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US Debt Uncertainty Hits Arab Markets

Gulf Corporation Council (GCC) markets have been reacting to global events over the last few weeks, experiencing some added volatility as a result of the U.S. debt threat.

US Capitol Building with cash
US Capitol Building with cash

Despite the start of Ramadan this week, a time when most Gulf stock markets have light volumes and shortened operating hours, some investors are still concerned about the situation in the U.S.

GCC members include Saudi Arabia, Qatar, Kuwait, Bahrain, Oman and the UAE. They bring together a gross domestic product of more than $1 trillion, with a population of almost 40 million people.

The connection between U.S. and GCC stock markets is more direct than it may seem. GCC markets are not isolated by the growth and wealth in the region and rely on the global system adequately functioning.

“Market sentiment will see an impact, regional investors look attentively at the U.S. markets and take their cues from them. The more fundamental impact is the result of any concrete U.S. fiscal cutbacks that seem unavoidable: If government spending is cut, the U.S. economy will experience a continued drag for which the private sector cannot compensate. Therefore, we may expect anemic growth rates, continued high unemployment, and subdued demand for everything from cars to air travel to, importantly, oil,” said Samer Solh, managing director of Amwal Asset Management.

In addition, there is a direct and unavoidable connection between the GCC and the U.S. through the dollar , which has been losing ground against global currencies.

“There's a deep loss of confidence in the U.S. and the dollar. For decades, the Gulf relied on the strength and stability of the U.S. economy in more ways than one: Pegging currencies to thedollar, selling oil denominated in dollars, investing sovereign wealth in U.S. paper. Now, it doesn't look so stable and these governments can't suddenly unwind investment positions and policies that have been in place for decades,” said Omar Abdullah, executive director at AT Capital Management.

And what about the region’s sovereign wealth funds? Most don’t disclose their holdings, but there is a belief that some GCC markets are exposed to U.S. Treasurys and thus might be impacted if the U.S. credit rating is downgraded.

“One of the only Gulf sovereign wealth funds that we have some visibility on is SAMA in Saudi Arabia. Back in late 2008, at the height of the financial crisis, they were bragging about how they were prudently, "almost fully" invested in US Treasurys. And of course, US Treasurys outperformed everything else during the crisis, so they were patting themselves on the back. Many people in Saudi must be losing sleep these days,” added Abdullah.

While many are hoping Tuesday's resolution to the U.S. debt-ceiling debacle will calm the markets, some investors are concerned that the damage has already been done. The threat of a credit downgrade still looms and the image of the U.S. has been potentially tarnished internationally by the political wrangling.

“I think there is a global disappointment among managers, and not just regionally, that the U.S. can't seem to get its act together at such an important juncture in the U.S. and global economy cycle. Sadly and while both sides seem to know the gravity of the situation they still favored playing Washington politics and games over financial well-being of taxpayers and the world. So I think everyone is disappointed,” said Haissam Arabi, CEO of Gulfmena Investments.

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