Last month, the European Central Bank announced the launch of their much awaited Quantitative Easing Programme. That begs the question – What is quantitative easing and why should we care about that? Or for that matter, why should we be concerned about whether the Reserve Bank of India slashed their rates recently or when the United States will begin ‘tapering’? If I am an SME owner here in the U.A.E., does any of this affect me in any way? Yes it does, and here is why.
In this post financial crisis world, it is more important than ever to understand and be aware of how your business could be affected by macroeconomic financial decisions made by governments all over the world.
Inflation is an indication of a country’s purchasing power. When inflation is high, it costs more to buy products and vice versa. U.A.E. is currently experiencing record high inflation, indicating that the value of money is declining and it now costs more to buy products than it did a year before. However, the recent slump in oil prices is expected to make U.A.E.’s imports cheaper and thus keep inflation in check.
But it is not just U.A.E.’s inflation rates that SME owners should be concerned about. Inflation affects a country’s currency exchange rates. UAE’s currency is pegged to the U.S. Dollar, therefore, changes in inflation in the U.S. has a direct impact on our exports and imports. When inflation rates rise, currency values decline. Thus, if inflation in the U.S. were to increase in the future, our currency values will decrease. This will make our exports cheaper and more competitive in the global market, but it will also become more expensive to import.
Economists and corporations follow the rise and fall of interest rates set by Central Banks very closely. Small businesses should also pay a lot of attention to these interest rates because it directly impacts the cost of borrowing. When interest rates rise, borrowing costs increase. If your business relies significantly on the availability of credit, your monthly payments just got higher. On the other hand, if you are looking to invest, rising interest rates is the perfect time to make that move as you will earn higher returns on your investments.
Quantitative Easing, in simple terms, is the process by which governments print large amounts of money and purchase bonds from people/corporations with the intention of stimulating the economy. The U.S. Federal Reserve ended its Quantitative Easing (QE) last year, while EU just announced the launch of QE in Europe.
The end of QE in the U.S. will result in the rise of interest rates there. Due to the value of U.A.E Dirham being pegged to the U.S. Dollar, this will give rise to high interest rates here as well. At the same time, U.A.E could likely experience a flow of funds from Europe as investors make use of the additional capital available and search for investment opportunities.
For those reasons, if you are looking for possible investors to start/expand your business, Europe could be a good direction to turn to right now!
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