The global economy may not be giving out the brightest of signals (don’t even look towards Europe), but expatriates in the UAE are keeping their fingers crossed as a stronger US dollar – to which the UAE dirham has a fixed peg – and a low inflation rate, thanks to declining rents, are heralding a feel-good factor they’d all but forgotten in the past few years. The US dollar has gained significant momentum in the past few months, and has led to the UAE dirham appreciate in tandem against currencies in which expats remit money home, leading to welcome monthly savings by expats. At Rs13.11 at 9.30am this morning, the Indian rupee, for instance, is trading at a two-year low against the dirham (the INR last traded at the same level against the UAE dirham in late September 2009). The Pakistani Rupee (PKR), on the other hand, is at an all-time low against the dirham, with Dh1 fetching as many as PKR23.9 as of Tuesday. The British pound, too, has lost ground against the US dollar – in effect, against the UAE dirham – and is currently trading at AED5.78 for £1, a level not seen since mid-January this year. Similarly, the Philippines Peso is trading at PHP11.90 vs Dh1, its lowest level since mid-March this year. Rental relief While the strong US dollar implies that expats with fixed monthly commitments back home – be it mortgage payments or family sustenance allowances – are making incremental savings on their remittances, what is really adding to their bank balance is perhaps the lower annual rental payments, which have declined substantially over the past two years. From the crazy days of early 2008, rents in the UAE – though still high compared to other property markets at a similar stage of development – have declined by 50 to 60 per cent in certain cases. With a vast majority of UAE expats living in rented accommodation, this has led to a substantial boost to their finances while at the same time pushing down debt levels in the country. Banking on growth According to UAE Central Bank statistics, bank deposits rose to an all-time record of Dh1.126 trillion in the first half of 2011, compared with Dh985.4b in the first half of 2010 – a growth of 17 per cent year-on-year. At the same time, overall bank lending (including loans to businesses) are witnessing a slowdown too, with loans and advances by banks up just 3 per cent in the same 12-month period. On the other hand, personal loans availed of by residents inched up by less than 1 per cent during the same period, from Dh245.6b in June 2010 to Dh248b in June 2011 – indicating that we are saving more and borrowing less now. Spending vs saving While this may bode well for the residents in the short-term, Keynesian economics suggests excessive saving, i.e. saving beyond planned investment, is a serious problem, encouraging recession or even depression. According to experts, excessive saving results if investment falls, perhaps due to falling consumer confidence and/or demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy declines, or stops growing. Saving in effect means not spending all of one’s income. Thus, it means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment – a recurring savings account or a fixed deposit in a bank, for instance. While such an account is ‘savings’ for one person, it gives the bank the freedom to lend the same money to another individual or a company for business purposes, plugging liquidity back into the general economy, which boosts growth. But in case of a lack of borrowing demand – as seems to be the case now – excessive saving corresponds to an unwanted accumulation of inventories, or what classical economists called a general glut. This glut in inventory eventually leads businesses to decrease production and then employment levels, leading to a fall in household income levels, and the beginning of a new recessionary cycle. A number of residents who saw their friends or friends of friends lose jobs or generally get into financial trouble in the recent past with the economic slowdown went into auto-savings mode – fearing the worst, they downsized their expenses and started saving for the rainy day. They became prudent in their expenditure. But at some point in their savings spree, prudent became paranoid – weekly grocery shopping bills began being overanalysed (did we really need the room freshener?); in some cases, non-working spouses returned to their home countries along with the kids to avail of complimentary (or at least less expensive) schooling there, and working individuals shifted to smaller accommodations, further cutting down on rents. But with things improving (incrementally and relatively), it may be time to stop being ‘paranoid’ and start being ‘prudent’ about your finances again. We are certainly not suggesting that you start splurging now in a bid to boost the overall economy – far from it – but do relax those purse-strings a little bit to once again enjoy some of the things that money can buy.
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