Inflation Fears

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Just weeks after a 30% rise in petrol prices, the Abu Dhabi National Oil Company (ADNOC) has moved fast recently to try and allay fears of a further 50% hike before the year's end. This was something of a relief for many, as analysts have been warning that oil price rises, alongside massive liquidity in the market, are creating major inflationary pressures.



In an official statement, ADNOC said on September 18 that it "does not intend at all to increase the price of petrol in the future in any form."



While Abu Dhabi has long enjoyed petrol prices far below the market rate, on August 28, ADNOC hiked prices at the pump by Dh0.40 per litre (nearly $0.11) to between Dh1.65 and Dh1.78 ($0.45-0.48), while diesel rates were raised by Dh0.37 ($0.10) per litre to Dh2.03 ($0.55).



At the same time, the 30% increase also sent prices soaring in vital sectors such as food, housing and transportation. Coming just before the seasonal surge in demand during the holy month of Ramadan, which begins in early October, these hikes have been particularly unwelcome to consumers.



In response to this public discontent, the Khaleej Times reported on September 17 that joint teams from the Planning and Economy Department and the Department of Municipalities and Agriculture were to begin monitoring prices across the emirate, after hikes in fruit and vegetable prices of up to 20% were recently recorded.
Rising rents have also drawn a response, with the Abu Dhabi Executive Council (ADEC) issuing a directive to the Abu Dhabi Department of Social Services and Commercial Building (DSSCB) forbidding any rent rises above current levels for at least the next few years. This move was taken to try and ease pressure on the DSSCB from landlords for an end to legislation forbidding rent hikes during the first two years of a rental contract.



Yet when all these recent price increases are added together, the results of a recent study by the Abu Dhabi Chamber of Commerce and Industry (ADCCI) come as little surprise. This noted that "the continuous price spiral" along with residential rent rises and the "uncontrollable prices" of everyday commodities were forcing many families to take out bank loans and approach special assistance and welfare societies.



This negative trend is particularly prevalent among expatriates, who constitute around three-quarters of the resident population. While families of UAE nationals currently have an average monthly expenditure of about Dh30,628 ($8340) and a monthly income of about Dh30,199 ($8223), according to the ADCCI report, for expatriates, the averages show a widening debt. The monthly average income this year of an expatriate family was estimated by the ADCCI at Dh9890 ($2693) against expenditure of Dh11,377 ($3098).



Yet such averages can be misleading, as expatriate wages vary widely. One group which will almost certainly be badly hit is taxi drivers, who are almost entirely drawn from the Indian subcontinent. Their margins have always been small, as have those of many other expatriate businesses. Early September, cabbies called for a hike in taxi fares, which, they said, had been held at Dh0.50 ($0.14) per kilometre for the last 20 years. According to drivers who spoke to Gulf News on September 2, their monthly income was around Dh2000 ($545). Hikes in cab fares would also have a serious knock on elsewhere, as many low and medium wage earners also use cabs, given the often patchy nature of public transport.



Other companies are also suffering. "I am almost out of business," Abdullah Rashid, owner of a car renting company, told the Khaleej Times early September. "I have put some of the cars for sale and have dismissed several employees. Some companies that were tremendously affected have liquidated their businesses to avoid further losses. I have heard rumours of further petrol hikes. If this is true, it will definitely be a fatal blow to our business."



The price hikes had already drawn a response from a group of non-governmental organisations (NGOs), which called for lower petrol prices mid-September and for major corporations to bear increase social responsibility, rather than subject citizens to further hardships.



Yet the worry now is that price hikes may have a damaging effect on Abu Dhabi's wider business status. Many analysts fear that price hikes may put the brakes on the country's rapidly expanding economy, raising the cost of living while hurting investments and tarnishing the emirate's reputation as a cost-effective place to do business.



A number of tricky factors too have been blamed for the price surges. The ADCCI report listed the euro-dollar differential as a major factor - 92% of the country's export earnings are in US dollars, exposing the economy to fluctuations in the greenback.



At the same time, there has been a surge in liquidity also due in large part to oil price rises.



The stock market has soared, with the total market capitalisation of the UAE exchanges surpassing the $200bn mark early in September. Banking is booming as well. The sector is expected to post a record performance in 2005 and expand 20% with the growth in assets and deposits.



Controlling this high liquidity is therefore a major issue. Recent efforts towards this have included the central bank's hiking of interest rates by 25 basis points (bps) on certificates of deposit, as well as decrees against petrol and rent rises.



Yet it may take more than this if the government is to seriously restrain inflation. The widening gap in disposable incomes between nationals and expatriates is also a worry, as consumption and even the availability of labour may be seriously affected if wages also do not rise in line with prices. Yet that too risks setting up another inflationary spiral; the ADCCI report showed that prices had risen 18% in the months following the last salary hike for government and private-sector employees. Tackling this difficulty therefore looks likely to be exercising minds in Abu Dhabi for some time to come.

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