Company execs say the region has partially succeeded in insulating itself from overseas threats
Financial markets in the Gulf are comfortably outperforming most of the world during the latest wave of global turmoil - a sign, company executives say, that the region has partially succeeded in insulating itself from overseas threats.
Five years ago, the six oil-rich economies in the Gulf Cooperation Council (GCC) were hit hard by the global credit crisis. Lending dried up, stock markets more than halved in value and currency pegs to the US dollar came under pressure.
But Gulf markets have moved little this month as asset prices in many other countries have tumbled, responding to expectations that the US central bank will soon cut its monetary stimulus and launch an era of rising interest rates.
Arif Choksy, chief financial officer of Ducab, a major United Arab Emirates-based cable manufacturer which operates around the Gulf, said corporations in the region were better prepared than before to cope with global headwinds.
Companies are less stretched financially than they were five years ago and have given themselves room to maneouvre by lengthening the maturities of their debt, said Choksy.
Also, large state spending programmes launched since the crisis are helping corporate confidence, and in some countries they have ignited consumer spending booms which may continue to fuel economic growth even if the global outlook darkens.
"Some of the weaknesses that existed before have been addressed. This time, we're more insulated than we were from the problems overseas," Choksy said.
The resilience of Gulf markets this month suggests investors agree. Saudi Arabia's stock market, the Arab world's biggest, is up 1.5 percent since the end of May; Kuwait is down 4.8 percent. That compares with an 11.3 percent loss by MSCI's emerging markets index.
Because of the uncertainty over interest rates, many corporate bond issues have been put on hold in the Gulf, as they have elsewhere in the world. In early June, Dubai-based shopping mall and hotel developer Majid Al Futtaim (MAF) indefinitely delayed plans to raise at least $500m from a bond sale.
But Daniele Vecchi, MAF's group treasurer, said his contacts with bankers in the region suggested there had been no fundamental worsening of the availability of finance to firms.
"Liquidity has been improving for the past 18 months, for small and medium-sized companies as well as large ones," he said. "We don't expect to see this trend changing."
Prices of outstanding bonds from the Gulf have generally dropped less this month than similar bonds issued in the emerging markets of Asia and eastern Europe.
Meanwhile, the Gulf has avoided the currency pressures suffered elsewhere. Forward contracts for the Saudi riyal and the UAE dirham have not moved significantly, showing no pressure on their dollar pegs; currencies have plunged in big emerging economies such as Brazil, where the real is down nearly 4 percent against the dollar in June.
At the root of the jitters in emerging markets is the possibility that higher US interest rates could suck money out of countries which depend heavily on inflows of foreign capital because of trade and budget deficits.
The Gulf can largely ignore that threat because of its oil-fuelled surpluses and its currency pegs, which remove an incentive for money to flow into the dollar if the US currency appreciates as a result of higher interest rates.
Policy changes over the past few years have also improved the Gulf's prospects, however. State spending increased in response to the global crisis several years ago and was ramped up further to buy social peace after the Arab Spring uprisings; this cushions economies from any instability abroad.
Meanwhile, conservative financial regulators in the Gulf have pressed banks to boost loan loss reserves. Many Gulf banks have capital adequacy ratios near 20 percent or above - very high by international standards.
"Banking systems are in much better shape, and companies are less reliant on short-term funding," said Vecchi.
As in 2008, the global oil price is the Achilles' heel of Gulf economies and markets; a sharp, sustained drop from the current level around $100 a barrel would slash export income and state revenues. But there are signs the region could withstand even this blow better than it did five years ago.
The bigger GCC states have built up huge fiscal reserves that would let them keep spending if incoming revenues shrank. Saudi Arabia's accumulated budget surpluses in the past three years alone could cover almost an entire year of its spending.
Also, there are signs that years of government efforts to diversify economies and foster growth outside the oil sector are finally bearing fruit. This suggests that to some extent, domestic demand could make up for any cut in external demand.
The share of the non-oil sector in Saudi Arabia's gross domestic product climbed to 57.6 percent last year, according to official data, from 55.0 percent in 2008.