Forecasts indicate that the inflation outlook for the UAE is not as alarming as in the case of a number of developed and emerging economies. “The UAE is well positioned to remain robust with strong oil and non-oil sectors,” said Scott Livermore, ICAEW Economic Advisor and Chief Economist and Managing Director, Oxford Economics ME.
With inflation forecast at 2-2.5% this year from 0.2% in 2021, the UAE Central Bank has warned that the country is not immune to a surge in inflation. global inflation. “Soaring global inflation is a concern for open economies such as the UAE, where imported inflation would eventually feed through to domestic prices and fuel headline inflation,” the regulator said in its review. quarterly economy.
Individuals and businesses with fixed rate loans will benefit if their rates are locked in for the life of the loan. Those with variable rate loans will see an immediate increase in their interest charges. The increased cost of borrowing, at least in part, will be passed on to consumers and should dampen consumer demand.
The rise in interest rates in the United States follows a rise in the exchange rate of the dollar against other major currencies. Real effective exchange rates of the UAE dirham will also strengthen due to its peg to the dollar. The dirham’s growing strength in line with the dollar could make UAE exports – including “reputable exports” such as tourism, hospitality, investment in UAE asset classes such as real estate – less attractive to foreign investors due to inflated valuations resulting from currency strength.
Since the start of the year, the greenback has appreciated by more than 8% against a basket of foreign currencies. On a positive note, the rise in the real effective exchange rate of the dirham will, to some extent, reduce the impact of imported inflation on consumer prices in the UAE.
Rising interest rates will significantly boost the profitability of the UAE banking sector which has suffered from prolonged margin compression due to low interest rates. Net Interest Margins (NIM) of banks in the UAE are expected to improve significantly from the second quarter (NIM is a measure comparing the net interest income that a bank/financial firm generates from credit such as loans and mortgages, with the outgoing interest it pays to depositors and other funding sources). The impact will ripple through banks’ profit and loss accounts fairly quickly as rate hikes take effect almost immediately on loans, while the one on deposit rates could be lower and come with a lag. Most banks in the UAE are well capitalized and have adequate funding. Taking advantage of the low interest rate environment of the past two years, most banks had concentrated their fundraising activities.
Analysts say a higher loan load will drive up mortgage rates, personal loans and SME financing rates. This, combined with the phasing out of the UAE Central Bank’s support for banks in June, is expected to lead to an increase in loan defaults. “Depending on the pace and overall amount of the increase, some clients may experience difficulty and restructure their debt,” said a senior director of financial services at S&P Global Ratings.
Many UAE banks have started notifying their customers about increased deposit rates to attract term deposits. The rates offered by banks will be based on their financing needs and their access to other sources of financing at competitive rates. “We do not expect competitive rate increases on deposit products. However, smaller and lower rated banks are likely to offer higher rates to attract and retain deposits,” said a senior banker.