Eman El-Shenawi: When the Euro disease lurks…are Gulf markets immunized?

So the Euro was about to fall off a colossal cliff of debt, got pulled from this brink of disaster by Euro zone leaders; they applauded and cheered because they “heroically” staved off an economic Armageddon (or because they managed to reach an accord), and that was that. For now.

But I’m sorry to be the one to clear my throat out loud here and liken the situation to something more gruesome.

Imagine the Eurozone crisis as an infestation, a disease – yes, we know it’s contagious, we know it has the power to swarm over and drag down Italy and Spain (as it had done with Portugal and Ireland) and that these dangers still lurk. But stretching this further, I’d like to question whether the shockwaves will spread to Gulf markets.

Ask an expert about the economic status of Gulf states, especially the oil-rich, you’ll find that it is all quite chipper. Huge public spending programs to boost the private sectors alongside strong oil prices hovering at $100 a barrel and good second-quarter earnings in top regional markets such as Saudi Arabia and the United Arab Emirates have all heavily supported Gulf markets recently.

But here’s where the “international mood” comes in. Frantic United States deficit talks have made for tentative global markets; there have been daily losses in both Asian and Gulf markets as the talks have been crumbling, raising the specter of a default on the US $14.3 trillion debt. The “debt-defying” drop facing the US is not the only killjoy to the global mood. Closer to home, Ramadan is now only a week away and the Islamic month of daylight fasting is traditionally known to be a slow business period.

In turn, the Euro zone mess has easy entry to already shaky markets in the Gulf. Firstly, businesses in the Middle East have already been impacted by the crisis through their bond sales. We’ve seen one of the region’s most prominent property and shopping mall developers, Majid Al Futtaim Holding, postponing a bond issue in the wake of the deteriorating European crisis. Quite simply, price bids were below the company’s expectations and so it was forced to raise a $1 billion from a group of banks to refinance debt.

Earlier this year, there was a rebound in global credit markets. Middle East companies took advantage of this and obtained finance from international governments and businesses, a Gulf daily newspaper reports. In the United Arab Emirates, the Dubai government substantially funded local companies, while global businesses such as Emirates Airlines played this role too.

But then the Euro zone and US crises skipped along into the picture alongside the Arab Spring (which by my guesses, the media will soon abundantly start calling the “Arab Fall” – whatever that may geopolitically connote when we begin to enter those autumn months).

Meanwhile, Gulf stock markets are also likely to face selling pressure, Sebastien Henin, portfolio manager at The National Investor told Reuters. He said that there will be no “strong news flow to bring local investors back to market,” if the global downturn still drums along. Again, the mood is somber and slow. Investors waiting for global markets to settle may recall the times where in the event of Gulf markets leading stock losses, it would have been positive Euro zone activity that reassured global investors. And this time was only in February. Let’s just briefly go back in time together!

Here’s a stock market report from February 21, 2011 from Reuters:

“Strong Euro zone economic data provided some reassurance. Europe … got a boost from a healthy reading for private sector activity and data showing German business sentiment improved for the ninth straight month in February.”

Five months later and we can only laugh.

Currency and stock markets gave an initial thumbs-up to the deal reached last week by Euro zone leaders ($158 billion and $72 billion more to help Greece’s private sector). But analysts are sternly saying the deal does not provide a definitive end to the problem with public finances in Europe, nor does it put Greece back on the road to solvency -- with its debt reaching $507 billion, that’s almost 160 percent of its gross national product.

Most Gulf currencies are not pegged to the waning Euro that is trying to be rescued. If they are infected by the Euro zone crisis which is still far from the road to recovery, it will come down to global investment ties and stocks. Gulf export/ import markets and general economic indicators will not take much of a hit, as they would if the US debt talks end askew and disaster strikes (due to their chummy and popular Gulf dollar pegs).

As contagion still threatens Italy and Spain with reverse gains and bond yields remaining low, fuelling worries about their sizeable debt burdens, Gulf markets should remain careful. To sit and watch the spread of Euro zone infection is probably wise. Although the possibility of the US debt mess ending messier would impact them more, the Euro zone crisis is a different kind of disease. Jumping from one spot to the other, extending its potency.

For the Euro zone: it’s a disease that is hard to dart. Quite simply, blink and you’ll catch it. For the Gulf: beware of the side effects. Read the label, and all that.

(Eman El-Shenawi, Editor and Columnist at Al Arabiya English, can be reached at: [e-mail].)