A bad October for GCC capital markets has been followed by a terrible November.

The Dubai Financial Market (DFM) fell by 24 per cent in the first 13 days of the month and is down more than 60 per cent since January. Trends in other Gulf markets are similar.

The GCC, because of its savings and the world’s abiding appetite for energy, is partly insulated against the financial crash that will send the world into recession in 2009. But it will suffer nevertheless. In some areas, the Gulf is remarkably vulnerable.

It is said that a financial tsunami is sweeping the world. In fact, seven waves, not just one, have been unleashed.

• The first is in the form of the equity crash which began in the Gulf at the end of 2005. In six months, most of the region’s markets fell by more than half. A recovery the following year looked promising but has been buried by the Wall Street crash of 2008.

• The second wave, which has now passed, was the slump in the dollar. Gulf currencies, with the exception of Kuwait’s, are pegged to the US currency which fell to a cyclical low in November 2007. This cut the GCC’s international purchasing power and led to spiraling prices. Real Gulf interest rates turned negative, helping to fuel a credit binge.

• The third wave is the Gulf credit squeeze. Senior UAE bankers started complaining about a shortage of liquidity at the start of 2008. This was only partly because of the US sub-prime crisis, although contagion had a bigger impact on Gulf banking than originally supposed. Markets where foreign banks are significant have been the most heavily affected. On 12 October, the UAE government announced it would guarantee deposits and savings in most banks in the federation.
  It was the first official admission that the credit crisis was testing the UAE.

• The fourth wave is the real estate tsunami. This arrived later in the GCC than it did elsewhere in the world, but its impact could be devastating to some. Dubai property prices increased by more than 60 per cent in the first half of 2008. Confidence in real estate was buoyant until October. This has now evaporated. Prices have fallen by up to 50 per cent in just over a month in some Gulf developments. The real estate tsunami is particularly lethal. Most Gulf banks are exposed to housing finance borrowers, many to an extent they still don’t realise. Anticipating problems in the sector, investors have dumped property shares. Across the region, real estate has led the stock market slump.

• The fifth wave is the aviation and tourism crash. International travel is one of the first spending items cut when business slows. Aviation, weakened by record oil prices in the first half of the year, will now face a drop in passenger and cargo traffic. This is a particular concern to some Gulf airlines.

• The sixth wave is a contraction in world trade. The IMF earlier this month said the world economy will effectively be in recession in 2009. It will lead to lower world trade and reduced demand for Gulf exports of all kinds.

• This in turn sets the scene for the seventh and, potentially, the biggest tsunami: the possibility oil prices will fall still further, to $30 a barrel and even lower.
  Opec has slashed production once and will probably have to cut again before year end. But even this might fail to prevent prices falling through the floor.

The seven tsunamis mean most sectors of the GCC economy will stagnate or contract in 2009. This is not all bad news. Budget constraints will encourage government and business to avoid duplication.

Building materials and other costs have fallen sharply. This and the dollar rebound should ensure inflation stops being an issue. But the Gulf downturn will hurt and last.

It will educate the region that it cannot defy global economic forces. Its system of financial management has been exposed as inadequate. Individually, GCC states are as vulnerable as anyone else when financial storms hit.

Recent events have increased the chances that currency union, including a strong GCC monetary authority, will proceed in 2010 as planned. Unnecessary projects, including replicant ports and airports, will be pruned.

Countries that previously treasured national autonomy will recognise the need for more regional co-operation. Remarkable change is possible.

As the election of Barack Obama shows, the crash of 2008 has changed America and the West. It is now beginning to transform the rest of the world in ways no one forecast. The Gulf will be no exception.