The UAE is arguably the world’s best protected economy in a global economic recession with a strong commitment to domestic infrastructure underpinned by high oil revenues and huge income generating financial assets at home and abroad.
Even if the United States economy is joined by Japan, Mediterranean Europe and the United Kingdom in recession, the UAE will still thrive. Indeed, the cost of imports during a recession from these countries is likely to fall and the nation has huge savings accumulated to carry on paying its bills.
The biggest threat to the UAE economy is high inflation. In the latest MasterCard Worldwide Index of Consumer Confidence Survey, the UAE score fell back from 88.8 six months ago to 78.5. This is still high but officials said the fall reflected people’s fear of the declining spending power of their salaries and the value of remittances to their home countries. But salary levels remain high, so the UAE is not like Egypt, where soaring food prices have sent the MasterCard survey score tumbling from 95 to 65.9 in six months.
Dr Nasser Saidi, Chief Economist at the Dubai International Financial Centre, told journalists after the launch of the MasterCard survey that inflation in the UAE was down to two factors: domestic inflation of non-traded goods and services, such as housing rents; and one-third due to the dollar-peg and the decline in the purchasing power of the dollar. The authorities have taken steps to tackle the first cause of inflation through tighter rent cap, and are overseeing a massive increase in the supply of property over the next few years.
That leaves dollar-peg inflation, where a failure to make a decision to either upwardly revalue the dirham and keep the peg, or to abandon it in favour of a basket of currencies has resulted in local inflation being about one-third higher than it otherwise would be, according to Dr Saidi.
He said currency reform should be part of an evolution towards a common GCC currency, which would then be managed within the region and produce benefits in terms of wealth creation.
All eyes are now on Saudi Arabia, where the Custodian of the two Holy Shrines King Abdullah bin Abdulaziz will convene a meeting of the Shura council on February 10 to hear presentations about the revaluation of the riyal. It is highly likely that the UAE and at least two other dollar-linked GCC states will follow any Saudi move.
The odds point towards revaluation, although local currency markets seem to have given up trying to predict the move since their disappointment in December. And the main case against revaluation now is that one revaluation would just be followed by speculation about the next. That means for it to have an impact, it needs to be seen to be large enough to do the job.
Inflation biggest danger to UAE