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Inflation threatens UAE competitiveness

Rising inflation in the United Arab Emirates, driven partly by the currency's peg to the tumbling US dollar, is undermining efforts to develop a non-oil sector, Moody's Investors Service said yesterday.

Inflation in the UAE, holder of the world's fifth-largest oil reserves, hit a 19-year high of 9.3% last year.
"Inflationary pressures have risen markedly in recent years - stimulated by capacity constraints, strong growth in public expenditure and the peg to a falling dollar," Moody's said in its annual report on the second-largest Arab economy.

"This threatens to undermine the competitiveness of non-hydrocarbon sectors," it said.

The UAE dirham hit a five-year high on Wednesday, extending a rally since the UAE central bank governor said last week he could track a basket of currencies in concert with Gulf neighbours because he was under pressure to contain inflation.

According to the report, political, administrative and legal institutions tend to be weaker than those of higher rated countries, and the poor quality, scope and timeliness of the official data act impedes economic analysis.

Moody's upgraded its rating of the UAE federal government to Aa2, from Aa3 in July.

Ratings remain supported by the country’s strong economic fundamentals and long history of domestic political stability, the report said.

Despite the stability on the domestic political front and the fact the UAE has historically been relatively unaffected by regional geopolitical instability, there remains a risk that a deterioration in the neighbouring political environment could have an adverse impact. However, this risk is deemed to be slight.

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