Monday, October 06, 2008

How Will the US Bailout Plan Affect Middle East Markets?

Sources: US Bailout Plan to Boost ME Bourses, Bahrain Tribune; Oil Falls Below $90 as Financial Turmoil Spreads, Seattle Post-Intelligencer; Credit Taps May Run Dry as US Crisis Spreads to Other Regions, Emirates: Business 24/7

The US bailout plan is expected to have a positive impact on Middle East markets, which plummeted amidst psychological fears of a spillover from the US financial crisis. It is anticipated that the plan will work to evade the collapse of the world financial system, although it is unlikely to fix the problem entirely.

Although some in the Middle East are optimistic about Congress’ rescue of the American financial sector, others warn that the full impact of the crisis on the wider US economy is yet to come, which could spell disaster for the Middle East—especially the Gulf region.

Economists in the Gulf claim that it would be unrealistic to assume that real estate and infrastructure projects relying on foreign funding will not be in trouble. In addition, similar to the increase in inter-bank lending rates in the United States, inter-bank lending rates in the Gulf have doubled. This increase has occurred because banks are refusing to lend to each other for fear that loans will not be repaid.

There is also fear that oil prices will continue to fall. Even with the passage of the bailout plan, many macro-economists predict that global growth will likely decline, leading to the continued decrease in oil prices. On Monday of last week, oil prices fell to an eight-month low below $90 a barrel on speculation that the financial crisis would exacerbate a global economic slowdown and cut demand for crude oil. To counteract the drop in demand, OPEC may move to cut output (the supply of oil) in order to stabilize oil prices. The law of economics provides that a decrease in demand or an increase in supply will lead to a decrease in prices. Therefore, by decreasing supply, OPEC can work against the decrease in demand and effectively prevent a decrease in oil prices.

Although most would agree that the $700 billion bailout plan will have a positive effect on global markets, there is also consensus regarding the limited effect of the rescue. The plan is not a panacea, and it is likely that markets in other areas of the world will still be negatively affected by the US financial crisis.

Discussion: Do you expect OPEC to decrease oil supply as demand declines? In the wake of the crisis in the US, do you expect foreign direct investment into areas like the Gulf to increase or decrease?

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