Economies at the Mercy of Stock Markets

  • 7 March 2006

In the past few days, all six Gulf stock markets have registered varying degrees of decline. In a short span of two weeks, their shares have collectively lost over 150 billion dollars on their market value. No one denies that events taking place in these markets have started to reflect on all sectors of the Gulf economy. It is important to note here that the number of shareholders in Gulf stock markets has recently risen to the high figure of nine million, which constitutes roughly one-thirds of the total population of Gulf countries. Out of this number, four million are regular share market dealers. In the light of these facts, the major cause for concern is that about 85% of stock market dealers are borrowers. This makes for a sizeable chunk of the Gulf population, whose standard of living is now linked to the ability of the stock markets to register gains on a continuous basis. In other words, any decline in the market situation will expose these people to serious financial problems, which most of them will be unable to handle.

In view of this crisis and its potential fallout on several vital sectors of the economy—particularly banks and general partnership companies, whose activities are linked to the performance of the stock markets and extend to nearly all sectors of the economy—it can be said that the Gulf economies are presently at the mercy of stock markets. Compared to other sectors, banks are more involved with the functioning of share markets. The latter provide banks with handsome gains generated from share transaction fees, loan interests and facilities for speculators at high rates of interest. Accordingly, any fall in the performance of the share markets leads to a sharp fall in profits and increases the volume of bad debts. With regard to  general partnership companies, an improvement in their financial performance—as is usually shown in their balance sheets—occurs with the growth of their non-operating profits obtained from stock market investments. Consequently, any decline in stock markets has a direct impact on these companies' financial position and profitability rates.

The failure of Gulf officials to take practical measures to save the economy from the adverse impact of these markets may prove to be a major strategic mistake. Its negative impact will gradually show in the immediate future. In fact, some of the vital economic sectors in the Gulf have already started showing signs of decline because they had channeled their funds into stock market speculation. Still, this might only be the tip of the iceberg. The full picture of the painful results will be seen only in the event of, God forbid, a collapse of the markets.