The Power Of Fiscal Stimulus

Those of you who have been keeping a close eye on the economic landscape of the United Arab Emirates will have recently seen a robust and expansive approach to fiscal policy. This is in the face of the tightening of monetary conditions, and the associated headwinds created by rising interest rates. The recent trend of rising interest rates is largely a result of the United States Federal Reserve’s recent tendency towards the tightening of Monitory Policy. With the Dirham pegged to the Dollar, the UAE follows the same path towards higher interest rates, which has required the UAE to show itself to be adaptive and agile in this environment. Many of you will know that the UAE has a broad fiscal policy which is geared towards the promotion of high GDP and population growth. Here we will take a look at a few examples of how we can expect fiscal policy to continue to adapt and flourish as a counterbalance to the negative impact of rising interest rates.

In general terms, people are less likely to make large capital investments if their time horizon is limited to a two year period. With property being an illiquid asset, there is a tendency for people to only consider investment decisions with a medium to long term time horizon in mind. The significant capital investment inherent in buying residential property is much more likely to occur if the investor is assured of a longer term right to remain in the UAE. Many nationalities living and working in Dubai do not have the comfort of knowing that they will have their visa renewed at the end of a two year period. “The proposed reforms and the introduction of a new 10 year visa will have the effect of removing that element of uncertainty and as a result will encourage capital investment.” The UAE is aspiring to become a knowledge-based economy and by creating more flexible visa regulations, will be likely to attract a younger, more highly educated, multi-cultural generation. This demographic will be encouraged to settle in the UAE for the medium to long term and induce an increased level of real estate investment activity. With effect from 2019, expats in the UAE who are aged 55 or over, will be eligible to apply for a five-year retirement visa. This additional extension to their residence entitlement will offer retirees increased options and flexibility and will lead to the retention of existing capital investment within the real estate market. Not only will this be of benefit to the real estate market but it will also have a beneficial impact on other sectors of the economy such as retail and the healthcare industry. Very considerable sums of money are being invested in the infrastructure of Dubai in order to prepare the city for Expo 2020. This form of fiscal stimulus has had the effect of creating employment, which in turn, has been of benefit to the wider economy. More importantly, looking to the future, this investment in infrastructure will increase the capacity within the economy which will satisfy an increased level of demand, attract labour, fuel population growth, and contribute to a broadening of Dubai’s economic base. “These economic fundamentals are inherently good for Dubai’s property market, with the true benefit being felt in the years after 2020.” Moreover, with millions of people from around the world congregating in Dubai in 2020 to share ideas and innovative aspirations, Dubai will be in the global spotlight, the effect of which will continue to be seen for many years thereafter. The Government’s proposal to scrap aviation, municipality and other “market fees” in order to attract more foreign investment will cut the cost of conducting business in the UAE and make the UAE the destination of choice for investment across broad sectors of the market in the Middle East. Although many of these proposals and initiatives were announced months, and in some cases years ago, there will certainly be a lag effect before the true benefit is realised or seen within the economy. Big fiscal decisions offering a stimulus to the economy rarely have an immediate beneficial effect beyond the creation of positive sentiment. The true impact in economic terms will evolve over the next few years and will counterbalance the current negative conditions associated with the externally imposed tightening of monetary policy and rising interest rates. With monetary policy currently tightening and interest rates rising, this makes for a challenging property market at present. However, we are fortunate in the UAE that the Government is willing to implement an expansive campaign of fiscal stimulus which will have a lasting benefit. In due course this will position the UAE as a leading destination to work, live and invest.