Still digesting the impact of the Arab uprisings, regional stock markets were dealt a further blow in early August after rating agency Standard and Poor’s decision to downgrade US sovereign credit rating from AAA to AA+.

The Middle East and North Africa (Mena) region was the first to feel this impact, with most of the stock markets opening on 7 August.

“This is another case of global events dictating what’s happening in the region. It has created uncertainty,” says Fahd Iqbal, director of equity research at Egypt-based investment bank EFG-Hermes.

The week the decision was made, all of the local exchanges, apart from Tunisia’s Stock Exchange fell.

The worst hit were Egypt, Saudi Arabia and Dubai. Egypt’s current problems, former president Hosni Mubarak’s trial and the political uncertainty, have continued to affect investor sentiment. The Egyptian Exchange fell 4.1 per cent.

Dubai’s greater exposure to the Western markets made it more vulnerable and the benchmark Dubai Financial Market General Index plunged 2.2 per cent.  Saudi Arabia’s Tadawul fell 4.9 per cent, before gaining 0.1 per cent.

“Any improvement in equities in Mena will be a short-lived bounce, we do not expect to see a sustained improvement in volumes until after Ramadan has passed and third quarter results are approaching,” says Iqbal.

The devaluation in the dollar has also become cause for concern in the region. Coupled with the rising inflation, it will cause import costs to go up.

The US dollar is at the centre of the global financial system and accounts for 85 per cent of all currency trading. A weakening dollar is likely to revive questions over the validity of the currency arrangements.

“Changes in the dollar peg are unlikely in the short-term. At the present time US monetary policy is loose and much more appropriate to the Gulf than it was in 2007/08,” says Liz Martins, economist at UK lender HSBC.

The relationship between oil prices and the US dollar is perhaps a greater area for concern.

“Historically when the dollar has been weak, oil prices have tended to rise, but in recent weeks we have seen both the dollar and oil sell off simultaneously. If that correlation breaks down further, it will increase questions over the usefulness of the dollar peg,”  says Martins.

Lower oil prices will hit investor confidence, say analysts. The price of a barrel of oil on the New York Mercantile Exchange dropped to $84.09 on 8 August, the lowest in eight months and Brent, the European benchmark lost 3 per cent to $105.79 per barrel.

Further price drops will make it more difficult for the oil exporters in the region to fund their spending plans. Bahrain’s additional $800m to its budget and Saudi Arabia’s $67bn social housing programme, will be more difficult to achieve.

However, the Mena region still enjoys relatively strong fundamentals. While risk aversion will hit the region and there will be less foreign capital in the markets, it is likely to create buying opportunities for Mena equities.

“If we see sustained sharp sell offs in developed markets, then it is likely we will see a negative feedback impact on Mena,” says Iqbal.