Arab stocks plunge on downgrading of US credit rating

Aug 7, 2011, 13:47 GMT

Amman - Arab stock markets plummeted on Sunday on fears that the downgrading of the US credit rating by Standard and Poors would negatively affect an estimated 1 trillion dollars of Arab holdings of US treasury bonds, financial analysts said.

The Saudi stock market, the only Arab bourse to start the trading week on Saturday, edged higher on Sunday after diving 5.46 per cent on Saturday. The rest of Arab stock markets plunged across the board on Sunday, the first trading day of the new week.

The benchmark of the Dubai stock exchange sank 3.7 per cent, Abu Dhabi's all-share index fell 2.6 per cent, Kuwait's KSE index shed 1.6 per cent while Egypt's AGX 30 index plummeted 4.2 per cent.

'I believe the Arab governments in the oil-rich Gulf region stand to incur losses because of the lowered US credit rating, due to their exposure to Washington's debt ordeal,' Wajdi Makhamreh, CEO of the Amman-based Noor Investments brokerage, told the German Press Agency dpa.

'The fallout of the US downgrading will negatively affect the solvency of the Arab governments in the Gulf region and prompt them to try to liquidate some of their holdings of US treasury bonds and invest them in bonds issued by countries with better solvency like Germany, Canada and France,' he said.

He cast doubt on the possibility of investing part of the liquidated US treasury bonds in projects inside Arab countries due to the ongoing Arab Spring uprisings.

Abdullah Baeshn, CEO of the Saudi TeamOne Consulting, believed the risk lay in the declining value of the Arab holdings of US treasury bonds due to the retreating exchange rate of the dollar.

'A weak dollar will mean a smaller value for the Arab funds invested in the United States,' he told the Dubai-based Arabic version of the CNBC financial network.

'The downgrading of US credit does not mean that the US government will be unable to honour its financial commitments as represented by the debt itself and the cost of serving the debt,' he said.

Baeshn expected Arab markets to rebound in the coming few days as did the Saudi stock exchange on Sunday 'after absorbing the first shock.'

He predicted that the petrochemical sector in Saudi Arabia and other Gulf states would continue to suffer due to the declining prices of oil and an expected fall in demand for petrochemical products.