As the global financial crisis continues, markets across the world struggle to interpret and adapt to the wave of bank collapses, unprecedented government intervention, and wild volatility in equity and commodity markets. Markets everywhere are gripped with uncertainty as the saga unfolds. One fact, however, which is quite certain is that the Gulf — despite its fundamental economic health — is not immune to the crisis.
The Gulf’s vulnerability to the global financial crisis is evident in a number of ways. GCC equity markets have lost significant value in 2008, and investor confidence has weakened. Whereas just months ago, GCC entities were keen to increase their stakes in Western banks (e.g. ADIA’s investment in Citigroup), today they shy away from the ailing financial sector. The global trend of “de-leveraging” (a forced reduction of the debt-to-equity ratios of financial institutions, corporations, and households) will almost certainly manifest itself in the Gulf as well.
While there are many reasons why the Gulf is not immune to the current crisis, three salient linkages are particularly noteworthy:
1. The jitters felt worldwide are shared by Gulf investors
Immediately following the collapse of Lehman Brothers, an FT piece cited a UAE Central Bank official commenting that as much as 90% of “speculative” foreign money may have left UAE markets due to concerns regarding the crisis and its potential impact on local currencies. Over the course of the year, the Saudi (TASI) equity index was down about one-third year-to-date, as was the the Dubai stock market. Even the highly buoyant Qatar market was down 14% year-to-date following the Lehman collapse. Gulf investors, like their counterparts elsewhere, seek safer havens for their capital and are shifting away from volatile equity markets.
2. GCC institutions and investors hold securities affected by the subprime crisis
It’s important to remember that the Gulf’s leading investors generally hold a bulk of their assets outside the region. Gulf institutions and investors — long-time holders of US debt instruments, commercial paper, and financial stocks — have felt the pinch of collapsing asset values in their international portfolios. This pinch constrains institutions’ appetite and ability to invest, thereby dampening the local investment environment.
3. Volatile commodity prices increase the Gulf’s uncertainty
In the midst of the current crisis, the prices of oil and other commodities have been highly volatile — with the barrel dropping about $30 in a single day, then recovering most of its value in a see-saw pricing environment. This volatility makes Gulf institutions particularly nervous, as sustained energy prices are the backbone of the region’s wealth and the driver of increased liquidity.
Fundamental economic indicators remain positive in the Gulf, with substantial surpluses and savings, strong corporate profits, attractive demographic shifts, and ongoing de-regulation. In the current environment, however, the underlying strength of Gulf economies is obscured by turbulent financial markets. In yet another reflection of the interdependency of capital markets today, the Gulf is far from immune from the current financial crisis.