EK Pilot
3rd Jun 2006, 19:21
Counting the cost
By Andrew Shouler, Editor, Business Commentary
For many people, especially from afar, the UAE still has a magical appeal as a land of wealth and opportunity. Dubai's glittering skyline provides the cutting edge for that emotion.
This country's bid to become the focus of activity and attention between the international time zones of the Far East and Europe, completing a four-cornered set of centres globally with, for instance, New York, Shanghai and London, entails a whirl of head-spinning growth. That story continues.
On the ground, however, especially among the expat population, the magic may be wearing off somewhat, and another story may be developing. Growth very often produces inflation, and it is beginning to take its toll.
YouGov's data suggest that living standards are not only failing to match the breathless pace of change, but in a high proportion of cases are receding.
Inflation as experienced at street level by significant swathes of those who have come to spend some portion of their lives and save a pot of money for the future seems to be running at three or four times the rate at which pay packets are swelling.
Consequently, while the country's ambitions soar, the immediate horizons of those participants actually are shrinking.
It is important not to overdramatise the survey's findings, although the sample of over 700 interviewed, reflecting the country's demographics, is intended to be representative of the broader picture. The numbers do, however, speak for themselves.
The results confirm, as YouGov's Caroline Elford puts it, "a large increase in living costs in a relatively short space of time". The key data are portrayed in the graphics below.
In the past 12 months, average price increases were reported, across key areas of expenditure, in the range of 20-30 per cent namely in accommodation (27 per cent), foodstuffs (20 per cent), healthcare (18 per cent), education (20 per cent) and transportation (25 per cent).
Tightening
Meanwhile, pay growth lags a long way behind. While it is difficult to be exact, primarily because responses are grouped in data ranges, a rough calculation of the weighted average puts income growing by around seven per cent. Remarkably, by their own testimonies, 39 per cent received no pay increase over the last year, and three per cent even a decrease.
Naturally, a certain amount of belt-tightening is taking place. Dwelling arrangements have come under considerable pressure, with 44 per cent of the total surveyed reporting that living costs have already contributed to a decision to move, to share housing or to send the family away, while 65 per cent have considered such options. It is worth noting that 69 per cent live in rented accommodation.
Obviously, savings patterns also take a severe knock. On average, roughly nine per cent of income is saved. Yet, in the case of 41 per cent of respondents, apparently, no part of income is saved, seriously undermining the motivation to stay for those who consider their ultimate home is elsewhere.
YouGov refers to a social divide emerging, as those on lower incomes are disproportionately affected, both in terms of housing cost hikes and diminished savings. It also points to significant numbers of expats considering leaving the UAE, with 35 per cent of those departing citing rising costs as one of the key reasons.
Otherwise, taking the 'bottom-line' criterion, there is remarkable similarity across nationalities, gender and age with respect to savings ratios relative to income (although the tendency to save is, of course, not quite the same as the ability).
Meanwhile, not mentioned in the survey's analysis is the impact of the UAE dirham declining internationally (in conjunction with the US dollar), which, if it continues, weakens the value of repatriated earnings. Of course, if you are not saving anything at all, it doesn't matter what the exchange rate is; zero is zero in anybody's money. But it's another, critical angle which does not help ease the mind.
Perhaps the pending supply of new property will reverse the rising cost tendency. Moreover, if some people are leaving, and others are not so tempted to come, the demand side of that equation may also kick in. A concern there must be that such a reversal is not overdone, mirroring the recent plunge in the stock market.
Yet inflation in other categories clearly also applies, at fairly consistent levels. It certainly seems there is systemic pressure, which needs to be alleviated, preferably in a gentle way not damaging to the UAE's continuing development.
Maintaining competitiveness
Abdullah Sharafi, Economist and Executive Director of Gerab Ind. Enterprises
"If we are talking about a year from mid-2005 to mid-2006 then a 20 per cent inflation rate seems to be quite likely.
Prices have been on the rise in many areas - fuel, transportation, household goods, foodstuff, and recreational services.
The cost of borrowing has been increasing, and so has the prices of homes and rent.
"There is a threat to economic progress from inflation. If the value of the dirham does not decline against the currencies of countries the UAE exports to, then our exports become less competitive. Our cost of doing business increases, so businesses choose between keeping their operations in the country or taking it out. Furthermore, we make less profit to stay in the business.
