Will the UAE ditch the dollar peg?
A question asked by many investors, economists and analysts worldwide - Will the UAE abandon its currency peg to the US dollar?
Falling oil prices have a big part to play as the UAE has been hit considerably hard, with Brent crude tumbling more than 40% since November last year, an issue that’s taking centre stage.
With oil prices expected to continue falling, it is widely predicted that a free-floating dirham would devalue, like the tenge (Kazakhstan) and the kroner (Norway) did when they de-pegged from the dollar. And so, when people talk of the UAE, and other Gulf oil producers potentially ditching their fixed exchange rates, or free floating, they are essentially referring to a currency devaluation.
Bearing this in mind, what would be the impact of the dirham devaluing?
If the dirham were to devalue, the export of goods priced in local currency would become cheaper for foreign buyers. This would in turn promote job creation in many industries such as tourism and real estate, which will consequently increase domestic demand through wider economic growth.
However, developers and banks that have dollar-denominated lending secured against UAE property will find the cost of interest and capital repayments will go up. As a consequence, there is a risk the property sector could collapse. Additionally, increased exports could help avert the potential of the country having its first fiscal deficit or current account deficit in more than five years.
One of the main disadvantages will be that imports become more expensive. Therefore, any imported goods, such as cars, will see a price hike, which is likely to cause inflation. And so, interest rates may have to rise in order to bring inflation down.
Additionally, expats in the UAE who send money back home, perhaps to pay a mortgage in a foreign currency (e.g. GBP), would find that the value of the cash is reduced and so there would be a considerable increase in the cost of those repayments. Likewise, those people who are paid in dirhams would find that when they go overseas, their buying power will be reduced.
With so much speculation, it is hard to predict what will happen and if indeed, when it will happen. But the UAE doesn't need to rush into any hasty decisions.
Primary reasons being - there is a lower break-even price on oil compared to other GCC countries and it also has a lower fiscal deficit with considerable foreign reserves. Their economy is branching away from hydrocarbons, with a substantial amount of its GDP now coming from other industries such as tourism. And in reality, it is more likely that the UAE will introduce corporation tax and VAT before it considers un-pegging its currency. However, with all this said, it predominantly depends on the future of oil prices from here on in.
Acuma is housed by highly trained financial advisers who are dedicated to providing tailored financial solutions to meet your individual needs. If you require financial advice in Abu Dhabi or Dubai , contact deVere Acuma for a free consultation on how your finances can be secured against impending economic movements.
A question asked by many investors, economists and analysts worldwide - Will the UAE abandon its currency peg to the US dollar?
Falling oil prices have a big part to play as the UAE has been hit considerably hard, with Brent crude tumbling more than 40% since November last year, an issue that’s taking centre stage.
With oil prices expected to continue falling, it is widely predicted that a free-floating dirham would devalue, like the tenge (Kazakhstan) and the kroner (Norway) did when they de-pegged from the dollar. And so, when people talk of the UAE, and other Gulf oil producers potentially ditching their fixed exchange rates, or free floating, they are essentially referring to a currency devaluation.
Bearing this in mind, what would be the impact of the dirham devaluing?
If the dirham were to devalue, the export of goods priced in local currency would become cheaper for foreign buyers. This would in turn promote job creation in many industries such as tourism and real estate, which will consequently increase domestic demand through wider economic growth.
However, developers and banks that have dollar-denominated lending secured against UAE property will find the cost of interest and capital repayments will go up. As a consequence, there is a risk the property sector could collapse. Additionally, increased exports could help avert the potential of the country having its first fiscal deficit or current account deficit in more than five years.
One of the main disadvantages will be that imports become more expensive. Therefore, any imported goods, such as cars, will see a price hike, which is likely to cause inflation. And so, interest rates may have to rise in order to bring inflation down.
Additionally, expats in the UAE who send money back home, perhaps to pay a mortgage in a foreign currency (e.g. GBP), would find that the value of the cash is reduced and so there would be a considerable increase in the cost of those repayments. Likewise, those people who are paid in dirhams would find that when they go overseas, their buying power will be reduced.
With so much speculation, it is hard to predict what will happen and if indeed, when it will happen. But the UAE doesn't need to rush into any hasty decisions.
Primary reasons being - there is a lower break-even price on oil compared to other GCC countries and it also has a lower fiscal deficit with considerable foreign reserves. Their economy is branching away from hydrocarbons, with a substantial amount of its GDP now coming from other industries such as tourism. And in reality, it is more likely that the UAE will introduce corporation tax and VAT before it considers un-pegging its currency. However, with all this said, it predominantly depends on the future of oil prices from here on in.
Acuma is housed by highly trained financial advisers who are dedicated to providing tailored financial solutions to meet your individual needs. If you require financial advice in Abu Dhabi or Dubai , contact deVere Acuma for a free consultation on how your finances can be secured against impending economic movements.