Gulf States Bracing for Financial Fallout

10 August 2011 FDI Team

Background

Global economic uncertainty caused by the downgrade of the United States’ sovereign credit rating and the euro-zone debit crisis, has hit the Persian Gulf. With most Gulf states exposed to US debt and dependent on strong oil prices for continued growth, the outlook remains somewhat unpredictable. This has prompted a fall in regional markets. Meanwhile, the United Arab Emirates has begun drafting new Foreign Direct Investment (FDI) laws in an attempt to attract investment in non-hydrocarbon sectors.

Comment

The downgrading of the United States’ credit rating to AA+ by Standard & Poor’s has wreaked havoc on the share markets of the Gulf Co-operation Council (GCC) states. The Qatari Share Index and the Dubai Financial Market took particularly strong hits on 7 August, losing 2.51 per cent and 5.1 per cent respectively. All GCC states, with the exception of Kuwait, have their currencies pegged to the US dollar. All are thought to have significant exposure to US securities, meaning their fortunes are closely tied to the world’s largest economy.

The UAE and Qatar have both come out publicly in support of the US dollar, stating that they will continue to peg their own currencies to the dollar. This is mainly due to the lack of a viable alternative, as the debt crisis in Europe continues to deepen, undermining the euro.

The general global negativity has also depressed the oil prices upon which the GCC states depend for much of their revenue. West Texas Intermediate oil prices have fallen to less than US$80 dollars per barrel. In an effort to mitigate its dependence on oil, the UAE has announced it is in the process of drafting new laws aimed at increasing targeted FDI. The aim of the new legislation is to make it easier for foreign investors to buy into certain projects, approved by the Ministry of Economy, that are viewed as viable alternative industries to oil, such as tourism and higher education. This is in keeping with the larger economic objectives of the UAE and the other GCC states, which are all keen to move away from hydrocarbon-based industries to knowledge- and services-based economies.

Andrew Campbell

Future Directions International Research Intern              

Indian Ocean Research Programme

 

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