1. Oil Price Volatility
There is a substantial interdependency of GCC economies and North East Asian (NEA) economies on the oil price volatility. The volatility impacts are such that it leads to a decrease in NEA's exports to the GCC countries. To give a bit more clear idea about the impact, the past results of 2018 have shown that just a 1% increase in oil price could lead to a reduction of as much as 24% NEA export to GCC. The oil consumption in NEA has a very significant impact on GCC's exports.
This impact is also dependent on the elasticity of exports with respect to the exchange rate. But how does this concept actually work in practice, let's see that. The Elasticity of Export is the change in a country's export with respect to the change in prices and some other factors. So, considering the oil price volatility, when the oil prices go up, then certainly it would have an impact on the exports of the country where oil consumption is on a pretty significant level. Moreover, export elasticity is such a powerful means that it impacts a country's trade balance and overall economic growth.
Elasticity of Export = dX / dP
Where , dX = Change in the exports
dP = Change in the Prices or other factors
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What happens when the oil prices are highly volatile: The high volatile oil prices have some direct and indirect effects for the economies of oil importing countries. The economies are negatively impacted by the high oil prices at both macroeconomic and microeconomic level. The higher oil prices directly impacts at the macroeconomic level by hampering the aggregate economy through deteriorating the trade balance, government finances, and balance of payments.
If global trade slows down, oil demand may shrink, leading to lower oil prices. For Gulf economies like the UAE, this could mean:
- Reduced government liquidity
- Lower domestic spending
- Potential impact on the construction and real estate sector
2. Investor Becomes Cautious
Markets around the world seem to have been affected by the recently made tariff changes by the US president. Although there have been increased level of ongoing uncertainty and market volatility that is hampering the investors sentiments, but at the times of global instability, the investors have become cautious and hence it can have the following consequences:
- Investors may hold cash, delay purchases, or seek distress deals
- Dubai’s high-end segment might see a short-term dip in transaction volumes
- However, the fear-driven shift from volatile Western markets could actually boost Dubai’s appeal, much like during the Russia-Ukraine conflict
3. Currency Dynamics & Opportunity
On one hand, a weaker US dollar (due to tariff tensions) means a cheaper UAE Dirham as the UAE Dirham is pegged to US Dollar, and this is definitely a good news for:
- European, Russian, and Asian investors
- Making Dubai real estate more attractive and affordable
On the other hand, as a step of protectionism, a stronger US Dollar would promote the domestic manufacturers of UAE, but also lower the profit margins on importing the foreign goods in the UAE.
