At the beginning of September market traders in the GCC were taking a deep breath after what had been a long, difficult summer. From the start of June until the end of August the Dubai Financial Market (DFM) collapsed in value by 18 per cent; Abu Dhabi Securities Exchange (ADX) fell by 13 per cent; and the Saudi Tadawul by eight per cent. Surely things could not get worse? The expectation was that Ramadan would provide some breathing space, and that the usually calm trading during the holy month would result in a pick-up in business in October, when positive third-quarter results were expected. Generally, traders were optimistic and most felt the underlying fundamentals of the region were so good that they would be shielded from the problems in the West. Most observers were divided on whether liquidity was tight, with most not expecting a regional credit crunch.
However, events on Wall Street set the tone for the grimmest month in markets' history. In September, the Saudi index lost 15 per cent of its value; the DFM Index shed 13 per cent; and the ADX lost nine per cent. The GCC markets as a whole lost Dh477 billion (US$13bn) over the course of September. The DFM and ADX's banking and real estate indexes all fell by between 13-15 per cent in September. Traders were left shaking their heads and wondering where it all went wrong.
The difference between September's collapse and the summer's were stark but both involved the decisive role of foreigners, albeit in very contrasting ways. One of the main causes of the GCC's summer of discontent was foreign investors pulling out - after piling into the markets the previous September on the expectation that local currencies would be revalued, and the peg to the dollar abandoned. Kuwait did so, but nobody else followed suit. In May it became clear this would not happen and as a result, large amounts of money were taken out of the country. In addition, turmoil in the West forced many investors to close their GCC positions in order to meet margin calls back home. According to the central bank, more than 90 per cent of "speculative money" had gone from the market. These events affected GCC liquidity, hitting lending which has been the fuel of so much growth in the Middle East.
Events of the summer were not conclusive in resolving the 'decoupling' theory, which states that the GCC has detached itself from the West and is no longer heavily influenced by events there. While foreigners were indeed causing much of the summer crisis by pulling money out, this was not a clear-cut, straightforward case of the GCC blindly following Western markets and economies, it was far more indirect than that.
The events of September have, however, completely blown the decoupling argument out of the water. Past weeks have seen the GCC rise when the US does, fall when the US does and stagnate when there is no positive news coming from Washington DC and New York on the resolution of the financial meltdown. Indeed, the last week has seen GCC markets fluctuate merely on any news as to how well the passing of the US$700bn bailout was going. Latest answer: badly, and possibly not at all. The GCC markets can count themselves lucky that Congress voted down the bailout on Monday literally hours after they closed for Eid.
The GCC is now once again well and truly hitched back onto the US's corporate bandwagon, as indeed one could argue the rest of the world now is too. One can only imagine how badly markets will react when they reopen after the Eid holiday. Udo Schaeberle, the director of clients at the Abu Dhabi branch of BHF Bank, is confident a second Congressional vote will see the measure passed before the GCC markets reopen on Sunday. If it is not, he believes the local markets will go into free fall, but will be limited by the 10 per cent floor the exchanges impose to prevent apocalyptic meltdowns.
"The reaction of the wester markets after the vote shows the potential of what the falls could be if it does not go through," he said. Despite his optimism, he maintains markets will take a long time to recover to previous lending levels, and the world will have to endure some long-term suffering. Mohammed Ali Yasin, the chief executive of Shuaa Securities in Dubai, said the difference between traders now and just a few months ago is discernible. "Now traders and speculators look at how the Asian markets have been performing overnight, and then follow the Europeans when they open because they know we can be affected by things around us now. This is one of the aspects now about emerging markets, that we are linked," he said.
The American influence may become even stronger over the coming months as it becomes clearer how much exposure local banks have to US toxic investments; the obvious local credit crunch seems to be heralding this new, dangerous stage. The question now is what to do to prevent the global recession engulfing the GCC, rather than a slowdown which is now seen as inevitable. The immediate problem is liquidity - inter-bank interest rates have been steadily rising since May, the amount of money being lent out for mortgages is falling, and bank capital is generally depleted after a summer of shrinking deposit bases and excess lending. If banks are not lending to each other, they are even less likely to lend to companies. In an official acknowledgement that there is a problem, the UAE's central bank recently announced a Dh50 billion emergency loan facility for local banks. Few - if any - have taken up the offer, declaring in private that it is too expensive. It is also seen as a sign of weakness to tap the central bank for funds.
There have also been reports that bank consolidation is on the cards, in particular the possibility that Abu Dhabi Commercial Bank and National Bank of Abu Dhabi would merge. The two banks have, however, denied they are holding merger talks. For Mr Yasin, more decisive action is needed, above and beyond mere loans - the central bank needs to take action to prop up long-term deposit bases, by depositing it with them like a customer, rather than just investing the cash abroad.
"Liquidity is in abundance and is in the hands of the government," he said. "We have a budget surplus, so are we going to put it in to keep things going? We need to pump liquidity into the system and make deposits available to banks. There is no other way in the short term to keep us moving and make sure banks go back to lending." Mr Schaeberle said the main threat to the region will be a slowdown in large infrastructure projects if loans dry up, but added the region may be rescued from contracting growth by the one commodity it has striven to escape from its dependency on - oil.
"The world is connected and linked but maybe the future story is still decoupling, even if the region suffers lower growth - because of oil. All the GCC will grow next year as long as oil stays above $60," said Mr Schaeberle. His bank, BHF, is confident that even in a global recession the price of oil will only drop to around the $60-70, which will be enough to keep the GCC ticking over. He adds there may be a repatriation of GCC funds from abroad - he said he has noticed his clients start to move capital back to local banks in their home countries because it is seen as safest, so this may counterbalance the summer's net outflow of funds from the Middle East.
It is hard to predict how the following year will turn out, just as few people guessed the current situation a year ago at the start of the credit crunch. As Mr Schaeberle said, six weeks ago he thought all the big European banks were safe to deal with - now, he just can not know, because in Europe and the US, "there is no safe haven". afoxwell@thenational.ae