"A high rate of inflation also discourages savings, if the interest rate on deposit is less than the inflation rate. In fact, it encourages excessive borrowing, because the money to be repaid would be worth less in future. Cheap money further pushes up prices of commodities, properties, stocks, and other services, as conspicuous consumption and speculation pushes up prices.
"Whereas living standards may have improved in Dubai, the cost of living is excessively high. Already we as a company are setting up units in less expensive countries to perform some of our non-core operations so as to contain the increasing cost of adding new staff. Also, we are experiencing lack of interest from qualified people who are familiar with the cost of living conditions in Dubai.
"With respect to policy measures, a revaluation of the dirham would slow inflation down, but then it would have other kind of negative implications on the economy and the government treasury.
"I feel that opening up the entire property market to foreign investors, and not just certain enclaves that are marketed by a small number of people, would bring more sense into the property market.
"A third thing is to slow down the rate of growth. This could mean postponing some of the projects, or just extending the time it takes for their implementation."
Separating fact from fiction
Peter Riddoch, Chief Executive, Damac Properties
"With most of the information circulating being anecdotal, it is difficult sometimes to separate 'fact' from 'fiction'.
"However, it would seem that some landlords of older buildings in Dubai, for example, have in recent months substantially increased rents, reportedly by over 50 per cent this year. That does seem excessive, particularly when many of these buildings will have been 'paid for'.
"Employers, whilst conscious of the strain on employees, cannot just chase up salaries, since this would set off an even greater inflationary spiral, which could then make Dubai uncompetitive. Increases in salaries will have to be matched by increases in productivity to allow 'Dubai Inc.' to remain competitive."
Keeping the right calibre
David Thatcher, Principal, Career Partners
"Unfortunately, Dubai has inherited a legacy of hiring to the cheapest price, which must change if it is to attract the right calibre of people.
"Spiralling property rents on commercial and domestic premises, inflation as well as infrastructure problems have created a more stressful environment.
"Considering that for many people over 30 pe cent of the monthly income is paid out in rent, and inflation continues to increase the cost of living, many have less money to spend, and for some repatriation is becoming a practical alternative to questionable career prospects and increasing expense.
"This impacts job market fluidity and creates a discontented and demotivated workforce."
By Andrew Shouler, Editor, Business Commentary
For many people, especially from afar, the UAE still has a magical appeal as a land of wealth and opportunity. Dubai's glittering skyline provides the cutting edge for that emotion.
This country's bid to become the focus of activity and attention between the international time zones of the Far East and Europe, completing a four-cornered set of centres globally with, for instance, New York, Shanghai and London, entails a whirl of head-spinning growth. That story continues.
On the ground, however, especially among the expat population, the magic may be wearing off somewhat, and another story may be developing. Growth very often produces inflation, and it is beginning to take its toll.
YouGov's data suggest that living standards are not only failing to match the breathless pace of change, but in a high proportion of cases are receding.
Inflation as experienced at street level by significant swathes of those who have come to spend some portion of their lives and save a pot of money for the future seems to be running at three or four times the rate at which pay packets are swelling.
Consequently, while the country's ambitions soar, the immediate horizons of those participants actually are shrinking.
It is important not to overdramatise the survey's findings, although the sample of over 700 interviewed, reflecting the country's demographics, is intended to be representative of the broader picture. The numbers do, however, speak for themselves.
The results confirm, as YouGov's Caroline Elford puts it, "a large increase in living costs in a relatively short space of time". The key data are portrayed in the graphics below.
In the past 12 months, average price increases were reported, across key areas of expenditure, in the range of 20-30 per cent namely in accommodation (27 per cent), foodstuffs (20 per cent), healthcare (18 per cent), education (20 per cent) and transportation (25 per cent).
Tightening
Meanwhile, pay growth lags a long way behind. While it is difficult to be exact, primarily because responses are grouped in data ranges, a rough calculation of the weighted average puts income growing by around seven per cent. Remarkably, by their own testimonies, 39 per cent received no pay increase over the last year, and three per cent even a decrease.
Naturally, a certain amount of belt-tightening is taking place. Dwelling arrangements have come under considerable pressure, with 44 per cent of the total surveyed reporting that living costs have already contributed to a decision to move, to share housing or to send the family away, while 65 per cent have considered such options. It is worth noting that 69 per cent live in rented accommodation.
