06 October 2007
DUBAI -- Investors in the UAE's real estate sector will benefit from a highly probable dirham revaluation, investment consultants said.
A revaluation of the dirham, which is currently estimated to 30 to 35 per cent undervalued against the US currency, could provide investors a nice bonus on a property purchased in the UAE compared to parking that investment in a US dollar deposit account, investment experts said.
Gary Dugan, Chief Investment Officer, Global Wealth Management, Merrill Lynch, told Khaleej Times that the GCC currencies needed to appreciate by around 35 per cent to reduce excessive savings.
"In the shorter term we expect the UAE or Qatar will move to peg versus a basket of currencies this year."
"Apart from the substantial gains resulting from the current boom in property prices, investors will stand to reap benefits from the appreciation of dirham against dollar in the event of a revaluation, the extend of which is variously estimated," another analyst said.
However, real estate investors also face a dilemma. "While revaluation may provide a bonus on a property purchase as opposed to keeping money in a US dollar deposit account, a stronger dirham will make the UAE property prices a little less attractive to foreign investors," they pointed out.
"This, followed by the likely surge in local interest rates could have a negative impact on the real estate market."
Despite UAE Central Bank's insistence that it would neither opt for a revaluation of dirham nor move away from the US dollar peg, currency experts and economists believe that the likelihood of an imminent revaluation of the UAE dirham is 30 per cent.
"An investor who buys a property anywhere in the UAE will see his money getting one-off bonus against the dollar," a market analyst said.
With most economists affirming that an upward adjustment of dirham to the US dollar will be increasingly likely unless inflation begins to slow more noticeably next year, there is an increasing pressure on the UAE monetary authorities to drop dollar peg and switch to a basket of currencies as Kuwait and Syria had done. "Such a move will ward off any further inflationary trends by strengthening the dirham against other currencies," they contend.
However, experts warn that the UAE has to undertake a series of currency realignments to ensure the true value of its currency.
"While most of the UAE's exports (oil and gas) are priced in dollars, the country's biggest share of imports comes from non-dollar zone. A steadily falling US dollar is thus aggravating inflation which last year hovered above 10 per cent due to higher cost of imported goods, a steep surge in rents and other living expenses."
Dugan said the dollar looked set for further weakness. "We believe that dollar weakness comes from both cyclical and structural factors. Cyclically the US economy is set to be one of the weakest in 2008. Structurally the US economy is still facing the twin deficits of a current account and fiscal deficit. Also the weakness of the dollar has gained some momentum that may extend through the fourth quarter of 2007."
Dugan said the dollar's loss of value and influence in the global economy is coincident with the rise of the Asian region and in particular the very strong growth rates of China and India. "The reason that the possibility of more Middle Eastern countries dropping the dollar peg is being discussed more is that the region is facing high inflation and yet interest policy is strongly linked to the Fed. So despite high inflation interest rates are low if not being cut. Normally, with such high inflation the central banks would increase interest rates, instead rates have been kept unsustainably low, increasing the inflation risk."
or just read the latest IMF report on that:
a bit like life! 