Stock Money exchange dirhams currency
Before sending out their next remittance, residents in the UAE should consider options provided by steadily increasing rates on fixed deposits. Image Credit: Virendra Saklani/Gulf News

Dubai: UAE residents could be better off retaining some of their savings as deposits with local banks, as interest rates on fixed deposits rise to between 4-5.5 per cent annually from 3.15-3.9 per cent. These deposits typically are of Dh10,000 and over and for a tenor of 12-18 months.

Some financial institutions today offer fixed deposit rates from 4-5.5 per cent per annum.

- Sandeep Jadwani, Head of Investment Advisory, Habib Investment Ltd.

“Suppose a consumer has a loan at a rate lower than 4 per cent. In that case, they should continue to offset the loan interest liability by keeping their funds in high interest-bearing deposits (here),” said Sandeep Jadwani, Head of Investment Advisory, Habib Investment Ltd.

The 12-18 month timeframe on fixed deposits would also give them ample leeway to see where the dollar is headed in the new year - and the dirham along with it because of the currency peg. While the dollar has weakened recently after its summer highs, depositors should also be looking ever so closely at how their own home currencies are likely to fare in the initial months of 2023.

Will these currencies - ranging from the Indian rupee to the euro - recover/gain against the dollar after the shellacking they had for the best part of this year? Or will they likely lose more ground to the dollar? Until they get some trends early in the New Year, retaining their savings as fixed deposits short-term should be a consideration for residents.

Start restructuring loans

While FD holders are up for gains, bankers in the UAE have also warned customers with existing loans to their names to enter into restructuring plans with their banks to avoid falling into a debt trap. Javed Akberali, co-founder and Chief of Strategy at GoFinance and a former banker, said, “While things are not looking good for borrowers, there is a flip side to this narrative.”

“Individuals with fixed deposits in the bank are getting better returns. With rising interest rates, people will start to save more money or become frugal in their spending. If you look at the bank portfolios, deposits have gone up, and banks have become more liquid.

People are spending less, and the savings economy is coming back to life right now. UAE expatriates come here to lead a life they cannot live back home. But with how the global economy is going, home is where you live.

- Javed Akberali, co-founder and Chief of Strategy at GoFinance and a former banker

Savings rate below inflation

The good side to interest rates going up is that the savings rates have started to rise. However, savings rates are still way below the level of inflation. So, the money is still being eroded elsewhere, said c.

Stick with the contributions

“Perhaps, contributions reduce if there is belt tightening across the board, but it is important to try to keep at least a little savings continue month-to-month and try to get back up to normal levels again as soon as possible,” said Conor.

"The whole point of investing in the first place was to beat inflation and maintain the purchasing power of your money over the long term. That hasn’t changed, so your behaviour shouldn’t either."

If you are in the market for a loan, it may be best to act now to avoid higher rates later on.

- Rupert J. Connor, a Partner at Abacus Financial Consultants

A good time to borrow from banks?

While individuals with savings deposits are set to gain, the same cannot be said for credit consumers, experts warn.

UAE residents planning to take personal or vehicle loans must consider all the angles. “If you’re going to take a loan and head out for a holiday and live way above your means, there would be severe repercussions,” said Jadwani.

Borrow only for personal needs and emergency requirements and not for discretionary spendings that end up crashing your budget. This will only attract tougher spend cuts on your part in the future in a high-inflation, high-interest rate environment.

“Loans are the best instruments to create assets over the long term, but it is imperative to use them with caution,” said Jadwani. “If loans are utilised to maintain a lifestyle, it may seriously impact savings and wealth generation. Eventually, higher rates will help cool down inflation, benefiting consumers in the long run.”

Debt restructuring - a good idea?

People carrying debt should look towards stabilising their circumstances, and consumers should take ownership of their credit situation. For example, a credit card customer with Dh100,000 outstanding on their card should restructure it to Dh 5,000 every month.

“They need to take control of their financial situation, break it down into instalments and get rid of the debt,” said Akberali.