Businesses fear a weaker dollar may raise imports cost

Haseeb Haider

8 August 2011

ABU DHABI - The US credit rating downgrade will continue to devastate the share markets across the globe, but for the country like the UAE, which is dependent on heavy imports would be affected by a weaker US dollar, as the reserves currency is likely to loose its shine, businesses feared.

The credit rating downgrade of the world's biggest economy has sent shivers across the across the globe, as many economies would take a big hit, while the UAE, a fast diversifying economy, many businessmen said would remain largely unaffected.

Khaleej Times spoke to the financial gurus, leading importers and business leaders to know what they expect from the new turn of events in the US.

Imad Ghandour, managing director of Cedar Bridge Partners, which manages investment funds in MENA, termed the impact of the deteriorating confidence in the US economy and US debt as "substantial."

"The events of the last week signals a general increase in risk worldwide, and, whether short or long term, the consequences will be an additional risk premium that investors will request on all flavours of bonds and equities," he said.

The demand/supply imbalances may hide this trend in the short term, but longer term that additional risk premium will creep up into all financial instruments," Ghandour said.

It is "another signal that the US is losing its economic leadership," he said.

"For the GCC and oil producing countries generally, a main assumption in the oil demand dynamics and oil settlement currency needs to be revisited, and a strategy needs to be devised in order to coup with this increasingly likely eventuality," Ghandour said.

On its impact on investment activities in the UAE and the region, he agreed that the turbulence will definitely create hesitation to invest. "A turbulence of this magnitude will causemany causalities across the globe, and investors will shy away until they see a more stable economic environment."

Yusuffali MA, managing director of Abu Dhabi based retail chain Emke Group hoped "this turmoil does not escalate into something bigger like in 2008."

He saw no impact on the UAE's economic growth numbers.

On the retail front, Yusuffali, who also sits on the board of directors of ADCCI said, "yes, [the] weakening of US dollar might trigger imports cost, which will affect price of commodities and food, especially those imported from the Europe."

"We must look at finding a solution to keep prices steady." But this time around, he said, "I believe UAE is in much better position to handle any negative impact on it's economy."

Rizwan Sajan, Chairman of Dubai-based Danube Building Materials said the UAE economy is structurally more diversified now, so it is bit difficult to assess the full impact. Sajan feared exports could get "affected as the US dollar looses value and hence will not be competitive."

Commenting on the future of dirham peg to US dollar, leading importers said "this equation will not change so quickly." The need to move to a multipolar system and unified GCC currency might be revisited, he suggested.

While the US is fearing hikes in interest rates as a consequence, Sajan ruled it out in the near term. Asked about the impact on the prices of imported goods Sajan warned of inflationary pressures if the US currency weakens.

"A weak dollar could have an adverse impact on oil revenues and prices. Imports of consumer items and capital goods could see an increase over time," Rizwan Sajan said. On Greebbeck's future as a reserve currency, the leading importer of building materials said "there is no obvious alternative to the US dollar."

Dr B.R. Shetty, managing director of the NMC Group, said that the UAE's economic recovery that started earlier in the year would not be affected by any spillover impact of the US crisis, as consumer confidence has boosted recently. "Even properties prices have improved in the recent months, showing signs of strengths," he said.

Dr Shetty, whose group manufactures and imports pharmacueticals into the country ruled out any hikes in drug prices.

Vinod Nair, managing director of Buff & Lean International Insurance Consultants in Abu Dhabi feared turbulent days ahead for the shares. However, he termed it "an excellent opporunity" for the investors to buy as prices would be much attractive.

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