Multiple factors, including rising energy prices, strong demand for products and services and supply chain crisis, contribute to inflation risk
Dubai – Businesses in the UAE need to prepare for inflation – this can be done through agile budgeting, alternative funding avenues and supplier diversification
Businesses in the UAE must start planning for rising costs in 2022 and 2023, a senior corporate banking executive at Mashreq Bank has said.
“Inflation is a natural consequence of any contraction or recession,” says Hind Eisa Salim, executive vice president and head of services and manufacturing at Mashreq Bank. Factors such as an increase in demand for goods, disruptions in the global supply chain and rising energy prices contribute to inflation risk globally.
“But, with better planning and precautionary measures built into their strategies for 2022, companies will be able to weather this wave,” she said.
Salim emphasizes this approach for middle market businesses and small and medium-sized enterprises (SMEs), which form the backbone of the UAE economy.
Middle-market companies typically have limited sources of finance and lack the bargaining power to pressure their suppliers to extend credit terms, compared to larger companies. They are also not eligible for financial aid and buffers offered to SMEs by governments and banks.
She advises midsize businesses to prepare their budgets more carefully, taking into account the rising cost of inputs and financing.
“It’s essential to stay nimble and continue to assess market trends,” she said.
The economy of the United Arab Emirates witnessed a gradual resumption of business activities in 2021. In a September 2021 statement, the International Monetary Fund (IMF) attributed the recovery to the country’s strong response to the pandemic, the vaccination program successful, to Expo 2020 Dubai and a rebound in tourism.
As a result, the stimulus measures and lower interest rates introduced by the Central Bank of the United Arab Emirates (CBUAE) at the height of the pandemic to support businesses will eventually be withdrawn.
“So far, the Central Bank of the United Arab Emirates (CBUAE) has kept interest rates low to support businesses. But this is not a sustainable model and eventually had to return to its pre-pandemic stage,” Salim said, adding that rising interest rates should curb the risk of inflation, as people will borrow and spend less, and save more.
Companies that employ more efficient and innovative finance teams will be able to better navigate a rising interest rate environment, she noted. “We are coming out of an extraordinary set of circumstances with respect to the pandemic, coupled with the supply chain crisis.”
“But, ultimately, experienced management teams can be instrumental in navigating their businesses through the transition to the post-pandemic business environment,” she said.