August has been one of the most turbulent months for the Middle East, which saw $32bn wiped off the region’s capital markets in the first 20 days of the month. The Saudi Stock Exchange (Tadawul) alone lost about $16bn, half of the total decline, falling from $337bn to $321bn.
Overall the Tadawul has seen a slump of more than 7 per cent this month.
Shares fell the most in the past two weeks following reports that the global economic recovery has come to a standstill. Morgan Stanley’s report outlining US as “dangerously close to recession” has not helped.
The European debt crisis is also having a knock-on effect on Saudi Arabia. The volatility experienced on the European stock markets has been reflected throughout the region with investors edging away from risky assets.
Estimates suggest more than $8 trillion has been wiped from the value of global equities in the past month over concerns that the US may end up in a recession and the increasing debt crisis of European countries.
“Saudi Arabia has been affected by negative sentiment across global markets. There is a lot of volatility in developed and emerging markets at the moment,” says Liz Martins, senior economist at HSBC.
The kingdom’s oil-dependent economy, dollar-pegged exchange rate and a sovereign wealth portfolio that has invested heavily in US treasuries rendered it one of the worst-affected countries after credit agency Standard & Poor’s downgraded the US credit rating from AAA to AA+ on 6 August.
The Tadawul All Shares Index (Tasi) opened 6423.87 and tumbled to 6,073.44 on the same day, before recovering slightly on 7 August to close at 6,078.05.
“We saw a spike in economic activity on the back of the fiscal stimulus in February, but the third quarter looks like it is losing momentum,” says Martins.
After this initial spike, which saw highs of 6,486.83 on 16 February, the Tasi fell to its lowest in the first week of March, to 5,323.27, as many had fears that popular protests and uprisings would spread to the kingdom.
A stern response from the authorities diminished any chance of an Egyptian-style revolution and the bourse recovered quickly.
Some of the figures do look promising. The market capitalisation of the Tasi grew by 9 per cent in the first half of 2011 when compared with the same period in 2010, to reach SR1.3bn ($349bn), but global economic woes and uncertainty in Libya is increasing volatility.
“There is fear in the oil [sector] that if a lot of Libyan oil returns to the market, it will push prices down,” says Martins.
With 20 per cent of the world’s oil reserves, the fall in oil prices will affect investor confidence in the kingdom, but is unlikely to reduce government spending.