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Nobody knows for sure how the international banking crisis roiling the global markets is going to hit them. But one thing is certain - lending rates are going to soar.
The Lehman Brothers' bankruptcy, Bank of America swallowing up Merrill Lynch and the AIG bailout, have killed banks' appetite for lending, whether to each other or to the public.
What follows is a worsening of the global credit situation, out of which the GCC would hardly be able to wriggle out. Lesser credit is going to affect the real estate sector, where the majority of the sales are mortgage-linked. When real estate companies suffer, so would their bellwether shares on the stock markets.
The regional markets that had earlier remained largely insulated from the global financial turmoil have been falling sharply.
This decline is largely due to negative sentiments prevailing in the market and the outflow of foreign investments. Foreign investors have been exiting emerging markets on account of liquidity crunch and losses in the equity markets. The selling pressures by foreign investors have accentuated over the past few days. Margin calls from local investors have been also adding the woes to the market.
As an exception, the Bahrain All Share Index is trading at a forward 2008 P/E multiple of 10.1, which is one of the most attractive among all GCC countries and provide a good investment opportunity for long term capital appreciation. Looking forward, investor sentiments would bounce back on the back of improved macro-economic conditions that will drive corporate profitability and future growth, says Global Investment House, Kuwait.
There is no change in the fundamentals of the country with Bahrain enjoying one of the most diversified sources of income compared to other GCC countries.
The economy has been posting healthy double-digit growth rates in the past five years. Exceptionally strong oil revenue and the rise in economic confidence as a result thereof have encouraged the government to plan for the future by continuing with the pace of reforms and also carry out high level of infrastructure and construction development activity in the country, says GIH.
The thrust on infrastructure development and the current reforms carried by the government will play an important role in taking the economy to a higher growth trajectory in the near term.
The kingdom has long been an open economy that has attracted foreign investment. Whether it is the financial sector, telecom sector or the real estate, Bahrain has been witnessing strong private/foreign participation over the past few years. The strong growth in demand and increased profitability has spurred the corporate to invest in new ventures or expand their existing facilities.
The financial sector, the back-bone of the Bahraini economy continues to grow substantially and has shown excellent growth in recent times. Bahrain has for long remained at the forefront of regional banking and recently it has also played a critical role in the development of Islamic financial markets in the region.
The kingdom is continuously reforming its banking sector so as to keep abreast with the latest world developments and also developing world class infrastructure such as the Bahrain Financial Harbour (BFH).
The recent diversification and privatisation initiatives of the government have helped things further. As a result, Heritage Foundation has ranked Bahrain as the 19th freest economy in the world and first out of the 17 countries of the Mena region in its economic freedom index for 2008, GIH says.
Private as well as government investment is likely to go up due to increased confidence which will drive future growth.
What about other markets? Analysts say the GCC stock markets are seen as not large or diverse enough to severely impact the economy when they drop sharply in value, particularly as so many firms are family or state-owned and not listed, and because the economy rapidly recovered from the 2006 crash to last year's boom.
Other regional factors which played a major role in the market crash include expectations of slowdown in the Dubai real estate sector. After recording spectacular growth over the past few years, analysts expect the Dubai real estate market to slow down in the coming years as the supply-demand gap is bridged. The Dubai government has also taken steps to curb speculation in the real estate market which might slow down the growth to some extent in the near term.
GIH affirms that these regulations will strengthen the market in the long run. Factors like series of corruption cases in UAE, transparency issues and repatriation of funds parked in Dirham-denominated instruments due to strengthening of US dollar have also impacted the regional markets.
