Irregularity in the economy can affect debt management in a major way especially in an emerging economy such as the UAE. As observed, the country grossly depends on oil revenues and equally by virtue of its openness it is vulnerable to global shocks and thus understanding how these impacts the management of debt is important for everyone, including individuals and businesses in the country.
Oil price fluctuations
The UAE is greatly affected by the prices of oil, hence its economy is unstable due to fluctuations in the prices of oil in the international market. If the desired oil prices are achieved the economy will be growing and this will lead to additional consumer and business confidence. This environment often fosters borrowing and investments since the incomes are reasonably steady, and the outlook of the economy is good.
But if its prices go down it can be awful for the economy to slow down and as a result less government revenue, less business profit and people losing their jobs. During such times, people and companies with a lot of debts can be unable to pay them back. Evidently, such dynamics require the corresponding changes in debt management policies that, in particular, are directed at minimising the use of expensive credit during sluggish economic activity.
Currency value fluctuations
The UAE dirham has been fixed to the US dollar, this has made the currency more stable, but, of course, this has made the US dollar fluctuation affect the UAE strongly. When the dollar rises in value the price of imports comes down, especially for consumers but a zinger for exporters whose merchandise is understandably priced in other currencies. On the other hand, depreciation of the dollar elevates the price of imported goods thus the cost of living and saves less.
For persons with obligations in foreign currency which is the most frequent situation today, exchange rate fluctuations can be either a blessing or a curse in regard to the cost of servicing said obligations. Small examples of macroeconomic variables are that a strong dollar reduces the cost of foreign currency debt while on the other hand weak dollar increases the cost. In this context, managing debts means tracking the currencies’ trends and possibly refinance of debts to lessen the effect of the unfavourable exchange rates movements.
Interest rate changes
Interest rates in the UAE are affected because its currency, the dirham, is fixed to the dollar and therefore US Federal Reserve policies play the biggest role. The US interest rates affect the borrowing costs in the UAE in such a way that, when the former goes up, the latter will also go up. This can range from affecting the mortgage rates down to the personal loans and as we know debt becomes more expensive to service.
This is because charges such as interest rates linked to existing debts increase the monthly obligations and consequently reduces the disposable income hence resulting in defaults if the amount due is burdensome. Interest rate risk management should therefore be incorporated in debt management as follows: Possible lock-in fixed interest rate where possible and prepayment before the rates possibly go up.
Inflationary pressures
This is usually due to changes in the various economic sub-indexes which normally affects the inflation rates. High levels of inflation undermine the purchasing power and thus makes it hard for people and firms to honour obligations that they have given by taking loans. For example, increased costs of basic necessities make the households tighten their belts to cater for the necessities leaving little room for the repayment of debts.
Economic cycles in the UAE including oil price change, currency value movements, interest rate change and inflation influences tremendously the efficiency of the debt management. The economic realities are that individuals and businesses need to be aware of the prevailing economic indicators and adapt their debt management abilities to prevent going bankrupt. It means that thinking through potential changes in the economic environment and preparing for them one may remain rather effective at managing debt even in crisis.
