Credit Crisis Spreads to the Middle East

We have all watched as countries throughout the world raced to help bailout their ailing banks in light of the global credit crisis. Gargantuan sums – more on a global scale than we have seen to date – have been dispensed: Germany $650B, Russia $120B, UK £37B, etc. Collectively, it helped to stop market freefall a few weeks ago (although the markets are clearly still exceedingly unstable).

However, despite all of the global turmoil, the one area of the world which had seemed impervious to the economic storm was the Middle East. The oil rich nations were still riding high on record oil prices in July. Even without their 2008 economic boon, they had amassed extremely large cash reserves which were thought to provide a breaking wall for their banks in the economic turmoil.

However, despite the rich oil nations backing up their banking sector, foreign and domestic investors alike have been withdrawing from the markets which created their own credit crisis. A severe blow hit Kuwait on Sunday as the government announced a bailout for one of their leading banks: Gulf Bank.

However, the headline Wall Street Journal article yesterday entitled "Financial Storm Hits Gulf" claims it wasn't just the credit crisis which forced the bank to seek aid:

But it was currency trades – not bad loans – that plunged Kuwait into a banking bailout on Sunday. Gulf Bank said defaults by counterparties on bad euro-dollar derivatives contracts forced the bank to seek government intervention.

Not only was this a severe psychological blow - a major banking bailout in what was considered a relatively secure region, - but clearly has far-reaching economic effects as well. According to the same WSJ article: "Gulf Bank, which has assets of $18 billion, and the government declined to disclose the size of the bank's trading losses, but industry estimates in Kuwait were above $700 million."

According to the Emerginvest's Middle East Heat Map, the shock sent the market tumbling 3.5% on Sunday:

Middle Eastern governments have pledged extremely strong support for its financial sector, in fact the WSJ stated that:

Earlier this month, Saudi Arabia promised $40 billion in lending facilities to banks that needed cash. The United Arab Emirates pledged a sweeping three year-guarantee on domestic bank accounts…

Yet, despite the relatively very strong measures, the exodus of investors continues, as Kuwait's index is down 22.77% for the year, the UAB is down 20.6%, and Saudi Arabia is down 33.87%.

What do I see for an outlook? Regardless of whether the investment pullout of the Gulf was merited, investors are spooked globally and are entrenched in protectionist thinking. With, such large cash reserves and supportive government policies, I don't think the banking sectors of the Middle East are in danger. With that being said, I think that plummeting oil prices pose a greater threat and will continue to spook investors away. Crude is trading at less than $64/bbl and even with restricted supply like the governments are attempting to implement, it is not guaranteed to stabilize oil prices.

The question is how deflated will the nations' margins be at the end of the free fall? I think the driving factor which will keep investors away will be the fact that it is widely speculated that demand will not rebound in a traditional cyclical manner, especially with decreased consumption from the United States.

Do I think they are in severe economic trouble like other areas of the world? Absolutely not. I think they are just going to experience depressed growth than expected along with the rest of the world.

Disclosure: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.