Gulf markets plunge overstates Syria risk

Reuters/DubaiGulf economies are not as vulnerable to the effects of a widening of the conflict in Syria as steep falls in their stock markets this week suggest. Rising tension over a potential US-led military attack against Damascus over a chemical weapons attack last week triggered a 7% plunge in Dubai’s stock market on Tuesday, its biggest one-day fall since the emirate’s corporate debt crisis of 2009; the market fell a further 1.3% on Wednesday. Saudi Arabia’s share market, the Arab world’s biggest, is down 5.4% this week. Its drop on Tuesday was the largest since late 2011. But it is not clear that any expansion of the Syrian conflict would have much impact on the six economies of the Gulf Co-operation Council (GCC). Gulf States have strengthened their finances and made contingency plans since a dispute over Iran’s nuclear programme flared up three years ago. “Our markets have seen a lot of political events and weathered storms like the Arab Spring, Tunisia and Egypt - this is not new,” said Amer Khan, fund manager at Shuaa Asset Management in Dubai. So far, none of these events has been as damaging to the Gulf as people feared, Khan noted. This week’s sharp drop in the stock markets has more to do with the Gulf’s economic success than its vulnerability, he and other analysts argue: big rises early this year set the markets up for a burst of heavy profit-taking by local investors. The Gulf’s biggest economies are running huge current account and state budget surpluses, which mean they do not need foreign capital and can ramp up government spending if necessary to sustain confidence when domestic investment flags. The budget surpluses which Saudi Arabia accumulated over the last three years alone, for example, were together almost as large as its total state spending in 2012. In fact, past geopolitical crises in the Middle East have often ended up inflating the value of oil exports. Societe Generale estimates that oil prices could surge as high as $150 per barrel, from around $115 now, if the Syrian war affects key producers such as Iraq. If oil supplies were curtailed by a military conflict, the market would rely on extra output from Saudi Arabia, the only member of the Organisation of the Petroleum Exporting Countries with enough spare capacity, Societe Generale said. Parts of the GCC may also be seen as safe havens if the Syrian war escalates, attracting money and people from countries affected more directly, such as Lebanon, Iraq, Jordan and even Syria itself. The UAE and Qatar have drawn billions of dollars of capital flight since the Arab Spring uprisings began in 2011. “I expect UAE and Qatar to continue being safe havens when this is over and one thing that benefits is real estate and equity,” Khan said. For these reasons, five-year Saudi Arabian credit default swaps - used to insure against any Saudi sovereign debt default, and therefore an indicator of geopolitical tensions in the GCC - have barely reacted to rising tension over Syria. They are up just 4 basis points to 72 bps this week, remaining well below levels of above 100 bps recorded in 2012. This year’s peak of 90 bps, hit in June, was in response to a spike in US Treasury yields, not a political event. A worst scenario for the Gulf would probably be the closure Strait of Hormuz to oil tanker traffic and other trade. But while Iran threatened repeatedly to close the Strait in 2012, it never attempted to do so. Disruptions to shipping might occur, but preparations over the past several years mean they could be less economically crippling to the GCC than in the past. Last year the UAE opened a pipeline to the emirate of Fujairah pipeline, bypassing the Strait; it will be able to carry most of Abu Dhabi’s oil exports, officials said. Saudi Arabia has reopened an old pipeline in case it needs to boost exports from its Red Sea terminals. Oman has been expanding its port capacity at Salalah, Sohar and elsewhere. These routes could not carry all of the GCC’s oil, but by keeping a significant level of exports going, they would buy the region time while efforts to reopen the Strait fully proceeded. Kuwait and Qatar are among the richest Gulf states per capita; they have built huge financial reserves abroad that could cushion the impact of any crisis for months or years. The assets of Kuwait’s sovereign wealth fund are estimated at around $380bn, more than twice the country’s economic output in a year. Qatar’s sovereign wealth fund assets are believed to be about $115bn, nearly two-thirds of output. Such considerations mean stock price falls in the Gulf should be seen mainly as natural volatility in bullish markets, rather than signalling a sharp deterioration in the region’s economic outlook because of geopolitics. Dubai’s market is still up 55% since the start of this year, buoyed by a recovery of the real estate industry from its 2009-2010 crash. John Sfakianakis, chief investment strategist at Saudi investment firm MASIC, said: “Markets in the Gulf are predominately retail-oriented and they do tend to react violently and take a short-term view,” he said. “Given that markets in the region have rallied quite well year-to-date, retail investors tend to liquidate quite fast and because of less liquidity, reaction is exaggerated.”