Lebanon crisis: Cash becomes king in UAE

DUBAI — The conflict in Lebanon is making cash the king in the UAE and other GCC countries according to economists, stock market analysts and UAE based businesses.

By Babu Das Augustine (Assistant Editor)

Published: Fri 4 Aug 2006, 12:34 PM

Last updated: Sat 4 Apr 2015, 2:06 PM

As the conflict enters the fourth week without any immediate ceasefire in sight, investors, consumers and residents of the region are becoming increasingly cautious about investing, spending and in some extreme cases, keeping their money in the region.

While all six Gulf Arab stock markets have taken a severe hit from the conflict in Lebanon, the Dubai Financial Market that has the largest number of foreign investors is the most affected. Although the valuations are at historic lows with a market P/E of about 10, investors fear to commit their money.

“The situation in both Lebanon and Iran are affecting market sentiment in the Gulf region. There is bound to be hoarding of cash or other equivalent liquid assets such as gold. So far there is no hint of an end to the hostilities in Lebanon while the impasse on Iran continues. Under these circumstances, it is natural for both investors and consumers to postpone their decisions," said Steve Brice, Standard Chartered's Regional Head of Research, Middle East, Pakistan & South Asia.

Economists estimate the cost of war to the whole of Middle East to exceed $20 billion. While the reconstruction cost in Lebanon is estimated to be more than $ 5 billion, indirect costs in terms of lost investment opportunities and slow down in economic activities in the region will account for the rest.

The direct exposure of UAE investors in Lebanon is about Dh10 billion ($3.67 billion) out of which about 80 per cent is committed in Lebanon's real estate sector by leading developers such as Emaar, Abu Dhabi Investment House, Dubai Islamic Bank, Al Habtoor Group Damac and Al Futtaim Group. Private investments in real estate, hospitality and small business are estimated at Dh2 billion.

The impact of war on UAE does not end there. The UAE stock market has been on a steady decline ever since the beginning of the war. "The war in Lebanon has added to the overall negative sentiments. Some strong political statements on the situation in Lebanon from Saudi and Iran has added to market's woes," said P Krishnamurthy, a Dubai-based stock market analyst.

While retail investors are virtually absent from the market, big funds sponsored by banks are hesitant to step in due to the longer term uncertainty. Liquid shares such as Emaar, Amlak and du are attractively priced. But the lack of confidence is keeping investors away.

Although there are no visible signs of an economic slow down, the market sentiment is down and people are a bit confused. Khaleej Times' enquiries with a few leading luxury goods and electronic distributors reveal that the sales have become dull, but there is nothing to indicate that it could trigger a slowdown.

Economists believe that the overwhelming liquidity in the Gulf will override the negative sentiments. "Although Gulf countries have indirect costs from the war, it is unlikely to affect them adversely because all these countries have benefitted by the oil windfall resulting from the war. In an ultimate cost-benefit analysis, the war may have become an opportunity for the region especially the Gulf," said an economist with an international bank.

Historically, the wars in the region have helped the oil exporting countries in the Gulf. "This time too, the record oil prices are creating huge fiscal surpluses for the region which is sufficient to offset the indirect costs of the conflict. However, if the war is not contained within Lebanon, we could have a completely different scenario," he said.

Standard Chartered's Brice agrees. "An early end to the hostilities could give some big opportunities for Gulf economies, especially Dubai. We expect a surge in demand for real estate sector. There could be higher investment inflows from both Lebanon and Iran."

Despite some strong political statements from Gulf states such as Saudi Arabia, UAE and Qatar during the past few days, analysts think that there is no chance of any direct involvment of Gulf governments in the conflict.

“Despite the rhetoric, it is highly unlikely that Syria and Iran will get directly involved in the war as they have their own economic and political priorities.

The Gulf's economic interest will be seriously compromised if Iran's nuclear dispute with the West could escalate into a conflict,” said Eckart Woertz, an economist with Dubai-based Gulf Research Centre (GRC), an independent think tank in the region.

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