Double whammy hits recovery

Financial Fallout: Debt troubles in the US and the euro zone risks harming the Gulf's economic growth outlook - with video.

The double impact of the US rating downgrading and the euro-zone debt crisis risk damaging the Gulf's recovery from the global downturn.

Video: Closing market wrap up

A look at closing markets on August 8 2011

Video: Financial freefall in focus

The potential effects of the US credit downgrade on the Middle Eastern markets explained.

Fiscal woes in the developed world are already taking their toll on the price of oil, the region's biggest export.

Oil prices slid more than 3 per cent during trading yesterday. The September Brent contract on London's futures exchange was down to US$105.77 a barrel.

"The impact is likely on oil prices because of major revisions to the US and other global growth forecasts which could hit demand," says Alia Moubayed, an economist at Barclays Capital. "We expect more volatility in oil markets but not as sharp a drop as in the global downturn of 2008 and 2009."

Income from oil production and exports represents a large part of the region's overall economy. Big spending on job creation, infrastructure and other projects have been underpinned by higher production and oil-price increases this year. The UAE and Saudi Arabia both have room to manoeuvre to reduce capacity without impacting prices, say analysts.

The Institute of International Finance estimates prices would have to drop to an average of $84 a barrel for the UAE and $85 a barrel for Saudi Arabia to approach the break-even price needed to balance national budgets. Both the UAE and Saudi Arabia have large accumulated revenue surpluses to fall back on if needed.

The smaller producers of Oman and Bahrain, however, are more vulnerable to volatility in prices, analysts say. But an easing of global growth also risks buffeting other areas of regional economies.

Financial Fallout: More on the global economic chaos

Oil tumbles as gold tops $1,700 World stocks tumbled yesterday as investors fretted about the rate of global growth after Standard & Poor's cut its rating for the US on Friday. Read article

Investment advice never more timely Worried about the dwindling value of your stock portfolio after the market mayhem? Advisers say stay calm. Read article

Gulf businesses will find it harder to get funding Big businesses in the Gulf face rising borrowing costs as a result of the US and euro zone troubles. read article

Mixed effect of dollar decline for small businesses in UAE Small businesses that import goods priced in foreign currencies fear they will suffer if the dollar declines sharply. read article

"Slower global growth would have a negative impact on non-oil international trade," wrote Khatija Haque, the GCC economist at Emirates NBD, in a research note. "Tourism, retail trade and investment could also be negatively affected by weaker consumer and business confidence. These sectors are key growth drivers for a small open economy such as Dubai."

Regional growth had been picking up this year, spurred by higher oil production and increasing activity in the non-oil sectors of the economy. The UAE's financial services and tourism sectors have also benefited from the Arab Spring unfolding in other parts of the region.

Events in the US and the euro zone may also impact government plans in the region to tap bond markets, either to raise fresh funds or refinance existing debt.