Hmmm - maybe imported labor can not keep a lid on inflation in the Gulf
One of the standard arguments why the GCC currencies' depreciation – they, after all, generally peg to the dollar – won’t lead to high rates of inflation is that the GCC countries are open to both imported goods and imported labor. The ready availability of Chinese goods and imported Indian (and Pakistani) labor will contain cost pressures, allowing the GCC countries to have their version of what seems like an impossible trinity: rising domestic spending and investment financed by the oil windfall, an ongoing peg to the depreciating dollar and low inflation.
Or perhaps not. It turns out that Indian labor isn’t thrilled to be paid in depreciating dinars –particularly when the cost of living in the Gulf is going up. The rupee, after all has appreciated substantially against the dinar, the riyal and all other currencies pegged to dollar.
Rob Corder of ArabianBusiness.com:
In March 2006, every dirham earned in the UAE was worth 12.7 rupees back home. Today, the interbank rate slumped to below 11 rupees to the dirham as the weakness of the US dollar drags down the value of Gulf currencies to which it is pegged. And the fast growing Indian economy strengthens the rupee.
The 15% plunge in the value of dollar-pegged currencies against the rupee has coincided with at least 10% inflation in the UAE, and probably as high as 15% inflation in the emirate of Dubai. The wages of Indians in the UAE are therefore worth as much as 30% less than a year ago in rupee terms.All of this comes at a time when wages are growing in India, particularly in the construction industry.
None of this is news to the hundreds of thousands of Indians living and working in the GCC. What is new is that the subject is bursting into the open, not because the construction labourers have suddenly been given a voice, but because construction companies are facing a labour crisis as Indians turn their back on the region in droves.
Sounds to me like dinar wages for construction workers – not just the dinar revenues of sheiks and others who can dip into the oil revenue stream — will have to go up. Nothing wrong with that.
I suspect high-end expat labor in Dubai also is not thrilled by the dinar’s fall against the pound either. They weren’t happy last November and, well, the dinar was stronger then than it is now ..
Alternatively — as Serhan Cevik suggests — the GCC countries could unpeg from the dollar. It doesn’t really make sense for them to be pegged to a currency setting record lows when oil is almost as high as it has been in a very long time. But if all Kuwait can do is a series of tiny revaluations – the latest move was only 0.4% (for a total move of 0.77% this year)– and the others insist that they aren’t open to any change, well, then other variables need to adjust.
It is an open secret that the Gulf Arabs treat Indians and other Asian labor from the Philippines with contempt, like third class citizens (ie. almost like “slave” labor conditions). The Gulf Arabs literally don’t do any physical or manual labor with foreign workers in Kuwait outnumbering the native population. The US military is also employed to provide security protection defense for the region in exchange for the oil-backed, US dollar hegemony regime. Incidentally, US multinational corporations like Halliburton do the same with poorly paid Indians driving the dangerous fuel convoys from Kuwait to Baghdad Iraq. With economic conditions modestly improving back home, Indians would be expected to turn their backs in droves. On a separate note, Hong Hong has a large ethnic Indian population of 70,000 residents. Despite the Hong Kong dollar peg to the devaluating US dollar, I doubt you will find very many Indians lining up to return back to India. Hong Kong and even China is vastly better than the economic and social conditions back in Bombay, India.
Your point makes sense, but the following quoted does not:
“The 15% plunge in the value of dollar-pegged currencies against the rupee has coincided with at least 10% inflation in the UAE, and probably as high as 15% inflation in the emirate of Dubai. The wages of Indians in the UAE are therefore worth as much as 30% less than a year ago in rupee terms.”
It makes no sense to add the two. If the money is to be spent in India, one can add the depreciation and Indian (not UAE) inflation; otherwise it is the UAE inflation alone that matters. For the workers it should be a mixture of the two that of concerns. The first part probably comes close to the 30% figure so the overall point is still valid, even though the logic is not.
the relevance comes in calculating what an indian “guest” worker expects to clear from working in say the UAE. rising local costs (especially for housing) reduce their dinar savings — and then the rise in the rupee lowers the rupee value of dinar savings.
It would be interesting to hear from someone who works, or who knows someone who works there, but a dual citizen Irish/Canadian colleague of mine was paid in Canadian dollars while working as a civil engineer for Saudi Aramco - as he was hired from Canada - while his American friends were paid - similar salaries, but in USD throughout the period when CAD was 65 cents. Whether or not he was able to negotiate better benefits - his package was very good (housing, housekeeping…) to make up the difference, I’m not sure. But he stayed for 13 years. Another colleague who owned a shoe company based in the Philippines paid his staff in USD. Along with the ways FX may be influencing global capital flows to property investments in different regions, along with associated impacts on migration, if it might be worth exploring how FX differences affect job influenced migration and wages. Might the Indian workers also have other benefits or investment opportunities in the GCC which may not be available to them in India? Or if pay raises are making up for the difference. If not, whether another population may be set to replace those who leave, such as the Indian construction workers who are, apparently being hired to replace the Polish workers who have left Poland to seek jobs in the EU.
