Middle East crisis causes economic downfall

Gulf News, August 5 – The Israel-Hezbollah conflict has, so far, had only a minimal impact on the UAE’s economy, but analysts are predicting the impact on the Emirates could worsen if a ceasefire fails to materialize.

So far, no Arab country other than Lebanon has been directly affected by the Israel-Hezbollah war, but Lebanon has moderately strong trade links with many Arab countries. The UAE and Saudi Arabia are the second and third largest markets for Lebanon, with Lebanese exports to the countries reaching $1.7 billion in 2005. The UAE receives approximately 10 per cent of Lebanon’s exports with Saudi Arabia receiving around 7 per cent.

The conflict will certainly have implications for investors.

Lebanon has been the largest recipient of Arab investment in the last 10 years. The cumulative Arab investment in Lebanon totaled $4.74 billion between 1995 and 2004. The latest data shows that investments grew by 24 per cent to $1.05 billion in 2005, and an even larger figure was estimated for 2006. A large portion of these investments are now lost, but their magnitude is likely to be too small to have a significant impact on regional capital markets.

If the conflict ends soon and does not escalate into a wider regional conflagration involving Syria and possibly Iran, it will still have an indirect economic impact on other Middle Eastern countries. It could make some private investors less confident about the security and political stability of the region.

The Middle East has enjoyed strong economic growth in the past two years, with average rates close to 5.8 per cent in 2004 and 2005. This solid performance has been primarily caused by the high price of oil, which has benefited oil-exporting countries of the region. As well as the high oil revenues, Middle Eastern economies have also benefited from a surge in private and foreign investment.

Despite the ongoing violence in Iraq, a positive investment mood has prevailed throughout the Gulf region, and major international firms have shown a strong interest in the growing investment opportunities in these economies.

For these investors, the Israel-Lebanon war is a reminder of the region’s volatile security environment.

Six of the seven stock markets in the Gulf Cooperation Council (GCC) suffered net price declines during the second half of July. The Arab General Index, a composite barometer of all regional markets, had registered a strong recovery in early July, but saw gains reversed in the second half of the month, as most markets declined.