as an economy, the tougher phase. The view is now that interest rates are going to come down in the US and the cycle has turned. We have taken the brunt of it and now the cycle is turning.”
Bank mergers in the GCC
“I think strong banks in any economy are welcome. So, I think that’s the way forward, in terms of consolidation, having larger banks… At the end of the [day], larger banks that are able to support key projects in the economy, that are able to access capital from the international markets to bring them into the economy.”
“It depend from sector to sector. We are seeing investments continue in terms of the infrastructure, we are seeing investments continue in terms of investments [in] the core sectors, which are oil and gas, we are seeing investments in aviation and logistics continue, that is not being held back.”
“We still believe that… equities do offer reasonable returns. With the interest rates coming off, and the dollar not strengthening as much as it did in the past 20 months, it could ease the pressure on emerging markets, which would make the emerging markets a lot more attractive in terms of equities, as well as fixed income, more than we have seen in the last six to eight weeks.”
The impact of the US-China trade war on the GCC
“Not really, because [the GCC] is not a huge manufacturing base. But it impacts the public markets, it impacts investor sentiment. So, in that sense, it has an impact on the region.”For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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