Wall Street's seismic shift sends aftershocks

For anyone who thought Gulf economies had successfully weaved and bobbed to avoid the impact of the credit crunch this past year, it landed last week like a haymaker punch to destroy that notion.

The oil-fuelled feeling of economic invincibility has been shaken by the events of the last week. In its place is a new mood of caution that has been reinforced by the stream of bad news emerging from the US.

The collapse of Lehman Brothers and the move by the US government to take control of AIG so as to avoid a similar fate for the country's biggest insurer, has led to a seismic shift on Wall Street. Now we're feeling the aftershocks in the Gulf.

Dubai's Financial Market finished down on five consecutive trading sessions losing 12 percent along the way last week.

In Qatar, it was a similar story - five sessions in negative territory and down 12 percent. Oman and Saudi Arabia also declined by the same measure.

Despite the publication of broker notes highlighting the value of many of the region's benchmark stocks early on in the week, the sell-off continued.

The exodus of foreign investors from Gulf markets has left a bitter taste in the mouths of some of their local counterparts, who point to the departure of the foreigners as the main reason for the volatility of many stocks in recent weeks.

Once feted as bringing much-needed liquidity to the region's bourses, the foreigners are no longer flavour of the month in the Middle East.

"They're selling our markets like they always do when something like this happens," said one trader on the DFM on the morning after the news of the Lehman Brothers collapse broke last week.

While the regional equity markets have seen foreign capital hemorrhaging since the start of the year, of greater concern has been the sudden and more recent contraction of the debt markets.

Across the region, the cost of protecting government bonds from defaulting is rising, and what was perceived as a bottomless reservoir of debt options may be drying up.

Analysts interviewed this week expect regional debt markets to contract further this year, which could impact severely on the ongoing building boom.

It's particularly bad news for real estate developers, whose business model often relies on frequent recycling of debt.

Next month the region's real estate majors will gather for the industry's annual Cityscape jamboree.

Every year, the project plans unveiled at the show get bigger and bolder than the year before - as increasingly ambitious developments are revealed.

Some of them make it off the drawing board and some of them don't.

The balsa wood models are likely to be in copious supply this year as they are every year - but perhaps less so will be the funds needed to turn them into real buildings.

Sean Cronin is the editor-in-chief of Arabian Business English.