…and not forgetting the sizeable numbers of ‘outsourced’ East Indian professionals who are also living and working in the U.S., presumably being paid in USD? - and sending home billions to re-invest in India, rather than choosing employment in, presumably, similar postions at home.
Interesting post. I’ve resided in Dubai for over 19 years, worked at one of the top realty companies, and have seen lots of businesses employ workers from India, Pakistan, Phili. et al.
A few things readers have to be cognizant about are: a) Dubai’s labor laws have improved a lot, and on a comps basis are still better than India. b) While working conditions and requirements in India have improved now, they were non-existent about two to three years ago, and workers could earn a lot more in Dubai, construction jobs, given the boom after 2002 freehold announcement. Not only in Dubai, but its brethren Abu Dhabi is witnessing a massive construction boom as well, not to mention Saudi et al.
With regards to AED peg to US$. Inflation is a big problem back home- especially when it comes to rents, which are amongst the priciest. If a revaluation were to occur, it would ease inflationary pressures, via imports denominated in currencies other than the dollar, which continues to be a key problem in the economy. On a comps basis vs. NY or London, it may not seem a lot, but down there it’s very tough, as my non-banking friends tell me when it comes to living. Plus the revenues of Dubai will keep increasing thanks to Tourism, not to mention their latest policy of road tolls.
While Saudi Arabia, Oman, Bahrain have said they are standing by their pegs, UAE has so far been quite silent. I think that’s what fueled speculative inflows earlier this year in the AED/USD and may happen again. No wonder the US/UAE talks have stalled (trade related).
Any thoughts Brad?
I am not sure that the impact of a revaluation would only come on imports denominated in currencies other than dollars — europe imports lots of things china sells for $, but when the euro rises, europe can buy a lot more of those goods per euro. the same would be true of a stronger dinar. there is no good reason why the dinar isn’t a strong as the euro right now …
obviously, some of the inflationary pressures comes from rising rents/ other non-tradables, so dinar appreciation isn’t the only solution to inflation — indeed, in a lot of ways, inflation is a necessary part of real adjustment so long as countries continue to peg to the dollar and their price of their main export (more so for abu dhabi) has tripled … dinar appreciation would help, but i suspect the biggest politically possible dinar revaluation wouldn’t really be big enough to ease pressure for real appreciation with oil at $80.
that said, i don’t think the trade talks are stalled because of the dinar/ dollar … the us really doesn’t care about the GCC pegs. they don’t give the GCC a competitive advantage in the sale of oil, and the costs are mostly felt domestically.
A bit off-topic question (not the Gulf, but Japan): as it has been discussed several times here, the Japanese yen is very weak, largely because of the large carry trade. My question is: why has inflation not increased substantially in the past few years in Japan? Japan needs a lot of raw material, which is very expensive now that the yen is weak. Or they don’t import much for the domestic market?
Brad wrote: “..europe imports lots of things china sells for $..”. Why do they do that? If they sold those things for euro, they could diversify their reserves in a natural way.
What I meant was, why China does that, why do they sell those things for dollar, not for euro.
Rising Middle East Investment in Chinese Energy Infrastructure development
http://www.forbes.com/feeds/ap/2007/07/17/ap3920226.html
A Bahrain-based developer announced a US$5 billion (euro3.6 billion) plan Tuesday to build a business center for the oil industry in suburban Beijing, highlighting China’s growing ties to the Middle East and its booming energy market.
Investments in China by the six Arab Gulf countries - Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman and Bahrain - are expected to grow rapidly in coming years.
Dubai-based port manager DP World, a China veteran with operations here since the early 1990s, operates facilities in five cities and is paying for a US$500 million (euro350 million) development in the eastern port of Tianjin.
Saudi Arabia’s state oil company, Saudi Aramco, is a partner with China’s Sinopec Corp. in a planned US$5 billion petrochemical refinery in southeastern China.
Kuwait’s state-owned oil industry is financing a US$4 billion (euro3.4 billion) refinery in the southern Chinese province of Guangdong.
LC — I too am surprised by the continued dominance of the dollar for invoicing trade — including trade between say China and Europe. Inertia i guess. plus it generally has worked in the favor of European importers of chinese goods, who have no trouble trading their euro for dollars and paying for imported Chinese goods with dollars. Same applies to paying for russian oil and gas, tho maybe that is changing.
AC,
I think that the majority of raw materials that Japan imports are for production of goods that are then exported; hence no inflation. Given that the BoJ has been trying to generate some domestic inflation for some 17 years now, I don’t think the prospects for inflation in Japan during the next couple of years are very good.