Dollar-pegged Dirham: Good or bad?

Should the Dirham look to be re-pegged against the US Dollar, expatriates living in the UAE may need to consider how such a move would affect their incomes.

Currently, there exists concerns regarding the UAE Dirham’s vulnerability to market fluctuations.

Without a greenback peg, the UAE Dirham may experience severe devaluation, just as currently seen in Kazakhstan and China. As a result, the UAE and other members of the Gulf Corporation Council (GCC) are looking to review their monetary strategy and determine whether the region should adopt a free-floating strategy or a US Dollar peg.

Alp Eke, senior economist at the National Bank of Abu Dhabi, stated “If a free-floating regime is introduced, the AED will most fluctuate with respect to oil prices. Considering the current market conditions, and oil price, the AED will definitely depreciate with respect to the US dollar.”

For expatriates, the effects of the UAE Dirham’s strength is circumstantial. Expats who hold assets in foreign currencies may find that a free-floating, cheaper UAE Dirham would be beneficial in swelling their net values. The transferal of stronger currencies, such as the Sterling, Euro or US Dollar, may place the expat in a position where their purchasing power has been enhanced.

On the other hand, expats who send considerable levels of remittance to dependants in their home nations may find that a stronger, US Dollar-pegged Dirham is preferable as a more favourable exchange rate is maintained. However, these expats should keep in mind that such an advantage is obtained only if the US Dollar outperforms other currencies. Devalued dollars would present the same issues as a weak UAE Dirham, resulting in lower values being remitted.

Regardless, Eke suggests that a devaluation of the UAE currency should altogether be either avoided or heavily restricted. Eke warns that should the GCC indeed allow currency devaluations to rates of around 5-10%, the prices of imports will increase whilst inflation rises.

Eke reminded how inflation should be taken into serious consideration, reflecting “In July 2015, UAE registered 4.53 per cent year-on-year inflation, the highest since 2009. A devaluation would cause inflation to rise to 6 to 7 per cent within a few quarters.” Should inflation indeed occur, the advantage of transferring assets that are derived from stronger currencies would be lost as the increased purchasing power would be negated by rising prices.

“In a region that relies so much on importing skilled and unskilled labour, this would harm the competitiveness of the economy. Saudi Arabia is reported to have more than 10 million expatriates.

UAE is reported to have 8 million,” warned Eke as he referred to the possibility of a devalued UAE Dirham.

Currently, he UAE Dirham is considered to be 22% overvalued, with the Saudi Arabian Riyal also being overvalued at 16%. Despite these extimates however, Eke assured that the chance of a currency devaluation to occur is “very, very low”.

As the UAE Dirham is expected to eventually see changes, it would be wise to ensure that your personal finances and assets are kept in a protected environment. Effective financial planning can help prevent the negative effects of monetary transitions from occurring, allowing you to keep hold of your savings, retirement funds or otherwise.

Acuma is housed by highly trained financial advisers who are dedicated in tailoring financial solutions that meet your requirements. With offices in both Dubai and Abu Dhabi, our financial advisers are able to directly consult with you to determine your financial circumstances and aspirations. Contact Acuma for a free consultation on how your finances can be secured against impending economic movements.

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