x Abu Dhabi, UAESaturday 20 January 2018

You and your dirhams

The UAE is hardly sheltered from the global financial sandstorm. You are vulnerable in four main ways.


Bad times make for good stories. The financial crisis has pushed governments to inject massive amounts into stalled markets and to hastily erect buttresses for shaky industries, all of which led to some interesting reading these past few weeks. But as is natural with such stories, the magnitude of the news has partly obscured one of the most crucial questions: in what ways, exactly, will the financial crisis affect us, the legions of everyday people here in our little corner of Arabia?

In many respects the answer is, not at all. The Government recently guaranteed deposits at all national and foreign banks with significant operations in the country. If your bank fails, in other words, you will almost certainly get your savings back. The authorities have also injected cash into the interbank lending markets in an effort to lower the cost of loans that banks make to each other. More measures could be in the works to rescue ailing stock markets and restore investor confidence, after sharp falls on local exchanges. The Dubai Financial Market fell at one point this month by almost 52 per cent from its high in January, and the Abu Dhabi Securities Exchange has taken a hit of 26 per cent this year.

But while the Government is doing all it can to reassure consumers in this time of trouble, our outpost on the Arabian Peninsula is hardly sheltered from the global financial sandstorm. You are vulnerable in four main ways. Your property Invested in property? Your gains have been high and consistent for the past few years. Yet while the property market in the UAE remains stable, there are signs that the financial earthquake could be sending tremors our way. While they remain on an upswing, growth in Dubai property prices has slowed in recent months, according to a Colliers International report. That may in part be attributable to the actions of foreign investors, who make up a large slice of the property buying pie. According to Citibank research, only 24 per cent of the developer Emaar's buyers are Emiratis. The rest are a broad mix of Indians, Iranians, Pakistanis, Britons and others.

If those foreigners have less cash and can borrow less money because of the global slowdown, they will not be able to invest as much in foreign real estate, which could affect property prices in the UAE. Existing expatriate owners could also affect prices on the negative side by deciding to sell in the wake of the global crisis, retreating en masse to refocus on ailing portfolios back home. "There is a risk of lower demand from expat buyers because of the economic downturn in their domicile economies or contagion effects in their global investment portfolios," the Citibank analyst Hasnain Malik said in a recent report.

There is also a credit squeeze afoot in the UAE, which means that mortgage lenders have less cash to hand out. And a spate of alleged corruption cases along with an official curb on speculative buying have taken a bit of heat out of the sector. Yet while the fear of short-term trouble because of the global turmoil is real, experts see a largely sunny picture in the long term as white-collar expatriates continue to emigrate, tourists stream in and the population booms. "We expect ongoing white-collar immigration, controlled addition of new supply and price rises towards global ceilings," Mr Malik said.

Your investments If you own investments in the UAE, China, Russia, Japan, the UK, the US or, well, pretty much anywhere, the global crisis is not leaving you alone. Stock portfolios across the globe lost value rapidly in recent weeks as fears of a global recession intensified. The Dow Jones Industrial Average has fallen 34 per cent this year. The FTSE 100 lost 38 per cent and Japan's Nikkei Index lost 42 per cent.

If those investments are meant to fund your retirement, the downturn has probably been unnerving. The sting is especially painful if you are close to retirement, or early on in retirement. You may have to rethink decisions about when to retire, how much money you will have to live on in retirement and how your assets should be allocated. According to the US Congressional Budget Office, Americans have lost an estimated US$2 trillion (Dh7.34 trillion) in workplace sponsored retirement savings plans in a mere 15 months, and there is mounting evidence that people are delaying retirement because they have not saved enough. With today's broad-based portfolios and intertwined markets, average people in the UAE are probably losing money - and making similar plans to put retirement on the shelf.

Your borrowing A credit crunch is afoot in the UAE. That's what happens when banks have trouble finding money to lend. With less money to give you, interest rates on loans need to go up so that the demand for borrowed money matches the short supply of it. Higher interest rates, in turn, mean you pay more of your hard-earned cash to the bank for your car loan or your mortgage. Many mortgages and other longer-term loans are priced based on the Eibor, or Emirates interbank offered rate. That rate, a measure of what banks charge each other for loans, has skyrocketed in recent months, increasing from about 1.8 per cent early this year to above 4.5 per cent last week. Existing loans with fixed interest rates will not be affected by the increase, but those with variable rates - such as credit cards and most mortgages - could end up paying significantly more.

There is one potential upside to all this, though. Banks make their money by charging higher interest on loans than the rates at which they borrow or the rates of interest they pay to customers with deposits. This forces them to levy more interest on car loans, mortgages, personal loans and overdrafts. But it also allows banks to give customers attractive rates on savings in order to build up deposits that they can then lend out. Emirates Bank, for example, was recently offering promotional rates of up to four per cent on one-year fixed deposits.

Your dirham Part of the policy response to the crisis in the West has been co-ordinated decreases in key interest rates by central banks. The US Federal Reserve lowered its federal funds rate by two per cent this year - from 3.5 per cent in January to 1.5 per cent this month - in tandem with a group of other developed nations. This may affect you because of the dirham's peg to the dollar, which forced the Central Bank to lower rates to the same level as in the US. Lower rates mean money flows more freely into the economy as institutions can afford to borrow from the Central Bank in larger quantities. Central bankers usually lower rates to pump money into the economy in an effort to curtail recessionary tendencies like the ones in play in the US and the rest of the developed world.

But lower rates also have inflationary consequences. It's a simple supply-and-demand equation: with more currency in circulation, vendors can demand a greater amount of money for their goods and services. So in the UAE, where there is no looming threat of recession, the lower interest rates can only exacerbate the nation's inflation problem. Official figures put inflation last year at 11.1 per cent, and other estimates indicate it may have accelerated this year.

The bottom line: the short term does not look good. In fact, it looks pretty dreary. Inflation is high, stock markets are quaking, the property market is showing signs of slowing growth and it is harder than it used to be to get a loan to finance your dream car. We may have lots of oil and lots of cash here, but that does not mean we are living in utopian isolation from the world's troubles. However, assuming you are not one of the unlucky few whose retirements have been derailed by the crisis, you have little reason to worry in the long term. Markets rebound and things return to normal. It may take a year - or 10 - but the story, at least so far, is always the same: what goes down must come up.