Money matters 2017: UAE inflation to rise; VAT to push GCC costs higher

• UAE inflation rates projected to reach 2.5 percent by Q4 2017
• KSA projected to realize 3.5 percent inflation rate in Q2 2017; 3.1 percent by 2020
• VAT will push cost of living and doing business higher
• Higher business cost will be passed to consumers, leading to price rise and inflation

Changes in the global political climate have caused increasing uncertainty in trading markets and economies around the world. For investors, this could be either a great time to invest in assets or a better time to protect their net worth.

Although positions may vary, the one thing many economists believe is that the inflation is set to rise, leading up to 2020.

VAT’s in store

The introduction of value-added tax (VAT) could push the cost of living and doing business within the GCC region higher. This is because the added teax will increase business costs and this will be passed on to the consumer that would eventually lead to a rise in prices and therefore result in inflation.

For the UAE, inflation rates are projected to reach 2.5 percent by Q4 of 2017 and potentially reach 3.3 percent by 2020. Furthermore, Saudi Arabia is projected to realize a 3.5 percent inflation rate in Q2 of 2017 and forecasted to reach 3.1 percent by 2020.

On the other hand, with the adoption of the GCC Value Added Tax (VAT) Framework Agreement by the Bahrain Finance Minister and the Shura Council in Saudi Arabia, greater regional integration and commerce can be expected in 2018, when compliance is set to begin. This has the potential to lower compliance costs and to be highly simulative, generating new business opportunities throughout the region.

How to protect your wealth

Given that the economy is set to grow and inflation is forecasted to rise, it is evident that individuals in the region need to educate themselves on how to protect their wealth in real terms and make decisions that will enhance the opportunity to achieve financial freedom.

A diversified portfolio will usually help protect any individual from inflation. However, the portfolio needs to be balanced with commodities, stock and currencies, all carefully chosen based on how they react to rising prices.

Gold is the one commodity that everyone should have in their portfolio. The precious metal is a store of value and, when prices rise, so too will the gold rate, thus protecting an individual’s wealth in real terms.

Certificates of Deposit (COD) are quite popular in this region, as people purchase and hold these from local and international banks for a certain period of time in return for interest.

Usually, the interest rate is higher than the inflation rate, but in some situations there is risk involved if inflation rises faster than interest rates.

Another form of investment is Treasury Inflation Protected Securities (TIPS), which are quite popular in the West, as the principal is always adjusted to account for inflation.

For example, if you purchase a $100 TIPS with a two percent inflation rate, the principal amount after adjusting for inflation will now be valued at $102. TIPS are available in many countries and it is advisable to contact a bank and request more information about this kind of security.

Shaping the future

With the introduction of President Trump’s Manufacturing Council, comprising many C-Level executives from renowned multinational companies, it is worth mentioning that these companies are the forerunners when it comes down to shaping the future of the global manufacturing industry.

Some of these companies include: Intel Corporation, Dell Technologies, Ford Motor Company, Johnson & Johnson, General Electric, Tesla, Boeing, Under Armour, 3M and many more.

The growth potential of these companies has significantly increased and investing in them – or perhaps the companies they collaborate with in the automotive, technology, aviation, FMCG industries and more – will certainly contribute to protecting investors from inflation and increase their overall net worth in the long-run.

Currency affairs

Lastly, currency trading. Search engines, mobile newsfeeds and push notifications are keeping people updated about what is happening in the age of information. Furthermore, online trading Apps such as Xtrade empower investors to make trades in real-time.

Global events shape the rise or fall of certain currencies and by being aware of the macro- and micro-economic environments, individuals can make educated decisions about which currencies are on the path to inflation and make trades to mitigate the losses incurred from a weakening currency.

Protecting oneself from inflation is not a simple task. It is very complex and involves a plethora of economic, financial and political factors. However, by equipping oneself with the knowledge on options and how to react, the chances of successfully protecting the real-value of one’s wealth are, in fact, quite high.