The world’s hurtling uncontrollably towards a recession. Investors are fleeing the markets and even ‘safe haven’ gold is not safe anymore, as European and American policymakers fail in their duties and continue to put band aid on wounds that require full-scale surgery.

The Gulf is not immune to the U.S. downgrade by ratings agency Standard & Poor’s from triple-A to AA+, and the issue if European sovereign debt crisis.

“Successful articulation of polices will need to keep in mind several key and collateral risks that have erupted as a result of series of crisis including the latest downgrade crisis,” writes M.R. Raghu, head of research at Markaz, or the Kuwait Financial Centre. “In our opinion, the biggest challenge in a crisis ridden world will be to efficiently and effectively manage the surplus generated in good times.”

Markaz outlines key areas that the Gulf needs to examine as the world lives through the global downturn and American credit downgrade:

1 Surplus
How can the Gulf deploy its surplus in the troubled and risky world?

2 Oil
Sustained weak oil prices could eat into the Gulf state’s reserves. But the region can withstand weak crude prices.

3 U.S. Dollar
The long-term outlook for the American greenback remains weak and that could compel Gulf states to re-examine their peg.

4 Investments
GCC governments have undertaken large domestic investment programs based on their huge reserves. Being non-reliant on foreign investments is a huge plus.
However, the Gulf markets lost $31-billion in the immediate aftermath of the U.S. downgrade (July 27 to August 10), with Saudi Tadawul losing $21-billion alone.

“The stock markets could decline further as international markets fluctuate wildly on varying risk assessments,” notes Markaz. “Foreign investments, especially in the equity market, could see a decrease as investors turn risk averse in a tentative global economy. Although, given that Saudi Arabia is considered one of the world’s 10 ‘safest’ sovereigns, and attracts foreign investments of USD 10-20 bn a year, we do not foresee a significant decrease in the same in the Kingdom.”

Markaz also expects Kuwait’ stock markets to suffer, but have a low impact on domestic investments which are driven primarily by the government.

In the UAE, it is once again a tale of two cities. Abu Dhabi is expected to glide through the crisis - indeed the Abu Dhabi stock market is one of the best performing in the region. But Dubai is more vulnerable to investor flows given that it is more aligned to global trade. Stock market, domestic investment and foreign investment are all expected to come under pressure as the full implication of the U.S. downgrade and global crisis unfolds.

“Should economic growth in Dubai be hindered, it could prove detrimental to domestic investment by the government and private sector,” notes Markaz. “This may also affect the confidence factor for foreign investors, who would increase their risk premium on Dubai post the US debt downgrade. However, one should note the fact that Dubai has strong ties with foreign institutions which have been reaffirmed post-crisis through successful bond raises and continuation of major infrastructure projects across the emirate.”

Qatar should also weather the global crisis unscathed, but the major victims could well be Oman and Bahrain - two of the weakest Gulf states which saw domestic unrest earlier in the year. Domestic and foreign investment could well suffer in both countries as investors look for safer shores to park their funds.

 

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