Abdullah Hajeri led a march on the Emir's palace in Kuwait this week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.
“Every day the market is crashing,” said Saleh, a 42-year-old trader, staring dumbfounded last Tuesday as company names scrolled across the Dubai Stock Exchange's outdoor ticker in red.
The region's rulers are under pressure from citizens to shore up investors, not just banks, as they try to fend off what may be the worst economic crisis since December 1998, when oil at $10.35 a barrel forced them to slash spending. Crude prices have fallen 50 per cent from a record $147.27 in July, and stock indexes in Dubai and Saudi Arabia are down by as much this year.
Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world's tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched.
“There is no way you can say that any trouble in Dubai is going to be isolated,” Georges Makhoul, Morgan Stanley's president for the West Asia and North Africa, said in an interview in London. “The biggest threat is going to be local confidence in the local economy, whether it's in Dubai or Abu Dhabi or anywhere else.”
No Investors Left: There aren't many international investors left in the region, he added.
Regional competition to attract investors and tourists from around the world led to a surge in record-breaking projects.
Dubai is racing against Saudi billionaire Prince Alwaleed bin Talal's investment company to build the world's first kilometer-tall tower. Saudi Arabia has turned a spot on its Red Sea coast into the biggest property development in the West Asia. Now little more than sand and construction cranes, the $120 billion King Abdullah Economic City is meant to create 1 million jobs and be home to 2 million residents.
Projects risk going unfinished or becoming white elephants if economies around the world go into recession, keeping international investors and tourists closer to home.
Dubai's plans, including the Disneyland-style “Dubailand” that will be three times the size of Manhattan, are predicated on doubling the number of tourists annually to reach 15 million visitors by 2015.
“Many of the projects being marketed in the Gulf today will get shelved,” Kamel Lazaar, chairman of Riyadh-based financial advisory firm Swicorp, said October 7. “The price of land has been inflated. It will have to correct.”
‘Better Suited’: Kuwait on Wednesday became the third Gulf state to prop up its banking system. It did so after losses on currency derivatives at Gulf Bank KSC, the country's second-largest lender by assets, sparked a surge in customer withdrawals from the bank.
The United Arab Emirates said October 12 it would guarantee deposits of all local lenders and large foreign banks. It also set up a $19 billion facility to help banks make loans. Saudi Arabia, the world's largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low- income citizens.
“We are going to be impacted, but we are better suited than anyone else to deal with the problems,” Hareb Al-Darmaki, executive director of the Abu Dhabi Investment Authority, said October 28 at a London conference for companies from the United Arab Emirates' richest member. “We have the ammunition.”
Societal Setback: The emirate has almost 8 per cent of the world's oil reserves and a sovereign wealth fund with assets between $250 billion and $875 billion, according to a range of estimates compiled by the International Monetary Fund. Even with its decline, oil still averages $110 a barrel for the year.
Residents of the region are used to government intervention. All Gulf countries are run by unelected rulers who maintain political power through tribal allegiances and marriages. Generous state welfare programs have traditionally damped demands for more political participation.
How the region's rulers cope with the turmoil may define relations with their people in the future, as they try to wean their subjects off state handouts and encourage them to find jobs and embrace market capitalism.
“There's no question that it sets back the move from socialist, paternalistic societies toward more modern capitalist states,” said Gabriel Stein, a director at London's Lombard Street Research, which provides economic analysis to investors and companies. “It is a trend that we have seen all over the world. The immediate reaction is that you told us to do this, so now things are going wrong it's up to you to help us out.”
Market ‘Destruction’: On October 27, Hajeri, an independent equity trader, and 20 peers marched from the Kuwait Stock Exchange's trading floor to the emir's office to demand that the government close the exchange. Rebuffed, Hajeri said it meant “destruction to the market and the Kuwait people.”
All capital markets in the Gulf Cooperation Council, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have declined and interest rates have increased since Lehman Brothers Holdings Inc sought bankruptcy protection on September 15.
Foreign investors were net sellers of more than 5 billion dirhams ($1.4 billion) of shares on the Dubai Stock Exchange since the beginning of August, more than 1 per cent of its current market value, according to bourse data.
‘More Integrated’: “The US financial crisis has ramifications for all countries, including the Gulf,” US Deputy Secretary of Treasury Robert Kimmitt said this week during a speech in Dubai, where he met representatives of sovereign wealth funds. ''Our capital markets are more integrated than ever before, allowing opportunities, but also financial difficulties, to spread rapidly across borders.''
Of the Gulf states, Dubai may be hardest hit by a global economic slowdown because it has borrowed more to finance its transformation from a Persian Gulf trading post to a financial and tourist hub, and has only 4 billion barrels of oil reserves.
Government-controlled companies owe at least $47 billion, more than Dubai's gross domestic product, and they will continue to accumulate debt faster than the economy grows, Moody's Investors Service estimated in an Oct. 13 report. It concluded that Dubai may need financing help from Abu Dhabi.
Dubai-based Emaar Properties PJSC has shed more than 26 percent since Sept. 15 as investors lost confidence in the ability of the Middle East's biggest publicly traded real-estate developer to finance projects by borrowing through local and international banks.
Real Estate Bust?
Dubai property prices will likely remain unchanged through 2010 after quadrupling in the past five years, Colliers CRE Plc said Oct. 5.
''There is a liquidity and credit crunch and now oil prices have fallen from $140 to $70,'' said Nouriel Roubini, a professor at New York University. ''I see the risk of a real-estate bust throughout the Gulf, but specifically in Dubai, and there's a huge amount of excess capacity being built.''
That's not keeping investors from betting on pain across the region. The cost of protecting debt from default has jumped more than fivefold since July for Abu Dhabi and Dubai, according to trading in credit default swaps. The cost of insuring Saudi Arabian government debt has risen 51 percent since Sept. 18.
The price of oil may determine whether governments can maintain government spending and support economic growth.
''If prices drop by $15 a barrel from the $60 to $70 mark, then they will probably not break even in terms of their budgets,'' said John Sfakianakis, chief economist at Saudi British Bank in Riyadh