Economic analysis of events in the United Arab Emirates and the Gulf
posted by John B. Chilton at 9/15/2007 02:18:00 PM
A telling part is when he asks whether Dubai can afford to appreciate the Dirham as it will adversely affest the millions of tourists and passengers travelling through Dubai airport. That suggests the question, should Dubai care more for its tourists or for its residents ?
You can't care for one without the other. Tourism is a significant source of income, which directly and indirectly, affects residents.It's the same with countries that have a lot of exports. For example, the appreciation of the Thai Baht has been hurting the country's exports. A lot of factories even shut down as a result. Tourism has not been hurt much by it, because it remains to be affordable, especially for the European tourists (and the Euro is also appreciating, so no one is feeling the difference).
'Dubai entrepreneur' appears not to understand that an inflationary bubble is no good for anyone. Weak Dirham does not make Dubai cheaper for tourists in the long run, it just forces up the price of everything to compensate for the weak currency. Look at the crazy hotel prices and the increases in restaurant bills. This is what inflation is. Are you really an entrepreneur? I don't think so. Few entrepreneurs like inflation.The inflation will have the biggest effect on high skilled and highly paid businesses in the knowledge economy in Dubai Financial Market, Media City, Internet City, etc. Such businesses will opt for other Gulf states that have proven themselves willing to address inflation. Few want to sink business investments into a place where the costs will double in the next couple of years.So the central bank's policy of covering their ears and chanting "rents will fall" and hoping inflation just goes away continues. Meanwhile the Fed has dropped interest rates by 0.5% and the UAE must follow suit if it is to maintain its peg. More fuel for the inflationary inferno.It's crunch time. With inflation well over 10% now, it's time to put up or shut up. The central bank either proves it is serious, or it kisses its 'business friendly' credentials goodbye and just milks the bubble for all its worth until the messy end.
I see no reason to extend the ever popular "Blame Bush" slogan to the inflation situation in the UAE. While the value of the USD is certainly not helping the AED, it's hardly the main factor. The phrase "irrational exhuberence" comes to mind when one thinks about the amazingly high priced real estate, the market place that is conspicuously zero VAT, and all the very high end vehicles wandering about on SZ road. When the USD falls, Americans lower their demand for international goods and services, which in turn, checks prices. That's exactly what a free market does -- it corrects.
Would love to see a post from the Emirates Economist on the current rumors of currency revaluation in the Emirates. I'm an American Expat and keenly interested.
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