Stronger dollar ramps up UAE remittances

Remittances from the UAE are increasing as expatriates, especially those from countries in Asia, take advantage of favourable exchange rates between the US dollar-pegged dirham and their native currencies to send an increasing amount of money back home, according to the heads of money transfer companies. UAE bosses at Western Union, Lulu Exchange and UAE Exchange say remittances have jumped since the dirham increased in value in tandem with the US dollar. The dirham is pegged to the greenback at 3.6725.

Greenback gains

The dollar has been boosted by positive US economic data and Asian currencies have hit a bad patch on poor investor sentiment. “As Asian currencies weakened against the dollar, expatriates made use of some of the best exchange rates in recent times to remit money home in the past few weeks,” says Adeeb Ahmad, CEO of LuLu International Exchange. “There has been a surge in remittances recently, especially to India, Bangladesh, [the] Philippines and Pakistan.”

Remittances have increased by an average of 10 per cent in September compared with August across the five GCC countries – the UAE, Oman, Qatar, Kuwait and Bahrain – in which LuLu Exchange operates, Ahmad says. Over the year, versus the US dollar, the Indian rupee declined 8.7 per cent, the Philippine peso by 5 per cent, the Pakistani rupee by 2 per cent and the Bangladeshi taka by more than 1 per cent, says Diana Jarmalaite, a Research Analyst with consultancy Euromonitor International. “All this has benefited the UAE residents who support their families back in their countries.” 

Remittances to developing countries totalled $436 billion in 2014, according to World Bank figures. In April, the bank forecast that this figure would increase by 0.9 per cent this year, the smallest rate of growth since the global financial downturn in 2008-09. However, the it was also predicted that the rate of growth would recover next year, climbing to $459 billion in 2016 and to $479 billion in 2017. “I would expect the World Bank to revise this figure, which was established in April this year,” says Hatem Sleiman, Western Union Vice-President for the Middle East. “What we have seen in the second half of this year — the fluctuation of [Asian currencies] and the strengthening of the dollar — helped remittances.”

The top five destination countries for migrant workers are the US, Saudi Arabia, Germany, Russia and the UAE, according to the World Bank. The top three remittance recipient countries by value are India, which received $70.39 billion in remittances last year, China ($64.14 billion) and the Philippines ($28 billion). Last month, UAE Exchange CEO Promoth Manghat said the company’s remittances had increased over the past two months as Asian currencies declined, local news media reported. In the first half of the year, UAE Exchange saw a 12 per cent year-on-year increase to $6.4 billion, Manghat was quoted as saying. In July and August, that jumped to an annualised rate of 18 per cent. Typical annual growth in remittances for the firm is 8-10 per cent, he added.

Forms of support

Migrant workers mainly transfer money to support families back home. One of the biggest uses of the money is for education. “In our recent research, 40 per cent of money [sent] was [for] education,” says Sleiman. Remittances are also used for health care and other support. White-collar workers may also save a portion of their earnings in the UAE and wait for an opportune time to transfer those savings back to their home countries — perhaps as a future deposit on a home or to fund retirement.

After the US Federal Reserve failed to raise interest rates, some commentators predicted the dollar’s recent climb would halt or even reverse. While there was a dollar sell-off immediately after the rate decision was announced, the greenback had regained those losses by early trading in London on September 21. The US currency’s quick rebound suggests that “the dollar is on a firmer footing than people realise”, says John J. Hardy, Head of FX Strategy at Saxo Bank in Copenhagen, Denmark.

“The Fed is waiting longer than expected [to raise interest rates], yet the dollar is still firm, so that suggests to me we [will see] the dollar rallying again sooner rather than later.”
However, Hardy predicts that, while the dollar’s rally may continue, the dollar-dirham peg may come under strain.
“It’s not pragmatic to hold this peg,” he says. “It’s a decision that’s difficult to do and it may take surprisingly long to do — but if oil prices are stable at $50 a barrel, [the authorities] will have to do it.”
Unhitching the dirham from the dollar would result in a devaluation of the UAE currency, making remittances less attractive.
The dirham and the Saudi Arabian riyal “are in the cross hairs for a big move and people ought to be getting ready for it”, Hardy explains. “People should be aware of the very high risk that there is a coming devaluation.”