While the euro’s drop yesterday to a low against the dollar not seen since 2006 may mean good news for businesses that import from Europe, it could also contribute to slower economic growth in the UAE amid weakening demand for the services sector, economists said.
The euro slumped to $1.1864, its lowest level since March 2006, before recovering later in the day, as concerns over Greece further fuelled expectations that the European Central Bank may introduce monetary easing measures.
“The weakening euro is negative because the competitiveness of the UAE’s non-oil sector, particularly Dubai’s service sector, is undermined not just by the weakness of the euro but most other currencies against the dollar and by extension against the dirham,” said Simon Williams, the London-based chief economist for central and eastern Europe, the Middle East and Africa at HSBC.
The dirham is pegged to the US dollar.
“Every other currency is weakening against the dollar right now,” he added. “The only ones that aren’t weakening against the dollar are the GCC pegged currencies, which undermines the competitiveness of the export-orientated goods and in particular service sectors such as tourism.”
The tourism sector contributed about 8.5 per cent to the country’s GDP in 2013.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, gained 11 per cent last year, the biggest annual gain since 2004. The dollar advanced 14 per cent against the yen last year, a third straight annual advance. And it rose 12 per cent against the euro, the biggest gain since 2005.
“It’s probable that the euro will go on sinking,” Stephen Lewis, the chief economist at ADM Investor Services International in London told Bloomberg News. “There are very few fundamental factors in its favour.”
Russian tourism to the UAE has been particularly hit by the appreciation of the dollar as well as the sharp drop in the price of oil, a commodity that Russia is also reliant on as a key driver for its economy.
Russian visitors to Dubai dropped by almost a fifth in November as the falling rouble, which lost 50 per cent of its value against the dollar last year, took its toll on Russian spending power. The 18.2 per cent year-on-year plunge in passenger traffic to Dubai from Russia and CIS countries in November was part of a trend that started in September when Russian visitor numbers fell 5.5 per cent from a year earlier, followed by a fall of 8.2 per cent in October.
Russia’s currency yesterday was down 5 per cent to 58.9335 per dollar at 4.08pm in Moscow.
As well as the strengthening dollar, the outlook for the UAE economy has also been shaken by the drop in oil, an export commodity from which the federal government funds more than 60 per cent of its budget. While the country has amassed large cash reserves in the previous years, a further drop in crude, Mr Williams said, may weigh on economic growth.
Already, UAE stock markets have weighed in with Dubai’s index dropping as much as 35 per cent last month from highs registered in November as oil prices plunged. The Dubai Financial Market General Index yesterday slipped 3.3 per cent.
* with agencies
Follow The National's Business section on Twitter