Obviously, savings patterns also take a severe knock. On average, roughly nine per cent of income is saved. Yet, in the case of 41 per cent of respondents, apparently, no part of income is saved, seriously undermining the motivation to stay for those who consider their ultimate home is elsewhere.
YouGov refers to a social divide emerging, as those on lower incomes are disproportionately affected, both in terms of housing cost hikes and diminished savings. It also points to significant numbers of expats considering leaving the UAE, with 35 per cent of those departing citing rising costs as one of the key reasons.
Otherwise, taking the 'bottom-line' criterion, there is remarkable similarity across nationalities, gender and age with respect to savings ratios relative to income (although the tendency to save is, of course, not quite the same as the ability).
Meanwhile, not mentioned in the survey's analysis is the impact of the UAE dirham declining internationally (in conjunction with the US dollar), which, if it continues, weakens the value of repatriated earnings. Of course, if you are not saving anything at all, it doesn't matter what the exchange rate is; zero is zero in anybody's money. But it's another, critical angle which does not help ease the mind.
Perhaps the pending supply of new property will reverse the rising cost tendency. Moreover, if some people are leaving, and others are not so tempted to come, the demand side of that equation may also kick in. A concern there must be that such a reversal is not overdone, mirroring the recent plunge in the stock market.
Yet inflation in other categories clearly also applies, at fairly consistent levels. It certainly seems there is systemic pressure, which needs to be alleviated, preferably in a gentle way not damaging to the UAE's continuing development.
Maintaining competitiveness
Abdullah Sharafi, Economist and Executive Director of Gerab Ind. Enterprises
"If we are talking about a year from mid-2005 to mid-2006 then a 20 per cent inflation rate seems to be quite likely.
Prices have been on the rise in many areas - fuel, transportation, household goods, foodstuff, and recreational services.
The cost of borrowing has been increasing, and so has the prices of homes and rent.
"There is a threat to economic progress from inflation. If the value of the dirham does not decline against the currencies of countries the UAE exports to, then our exports become less competitive. Our cost of doing business increases, so businesses choose between keeping their operations in the country or taking it out. Furthermore, we make less profit to stay in the business.
"A high rate of inflation also discourages savings, if the interest rate on deposit is less than the inflation rate. In fact, it encourages excessive borrowing, because the money to be repaid would be worth less in future. Cheap money further pushes up prices of commodities, properties, stocks, and other services, as conspicuous consumption and speculation pushes up prices.
"Whereas living standards may have improved in Dubai, the cost of living is excessively high. Already we as a company are setting up units in less expensive countries to perform some of our non-core operations so as to contain the increasing cost of adding new staff. Also, we are experiencing lack of interest from qualified people who are familiar with the cost of living conditions in Dubai.
"With respect to policy measures, a revaluation of the dirham would slow inflation down, but then it would have other kind of negative implications on the economy and the government treasury.
"I feel that opening up the entire property market to foreign investors, and not just certain enclaves that are marketed by a small number of people, would bring more sense into the property market.
"A third thing is to slow down the rate of growth. This could mean postponing some of the projects, or just extending the time it takes for their implementation."
Separating fact from fiction
Peter Riddoch, Chief Executive, Damac Properties
"With most of the information circulating being anecdotal, it is difficult sometimes to separate 'fact' from 'fiction'.
"However, it would seem that some landlords of older buildings in Dubai, for example, have in recent months substantially increased rents, reportedly by over 50 per cent this year. That does seem excessive, particularly when many of these buildings will have been 'paid for'.
"Employers, whilst conscious of the strain on employees, cannot just chase up salaries, since this would set off an even greater inflationary spiral, which could then make Dubai uncompetitive. Increases in salaries will have to be matched by increases in productivity to allow 'Dubai Inc.' to remain competitive."
Keeping the right calibre
David Thatcher, Principal, Career Partners
"Unfortunately, Dubai has inherited a legacy of hiring to the cheapest price, which must change if it is to attract the right calibre of people.
"Spiralling property rents on commercial and domestic premises, inflation as well as infrastructure problems have created a more stressful environment.
"Considering that for many people over 30 pe cent of the monthly income is paid out in rent, and inflation continues to increase the cost of living, many have less money to spend, and for some repatriation is becoming a practical alternative to questionable career prospects and increasing expense.
"This impacts job market fluidity and creates a discontented and demotivated workforce."