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Investors may shift Gulf exposure on political unrest

Investors may shift Gulf exposure on political unrest

Gulf to see capital outflows; UAE, Qatar could benefit; Libyan turmoil, Iranian naval vessels to add pressure.

February 22, 2011 1:01 by

Revolts in the Arab world may prompt investors to cut exposure in wealthy Gulf oil producers in the short term but more stable countries such as the United Arab Emirates and Qatar may benefit from a shift in capital flows.

Massive protests have swept through Arab countries that face crippling poverty and unemployment, unseating military-backed leaders in Egypt and Tunisia, threatening Muammar Gaddafi’s four-decade-old grip on power in Libya, and also triggering protests by members of Bahrain’s Shi’ite majority against their Sunni rulers.

Weeks of spreading unrest have sent debt protection costs and yields on government debt up across the Gulf, the world’s top oil exporting region, while stocks and currencies — most of them pegged to the U.S. dollar — have been volatile.

“The region as a whole has a degree of capital outflows,” said Dina Ahmad, CEEMEA strategist at BNP Paribas in London. “It is quite difficult to estimate because data are very lagged.”

At the peak of Egypt’s political turmoil, Citi has estimated capital outflows from the most populous Arab country at $500 million to $1 billion a day.

However, in the Gulf that benefits from robust crude prices, even the unrest-hit tiny Bahrain has not seen large outflows since anti-government protests began a week ago, market players say, partly due to a lower investor presence.

“There is a moderate risk of modest outflows,” said Gabriel Sterne, senior economist at London-based Exotix. “We have seen yields on the Bahrain bonds rise a bit.”

The yield on Bahrain’s Islamic bond, due in 2014, has shot up to 3.9 percent, its highest level since last May, while bankers have said the kingdom’s planned $1 billion sovereign bond issue was likely to be delayed.

Debt insurance costs for Bahrain, a regional financial hub and home to some $10 billion in mutual funds, hit fresh 18-month highs of 300 points on Monday, Markit said.

Concerns that the political unrest and demonstrations in Bahrain will persist prompted Standard and Poor’s to lower the country’s sovereign credit ratings on Monday.

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