x Abu Dhabi, UAEMonday 24 July 2017

Gulf countries have big stake in US financial future

The Gulf is unlikely to get a major boost from the compromise proposal to raise the US debt ceiling, but with its large oil reserves and pegs to the dollar the region has a major stake in the country's financial fate.

The region could benefit if perceptions of trouble in the US persist, prompting investors to liquidate their portfolios and buy assets in faster-growing emerging markets, according to analysts. Wadah Taha, the chief investment officer at Al Zarooni Group in Dubai, said the impending deal was good news for the UAE's exchanges.

"There is limited turnover from local and regional participants as it's the first day of Ramadan, but the reaction is generally positive," he said yesterday.

US links to the region through its influence on oil prices and its currency will also be closely watched, analysts say. Oil prices rose on news of the compromise, and the dollar strengthened against the Japanese yen and the euro.

Higher oil prices benefit the Gulf by raising revenues at the region's government-owned oil giants. A stronger dollar would give the dirham and other Gulf currencies more purchasing power in Europe and other economies.

But it is far from clear whether those trends will continue, and a possible downgrade of the US by the credit ratings agency Standard & Poor's could weigh heavily on global markets. "US treasuries are the benchmark that every other risk in the world is compared with," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi.

"When there is a possibility of downgrading that benchmark, investors need to realign all the risk across the world and across sectors, commodities, equities and debt, which would cause volatility. All this uncertainty is not positive."