Gulf economies face a potentially destabilising influx of capital as a result of a bubble affecting emerging markets, the chief economist of one the region's largest banks is warning.
Speaking at the Meed Capital Markets conference in Abu Dhabi today, Jarmo Kotilaine, chief economist at NCB Capital, the Saudi-based bank, said that the currency carry trade is "increasingly emerging as one of the great risks and great sources of concern in the global economy.
"We have had an interest rate differential for some time and there's a risk of an emerging markets bubble."
Currency carry trade is the strategy in which an investor borrows a certain currency with a relatively low interest rate and uses the funds to invest in a different currency yielding a higher interest rate.
Mr Kotilaine said: "Investors in the west are moving their money to a place where markets are much more benign.
"Capital markets are still in progress, these economies are attractive as their prospects are good but they may struggle to absorb the money which is attracted to them."
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Why it pays to compare
A comparison of sending Dh20,000 from the UAE using two different routes at the same time - the first direct from a UAE bank to a bank in Germany, and the second from the same UAE bank via an online platform to Germany - found key differences in cost and speed. The transfers were both initiated on January 30.
Route 1: bank transfer
The UAE bank charged Dh152.25 for the Dh20,000 transfer. On top of that, their exchange rate margin added a difference of around Dh415, compared with the mid-market rate.
Total cost: Dh567.25 - around 2.9 per cent of the total amount
Total received: €4,670.30
Route 2: online platform
The UAE bank’s charge for sending Dh20,000 to a UK dirham-denominated account was Dh2.10. The exchange rate margin cost was Dh60, plus a Dh12 fee.
Total cost: Dh74.10, around 0.4 per cent of the transaction
Total received: €4,756
The UAE bank transfer was far quicker – around two to three working days, while the online platform took around four to five days, but was considerably cheaper. In the online platform transfer, the funds were also exposed to currency risk during the period it took for them to arrive.
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