Gulf weighs negative impact of China crisis
by Sarah Townsend
China’s stock market crash could prompt GCC governments to tighten their budgets and reassess trade strategies, analysts have warned.
In the aftermath of 'Black Monday', fears abounded that China would find the UAE in particular, with its dollar currency peg, more expensive and curb investment in real estate and tourism.
Meanwhile, oil prices remained low prompting speculation that the biggest oil exporters of the Middle East and North Africa (MENA) could seek to further shrink their national budgets in response.
GCC stocks and shares appeared to stabilise yesterday, just days after Dubai’s index plummeted by 6.9% on Sunday, only to climb back by over 4.6% by close of play on Tuesday.
At the same time, Saudi Arabia surged 7.4% on Tuesday, its highest trading volume since May 2014, according to Reuters.
However, Wall Street’s overnight retreat suggested any recovery could be temporary, Reuters reported, and Asian stocks dropped again by at least 0.5% as investors feared China’s move to cut interest rates on Tuesday would not be enough.
Brent oil remains below $44 a barrel in Asia – close to a six-year low – and although demand for oil in China is “fairly inelastic” and demand is unlikely to drop to critical levels, according to Tim Fox, chief economist at Emirates NBD, the market nonetheless remains unstable.
“Oil prices are the main transmission mechanism through which the China crisis translates into the Middle East and North Africa (Mena) region,” Fox told Arabian Business.
“China’s growth stalled more abruptly than many people had predicted, affecting countries that rely on it for trade.
The impact in terms of commodities currency was most marked in Australia and Canada, but MENA is a big oil exporter and there has been speculation that the dollar peg may come under closer scrutiny following China’s collapse.
“The risk is that MENA governments get freaked out and then there could be a knock-on impact on national budgets as the oil price puts a strain on reserves.
“However, we are not expecting any changes in policy – the oil price drop here is not new and the region has been dealing with this for some time now,”he added.
The Gulf has plans to increase its trading links with China – the UAE in particular intends to boost trade with China by 30% in the next two years – but this week’s meltdown could have a negative impact.
Tariq Qaqish, managing director of asset management at Al Mal Capital, said: “Due to the fact that the UAE is a consumption driven economy, purchasing power will continue to support importing Chinese goods, therefore trade balance will be skewed more towards China.”
On the one hand, analysts said, Dubai is able to import at a lower cost from China because of its sudden currency devaluation.
However, prices in Dubai, particularly real estate and tourism, become expensive for Chinese buyers since the UAE dirham is pegged to the US dollar, impacting inward investment, noted Sébastien Hénin, head of asset management at The National Investor (TNI) in Abu Dhabi.