Stronger dirham good for remitters, bad for borrowers

Dubai - "The UAE hospitality sector, which is facing one of its worst setbacks in recent years with occupancy rates hitting an all time low in December, a stronger local currency can be a further dampener."

The end of seven years of zero interest rates era in the world's largest economy will have its repercussions in the GCC countries as a stronger dollar impacts the region on several fronts.
While a stronger dollar could translate into stronger regional currencies whose destinies as pegged to the greenback, consumers in the UAE and other GCC countries may enjoy a higher purchasing power vis a vis those currencies not linked to the dollar.
In other words, GCC residents can expect better rates of exchange on their currencies while sending remittances to countries with non-dollar denominated currencies or travelling or buying from overseas markets, excluding dollar pegged countries.
For expatriates, a stronger dirham can thus be a windfall but for the UAE export and re-export trade and tourism and hospitality, two fundamental pillars of the economy,  a stronger dirham spells more dismal situation. For tourists from traditional source countries including Russia, where rouble had fallen more than 14.5 per cent against the dollar in the last two months,  the higher cost of staying in hotels and shopping in the UAE could be a bigger challenge.
"The UAE hospitality sector, which is facing one of its worst setbacks in recent years with occupancy rates hitting an all time low in December, a stronger local currency can be a further dampener. Already, tourist traffic from several traditional source countries are at a low level," a hotel industry source said.
In line with the Fed rate hike, the interest rate increases by the GCC central bankers will also lead to a scenario of higher corporate and household borrowing costs. This may entail a slower credit growth, analysts say. There are quite a few others who predict a further tightening of liquidity by banks on the backdrop of low oil prices. Governments' borrowing costs are also likely to increase. Saudi Arabia has issued bonds worth billions in recent months to plug a budget shortfall, and several other Gulf countries are also planning to tap the debt markets.
Emerging markets are expected to be hit the most, with many economists forecasting huge capital outflows escaping to developed economies. Although it is too soon to judge the implications of US tightening on the long run, the initial reaction was positive and risk appetite drove all major indices higher. European markets also set to resume a three days rally, according to Hussein Al Sayed, an analyst.
However, some analysts argue that the elimination of uncertainty post the Fed event emerges as a major positive for certain Asian currencies, especially the Indian rupee.
The rupee is likely to correct from the recent lows of 67 to the dollar to around 66.3-66.6 to the dollar. A dovish rate hike by Fed is likely to be positive for the emerging markets forex space as questions persist not only over the timing of further rate hikes but also on the extent, a currency expert said.
The rupee is likely to emerge as a gainer in the near term. India Ratings believes the rupee is likely to gain in Thursday's trading session and consolidate in the 66.3-66.6 range. Its better-placed macro fundamentals indicate that the rupee could continue outperforming both in absolute and relative terms.
- issacjohn@khaleejtimes.com

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