Gulf States Lose Their Swagger Amid Regionwide Sell-Off

By Ellen Knickmeyer and Faiza Saleh Ambah
Washington Post Foreign Service
Friday, October 10, 2008

CAIRO, Oct. 9 -- The oil-rich princes and financial titans of the Persian Gulf went into the week touting their immunity from the financial turmoil of the West, but stock markets in the region ended it posting sharp losses.

Stocks in Dubai, the boomtown of the Gulf, shed nearly a quarter of their value in four days of trading. Saudi Arabia's market, the largest in the Arab world, lost more than 17 percent. In all, the region's seven stock markets by Thursday had lost more than $160 billion in market capital, cutting their value to about $770 billion.

The lessons for Gulf oil states: Billions of dollars in oil surpluses may not be enough to fend off a global recession.

"A very, very horrible week," Mohamed Alami, international desk manager of Naeem Shares and Bonds in Dubai in the United Arab Emirates, said Thursday. "Property developers were just dumped, left, right and center. The prospect of growth for the industry has gone to nil."

At least until this week, the Gulf's building boom outpaced that of China, with $1.3 trillion in projects underway, according to McKinsey & Co., a global management consulting firm. The developers and bankers behind the boom took the hardest market hits this week. In the United Arab Emirates, the market value of firms in the banking and real estate sectors dropped about 40 percent.

Markets in Saudi Arabia were closed Thursday, the start of the Saudi weekend. Abu Dhabi's exchange closed up 1 percent, ending the week with an 18.9 percent loss. Dubai regained 3.7 percent, making for a 22.5 percent drop since Sunday. Qatar's market rallied 2 percent, for an 18.7 percent loss.

Many Gulf central bankers waited until Wednesday to try to stop the sell-off, saying the region's banks and financial systems overall were sound. Kuwait and the United Arab Emirates cut interest rates; other Arab states, most of whose currencies are pegged to the U.S. dollar, were expected to follow.

Kuwaiti financial officials on Thursday said billions of dollars in oil revenue was available to boost liquidity.

Stock markets in the region are still immature, both in terms of regulation and investors' experience, said Rochdi Younsi, an analyst with the Eurasia Group, a risk analysis firm.

"The problems in the Gulf are very structural and caused by a lack of transparency and a lack of information. People trade on unsubstantiated rumors," Younsi said. "When small investors hear about someone pulling their money out of the market, the news is usually amplified and creates a sense of panic."

Many sovereign wealth funds, which Gulf states use to invest much of their oil revenue, have yet to disclose how much money they have lost in U.S. and European investments.

In Saudi Arabia, "banks and financial authorities have been slow in disclosing the extent of their exposure to U.S. toxic assets," said Abdel Aziz Abu Hamad Aluwaisheg, a Saudi economist. "Another reason is fears that the current international crisis may trigger a global recession that would lead to declining demand for oil, which in turn would reduce Saudi oil revenue." Global demand for oil plummeted this week. After hitting a record $147 in July, the price of oil fell to less than $88 a barrel Thursday.

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