Thousands of expatriates are lured to the UAE every year by the promise of tax-free earnings and never-ending sunshine. Although the country can guarantee both, for people sending money home – whether to help family or pay off debt – the current exchange rate is leaving many worse off.
This week there was a glimpse of hope for people sending money to the UK when the exchange rate dipped to Dh7.2 to the pound – a relief after the high of 7.5 seen towards the end of last year. The dirham and other Gulf currencies have been hit hard in recent months by the steady slide of the dollar against the euro, sterling and a host of Asian currencies.
In 2003 Dh6.3 was £1, today it is Dh7.2, the same year Dh1 was Rs12.4, today it is just Rs10.7.
The expat lifestyle traditionally involves sending the majority of tax-free earnings to savings accounts abroad. But with exchange houses and banks also charging to send money between countries, residents are losing out on their hard earned cash. Consequently, deciding what to do with your money is something at the forefront of most people’s minds.
For expats who choose to keep money in the UAE there is no problem, but those sending money home find they are sending upwards of 20 per cent more today than they did three years ago.
Independent financial advisor Martin Kinsey recommends only sending savings home if you plan to retire there.
“If you want to retire in Europe, save your money in euros because if the dollar changes when you retire, it might not be worth as much,” he advises. But the financial guru urges expats who do not have set plans for their golden age to save in the currency they are paid in.
However, with a predominantly young population in the UAE, things are not always so straightforward; some people have debts to pay, others want to buy a house in their home country or support their extended family. For those who fall into this category, there is little option but to deal with the exchange rate fluctuations.
And that is not the only problem. The weak dollar is also having a wider impact on the UAE economy as a whole, including affecting the cost of homes, says EGF Hermes’ senior economist Monica Malik.
“The weakening of the US dollar is resulting in imported inflation, along with rents. High inflation levels reduce the amount of savings and means there is less money to send home,” she explains.
Having less money is something affecting the majority of HSBC bank’s customers, with close to 100 per cent of its non-resident Indian customers sending money every month.
Manasije Mishra, the global head of NRI Services, says: “Expats are savvy so we try to give competitive rates in line with exchange houses. You can send money over the internet, through an ATM or paper cheque so it’s more convenient for customers.” But while Mishra recommends sending your money in lump sums every few months to cut down on transaction charges, he acknowledges many Indians here have a mortgage back home, which makes this impossible. Mishra, like Kinsey, believes offshore savings are still an attractive venture for executives wanting to save for the future. “If you are saving for retirement, Dubai is tax free so in that case it makes sense to keep your money offshore, because if you send it to England, you are under the gaze of the tax man, so you will have to declare it,” says Kinsey.
“If your home country taxes you on savings whether you live there or not, you are better going offshore, which is why most Indians tend to do it, plus you can save in a variety of currencies,” he adds.
Although there has been talk of the dirham cutting its ties to the dollar, there is no guarantee this will happen. If it were to happen it would allow inflation to move back in favour of the consumer.
“There would probably be a gentle appreciation of the dirham, which would help dampen imported inflation. The strengthening of the currency would increase the value of the money being sent home,” says Malik. But until that happens, expats are going to have to continue coping with exchange rate fluctuations.
Beat the rate sting
1. If you have a nest egg in your home country, bring your money back to the UAE so you have the chance to increase it if the exchange rate moves in your favour later on.
2. Save your money in dirhams or dollars.
3. Send large amounts every few months rather than small sums each month to avoid fees. This could also mean you can wait for a better rate.
4. If you are paid in dollars invest in US markets to avoid fluctuating profits.
5. Use the carry trade. For example, take a loan in the UAE to finance a house in India as the interest rate on a loan is much less here
Briton Susan Smith-Fitzgerald, 37, a headhunter
SENDS: Dh14,000 a month
2005 WORTH: £2,153
2008 WORTH: £1,944
“I have lived in the UAE for nearly three years and have sent the same amount home every month to cover bills on my UK property and for savings . But because of the poor exchange rate it has cost me more and more to send the same amount. When I first arrived the exchange rate was around the 6.5-mark. Now it is 7.2, and at its worst it was 7.5. I hope 2008 will be better, otherwise I may save in another currency.”
With confidence in the UK economy waning, the pound could fall sharply resulting in a gain of 10 to 13 per cent in terms of higher purchasing power with the dirham. For Indians, the future is not as bright, with predictions of a continued appreciation of the rupee.
Jason Goff, group head of treasury and market sales at Emirates Bank, says: “We’re not out of the woods yet. If the US economy holds up and there are rate cuts in the States we might see the dollar become even stronger. My advice to anyone sending money to the UK is to hold off until the second half of the year. For Indian’s we expect the rupee to continue to appreciate against the dollar but at a slower rate than in 2007.”