Gulf investors nervous as unrest reaches closer to home

Analysts skeptical Bahrain unrest will spread, but stock prices fall; "before unrest, people were pretty optimistic," strategist says.

By DAVID ROSENBERG / THE MEDIA LINE
Bahrain Protester 311 (photo credit: Associated Press)
Bahrain Protester 311
(photo credit: Associated Press)
Investors in the Gulf region are getting the jitters as the turmoil in Bahrain brings the political risk enveloping the Middle East closer to home.
Dubai’s stocks dropped to the lowest level in almost six months on Monday, with DFE index shedding 1.3% to 1516.43. The Tadawul All Share Index in Saudi Arabia, slipped 0.6% and Qatar’s QE Index fell 0.8%, bringing its total loss since mid-January to 8%. Bahrain’s marker declined 0.4%. 
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Bahrain was calmer on Monday even as protesters gathered again at Pearl Square, the center of the unrest in the country. At least seven people were killed and hundreds injured in clashes with security personnel in the previous week. In Kuwait, protesters representing the country’s 100,000 stateless residents also took the streets demanding citizenship.
Mass protests have forced the leaders of Tunisia and Egypt to step down and are posing threats to the rulers of Libya and Yemen, sparked by a combination of political repression and economies that failed to deliver jobs or rising standards of living. But the Gulf had been spared any unrest and even benefited as oil prices rose.
“Coming into the new year, people were pretty optimistic,” Akram Annous, Middle East and North Africa strategist at Al Mal Capital in Dubai, told The Media Line. Oil prices were climbing, governments around the region were slated to spend billions in infrastructure development and Dubai was emerging from its debt woes “Then you got hit with his unexpected event …which has thrown a wrench into everyone’s model.”
Gulf stock markets were briefly laid low two weeks ago at the peak of the unrest in Egypt, but investors rapidly determined that the turmoil was unlikely to reach the shores of the Gulf, where oil profits shield the economies from the inflation and poverty. That view is now being upset.
Bahrain’s sovereign credit ratings were cut on Monday by Standard & Poor’s Ratings Services, who warned that they may be lowered further. S&P reduced the country’s long-term rating to A-minus, the fourth-lowest investment grade, the short-term rating to A-2 and placed the debt on its Creditwatch with negative outlook.
“We expect the demonstrations that have taken place over the past month will persist, despite the government’s use of force to clear the protesters from central Manama,” S&P said.
Debt insurance costs for Middle Eastern sovereign debt continued to rise on Monday, with Bahrain's five-year credit default swaps eight basis points (bps) higher at a new 18-month high of 305 bps. Dubai’s rose nine bps to 440.
Nevertheless, most analysts said they were optimistic that the Gulf region would remain calm.
“In Qatar and the United Arab Emirates, you won’t have national or popular revolt. People are for the most part content. The expat population is much larger and they are guests,” Theodore Karasik, director for research and development, at the Institute for Near East and Gulf Military Analysis in Dubai, told The Media Line. “Only in Saudi and Bahrain do you have this Sunni-Shiite issue.”
The countries of the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) -- are all ruled by monarchs who tolerate little dissent. But they are also very wealthy, and their rulers have acted to ensure that there economies provide jobs, schools and health facilities.
Qatar, with an indigenous population of just 850,000 and some of the world’s biggest oil and gas reserves, has a per capita gross domestic product of $145,000, the highest in the world.
Bahrain, whose per capita GDP is just over $40,000, has little oil of its own but has led the way in developing a diversified economy. A quarter of its GDP is generated by the financial services and it is home to the world’s biggest aluminum smelter. But Bahrain is an exception to the general demographic rule of the region in that the majority of its population is Shiite Muslims who feel disenfranchised and face discrimination in access to jobs and services, while its ruler is a Sunni.
Saudi Arabia, with a population of almost 26 million and a $620 billion economy, also has a Shiite minority accounting for as much as a fifth of its population and concentrated in its oil-rich eastern province. But Annous said he doubted the kingdom was at risk for the same kind of upheavals.
“What’s happening in Bahrain is unique to Bahrain 100%,” Annous said.  “It’s a much more complex situation in Saudi though. I don’t think it’s fair to draw comparisons.”
But Karasik of warned that if the unrest in Bahrain continues, it risks spreading to Saudi Arabia, which is a key ally of the U.S. and the West in the confrontation with Iran over the latter’s nuclear program and its bid to become a regional power.
“The collapse of Bahraini leadership would open another Pandora’s box that has dramatic implications for the style of governance in the GCC as well as the strategic relations the GCC states have with the West,” Karasik said.