(MENAFN- Khaleej Times) The dollar-peg has served the UAE economy well in supporting macroeconomic stability and private sector confidence.
Dubai: The dollar-pegged UAE dirham which has recorded a 20 per cent surge in real effective terms against most currencies could appreciate further on tighter US monetary policy and render the real estate market particularly in Dubai more expensive for foreign investors economists at the Institute of International Finance IIF said.
The current steep rise in the value of dirham is also adversely affecting UAE’s non-oil exports and making its hospitality sector less competent to international tourists IIF analysts said.
The dollar-peg has served the UAE economy well in supporting macroeconomic stability and private sector confidence although it has implied about a 20 per cent appreciation in real effective terms as the greenback has risen sharply against most currencies said Garbis Iradian chief economist at the IIF.
“This loss in competitiveness could be mitigated by improving the business environment and promoting diversification” said Iradian.
He said the sharp real effective appreciation of the UAE currency and the prospect of persistently low oil prices call for intensification of diversification efforts and deeper reforms to raise and sustain high growth.
“As financial conditions tighten this year in the US policy rates in the UAE will rise in line with the US Fed but with some time lag. UAE banks are expected to remain sound because of their strong initial financing positions and will continue to be supported by growth in public spending on infrastructure — albeit at a slower pace than in the past — which has been driving bank credit and profitability” said Iradian.
Iradian noted that the UAE’s three-month interbank rate remained 0.6 percentage points above the prevailing Fed Funds Rate and is expected to increase in line with the Fed rate albeit with some lag. “The speed at which the UAE policy rate adjusts to its long-run relationship with the US rate is about six months compared to less than four months in Qatar and Saudi Arabia.”
However the rise in interest rates combined with a significantly appreciated dirham would dampen loan demand make real estate prices and tourism more expensive and hurt nonoil exports warned the IIF the Washington-based global association of financial institutions.
Some hotels have recently cut their rates to partly offset the impact of the appreciation IIF noted in a recent report. Tighter US monetary policy could also lead to further appreciation of the dollar and hence the UAE currency in effective terms leading to a further loss in competitiveness the report pointed out.
“The slump in oil prices has affected financial markets in most oil-exporting countries. Equity markets in the UAE declined sharply in the second half of 2014 albeit from overpriced levels. The real estate market particularly in Dubai also eased” said the report. The IIF said the slowdown in real estate prices is also due to higher transactions taxes tighter mortgage lending restrictions and lower demand from foreign investors particularly from Russia India and other countries whose currencies have depreciated vis-à-vis the dollar.
According to IIF UAE banks should remain sound because of their strong initial financing positions and the expected resilience of the UAE economy. “They posted double-digit growth in net profits last year and maintain healthy capital adequacy ratios and high provisions on bad loans.”
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