Fallout of global credit crisis might still reach local shores

Dubai: As the global credit crisis unravels amid the latest turn of events with Lehman Brothers, America's fourth largest investment bank, going under, the region and the UAE may do well not to be too sanguine about not being affected by the storm, analysts and fund managers say.

This is especially true in the light of consistently declining regional markets in the past two months.

"We are insulated, but we are not isolated," said Marios Maratheftis, regional head of research at Standard Chartered.

"We don't have direct exposure, but what the financial turmoil in the West is leading to, is a sharper reduction in risk appetite, and that is affecting markets worldwide. Investors become reluctant to take on board risk, and it is a global thing, it is no longer just in the West."

The US is still the largest economy in the world and if it falls into a recession -some say it has already -the impact would be felt globally.

The Gulf and the UAE would not be immune to it, analysts point out. This despite the fact that regional fundamentals are strong, companies are reporting robust earnings and all macroeconomic indicators point to a solid growth in the medium term.

Mohieddine Kronfol, managing director of asset management at Algebra Capital, said: "If the financial trouble drags on and there is a global recession, then, you know, it is no more an isolated case."

Maratheftis agrees. "When [the US economy] starts falling into recession with the financial sector in trouble, it is going to have an impact on the rest of us. We are better insulated in the Gulf but we will have some impact here, we cannot ignore that."

Lehman's fall is a significant moment in the evolution of the global financial system, feels one analyst, and in such a time it is perhaps too early to gauge the impact of the crisis.

"What we are seeing are the historical days of the restructuring or reshaping of the world financial systems," Mohammad Yasin, managing director of Shuaa Securities said. "This is, as one commentator said, a period of 'global deleveraging'."

Following Lehman's bankruptcy, he expects some local banks must have had some kind of exposure. "I believe it will take time to find out, we cannot be sure, towards the end of the year."

It is likely that banks and institutions here are not as exposed as in the rest of the international market but it is wise to be careful in what assumptions are being made, and what steps are being taken, analysts say. And the role of the central bank is crucial here.

On Monday, in the aftermath of the global market plunge, the GCC central bank governors including the UAE governor said in Jeddah that there was no systemic financial risk at the moment.

"In terms of directing liquidity into equities on the local front ... you have to think more globally than locally here. The central bank has to move quickly, yesterday the [UAE] central bank's response was an understatement, it did not address any of the serious issues."

Pointing to the Chinese Central Bank's response by immediately lowering interest rates, easing lending pressure on markets, Yasin said: "This is what our markets need, this is what our banking sector needs, these are the moves that have to be taken now and publicised. This will help restore confidence in the market, the central bank needs to move."