Down in the mouth about the dirham?

Stop me if you've heard this one. The dollar's going down, and so is the dirham, because it's pegged. That story has been doing the rounds for months, running into years, and has now even reached the residents of Snoozeville, Arizona. Enough already?

OK, try this. The extra twist this year has come from the international credit crunch, not necessarily so well-known to the man and woman in the street, although the word 'subprime' has been tripping off the tongue in financial circles, and even among those not directly concerned but who like a bit of jargon.

There is stress in the system, the upshot being that the dollar interest rates are dropping when they might otherwise be expected to rise to bolster the currency. The removal of that plank of support was not entirely expected, which is what has driven dollar exchange rates lower.

Then we come to the dirham, whose interest rates and exchange-rate levels are tied to the dollar. The apparent illogicality of GCC currencies languishing — when higher exchange rates would be justified by oil-based balance of payments surpluses, and higher interest rates would be useful to check inflation — has motivated speculative talk about revaluation.

Governments around the Gulf have resisted, partly because strategies to diversify their respective economies depend to some extent on retaining currency competitiveness, which is what a weak dollar helps provide. In the past week, the UAE's Undersecretary in the Ministry of Finance and Industry reminded us of that virtue in the status quo.
At the same time, the millions who have come to this country and region from abroad to work are feeling the pinch under these unchanged policy conditions.

Purchasing power

Expatriates here whose home currencies are in anything other than dollars are suffering loss of purchasing power in currency terms. That's besides losses in local terms experienced in the form of inflation, particularly in rents. "Rising inflation and an undervalued dirham work as a tax for the average expatriate living in UAE," says Syed Basher, an economist specialising in Gulf economies.

We reported last month that income-earners here in the UAE, across all the main categories of expatriate, have lost between 20 and 30 per cent in the past 18 months purely in terms of exchange-rate losses, with the dollar and dirham's slide. That seemed to be something of a wake-up call for some, although those remitting money home every month were already very well aware.

By comparison, salary increases had averaged only 10.7 per cent across the UAE in the 12 months to August. With the cost-of-living index rising in the order of 10 per cent per annum as well, it means your dirham income is haemorrhaging in terms of overall purchasing power. Put very roughly, paycheques would have to have risen by something more than 30 per cent just to stand still in real terms. For instance, the combined effects were "wiping out more than one third of the earnings of Indian expatriates working in the UAE," Sudhir Shetty, General Manager of UAE Exchange Centre, has said. Staff and companies alike should all know that this market is moving at speed.

Employers have very often not been able to keep up with the spiralling house rental costs of their employees. Consequently, "people have come out, done a foray, and decided not to come, [while] others have decided not to stay," says David Thatcher, a careers consultant in Dubai. They are casualties of the shakeout of the economy, he confirms, which is becoming increasingly sophisticated. "At the top end, good packages are being offered" to those needed on complex projects, he says, "but among middle-income levels it is inconsistent", and there is little sign of movement at the bottom end.

"The increasing cost of living in Dubai makes the life of a middle-class expatriate hard. Due to high expenses, they limit their happiness and work hard for the well-being of their families", which have in many cases returned to their home country, says Gulf News reader Harshida Abdul Hameed.

If you have just arrived, and benefited from implicit salary adjustments as a newcomer, then you may already been earning considerably better than your colleagues. But what can expat residents already here do, besides asking for a pay hike, or even leaving? If you are saving at all, where should that money go?

Interest rates in real terms are negative in the UAE because they are linked to dollar rates which are not only low but falling, with the US Fed dropping its target rate last week to 4.5 per cent. So, staying in cash is a losing proposition in investment terms. Equally, buying other currencies because they are 'strong' is as ridiculous as buying stocks because when they are 'high', unless you are convinced the trends will continue. Markets have a nasty habit of biting back. Gold too, which seems to have developed a reverse correlation with the dollar, is among them.

Many have decided instead to buy property here, but the market has gone so far so fast already that there is a degree of risk attached, particularly of prices slipping in response to the extra supply of accommodation coming in the next couple of years.

Paper investments

Paper investments offer another route, whether locally or abroad. Investing in local stocks has the advantage of avoiding exchange-rate risk. In fact, foreign institutional buyers have introduced support to markets in the region because they appear to be cheap, especially from a foreign-currency base, with a whiff of revaluation in the air.

With sufficient earnings at your disposal, you might consider yourself a candidate to enter the warm embrace of a financial advisor. Then it becomes very much a matter of your appetite for risk when in pursuit of reasonable investment returns. In that case, watch out for the gobbledygook, and the commission structure. Most expats are here to work, save and experience a different lifestyle from that of their home countries. Most will want eventually to return home with some kind of pot accumulated. But they also want to live well enough now. Yet a lifestyle change is due for many. Purchasing power should be on their radar. It means that they need to know their 'income' really is 'incoming' as they would hope. "People need to rein in," says Thatcher, "the UAE has a lot to offer, but it is not cheap."

TAKING ACTION
What you can do to protect your money

The key thing about protecting whatever assets you have accumulated in dirhams as an expat is that you relate back to your 'base currency'. That's the one you hope eventually to translate your savings into, and may also be the one you tend instinctively to convert local prices into when assessing a purchase.

Even without thinking about it, however, by working here and getting paid in dirhams you are already taking a gamble with regard to currency risk.

"That has worked a lot of the time, but [unless your base currency is the dollar] it isn't working now," says Sean Kelleher, chairman of Mondial Financial Partners International.

So how do you recover from the hit already taken? To begin with, don't panic, and don't rush to try to make up the loss.

The pursuit of higher rewards usually entails higher risk. "It's important to feel that you can still sleep at night," Kelleher says.

The dollar issue remains an acute consideration. The possibility of dirham revaluation — which would alleviate the difficulty considerably — is only that, a possibility, and officials have downplayed the chances. So whether the dollar will continue to plunge is the key question.

"It's hard," continues Kelleher, "but the advice we are getting is that the dollar will weaken further," with an outright housing crisis in the US likely to lean more on interest rates.

Since guessing where foreign exchange markets will go next can be a tough call, you might want to trust someone else's opinion. Financial planning services are available at the banks now, as well as from licensed financial advisers. No particular capital sum is necessary, although there are minimums applying to specific products and, Kelleher confirms, "the more money you have, the more attention you'll get."