Strong dollar spooks UAE services sector
EXPERTS SEE GREENBACK SURGE CASTING SHADOW ON RETAIL, TOURISM, REAL ESTATE
With the US dollar at its strongest levels since November 2017, analysts are voicing concerns about the economic impact of a stronger currency, saying it creates headwinds for the UAE’s economy.
But while that is creating challenges for the services sector in the UAE, it will benefit residents both in terms of remittances and travel abroad.
In the past two months, the DXY, the index that tracks the movement of the dollar, has jumped over 6 per cent.
“Foreign spending is an important part of retail, hospitality, hotels, and restaurants, but even things such as real estate demand are impacted by the stronger dollar,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“The support that we saw in the first quarter [of 2018] from the weaker US dollar is going to dissipate, and the strength in the dollar is going to be a headwind to the non-oil economy, especially the externally-facing sectors,” Malik said.
She added that she is already looking at how such strength in the dollar is going to impact economic forecasts for the rest of year, especially as Malik expects further strength in the dollar.
In the past few years, the UAE’s tourism and aviation sectors saw significant effects from currency fluctuations. In 2017, Emirates airline, for example, recorded a Dh661 million gain to its bottomline just from the decline of the dollar against currencies in other key markets, with the dollar shedding over 13 per cent between December 2016 and early 2018.
A year earlier, with a strengthening dollar, Emirates said it recorded a Dh2.1 billion hit to revenues “due to unfavourable currency exchange”.
“A strong dollar is never good news for UAE tourism,” said Nikola Kosutic, head of research for the Middle East at Euromonitor International, adding that tourists react “immediately” to currency fluctuations.
The gains in the dollar are even stronger compared to the euro. Between December 2016 and February 2018, the euro rose about 19 per cent against the dollar, according to Gulf News calculations. In early 2018, with a falling dollar, the UAE saw a rise in tourists from countries such Germany, a key source market in Europe.
Asked whether gains in the dollar so far were strong enough to hit tourism, Kosutic said, “The rule of thumb is that it’s sort of 5 per cent where we start to see an impact. Everything until that number is something that can be offset by different measures.”
Residents stand to gain
But while the UAE’s economy is likely to get hurt by a stronger currency, it’s the opposite case for the country’s residents, whose cash can now go further.
And travel agents around the world are well aware of that, with agents tending to have special campaigns for travel to countries where exchange rates are favourable. Away from tourism, when asked about the impact of a stronger dirham and dollar on trade, analysts said they were not too concerned as trade deals tend to be done on a longer-term basis. And that will depend on just how much stronger the US dollar gets.
Jameel Ahmad, global head of currency strategy and market research at FXTM, said he doesn’t expect the dollar rally to last long. “I still [think] that this is temporary because there’s no real justification for the dollar to move back towards those milestone highs because we know that the US administration wants a weaker dollar and they would talk down the strength of the dollar at some point, so on that basis, I don’t see the strength going that much further,” he said.