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Persian Gulf Analysts Discuss U.S. Debt Crisis and Local Markets

Following are comments from analysts in the Persian Gulf region as politicians in the U.S. near a deadline on raising the government’s debt limit.

Paul Cooper, Dubai-based managing director at Sarasin-Alpen & Partners Ltd.:

“There are two issues: Will the debt ceiling be raised so that the U.S. can avoid a damaging default and, second, if the debt ceiling is raised, will the accompanying deficit-reduction proposal be sufficient to retain the U.S.’s AAA rating? Currently the balance of probability seems to point toward a downgrade, not a default.

“The implications for the region, indeed for all emerging markets, in this scenario are relatively modest. The dollar may strengthen when a default is avoided, but it is likely to weaken thereafter when the country’s mediocre growth rate is taken into account. The same will apply to the U.S. bond market, where economic weakness, rather than the lack of an AAA rating, will prevent yields from rising too far.

“The economic slowdown has greater implications for this region. Slower growth, together with the dampening effect of the budget-deficit program, will ensure that U.S. interest rates remain low, while currency pegs will keep interest rates low here as well, supporting the region’s economic recovery. The oil price may fall, but it will be high enough to finance the expansionary fiscal policies in place throughout the region.”

Yong Wei Lee, who helps oversee about $1.2 billion as a senior fund manager at Emirates NBD Asset Management in Dubai:

“At a high level, concerns over the U.S. debt issue are having a negative effect on global equities, and that spillover effect is expected to be felt in regional markets as well.

“It is justifiable that some correlation should exist, since most of the currencies in the region are pegged to the U.S. dollar. Hence economic decisions that have long-term implications for the U.S. dollar are also likely to affect regional economies.”

Sachin Mohindra, a fund manager at Invest AD in Abu Dhabi:

“The uncertainty surrounding U.S. debt issues has and will continue to affect investor sentiment in regional markets. With foreign institutional flows drying up, the only providers of additional liquidity are regional investors, high net worth as well as local institutions.”

“In the absence of any significant short-term local triggers, regional high net worth [individuals] have been increasingly focused on international markets to provide direction. The U.S. debt crisis has clearly affected sentiment and will continue to result in increasing risk aversion on the part of investors.

“Attention is now not only focused on the risk of a default on Treasury debt, but also on the risks relating to a potential ratings downgrade. While opinion is divided on whether a downgrade by itself would result in a financial crisis, the overall uncertainty and the ‘fear of the unknown’ has prompted a number of investors, regional included, to adopt a risk-off attitude, with investors unwilling to commit any substantial incremental funds to equity markets.

“Regional investors have been adversely affected by various financial crises over the last few years and appear to be unwilling to second-guess the consequences of a potential economic shock, and hence this wait-on-the-sidelines approach. Poor liquidity conditions in our markets have further exacerbated the problem.”

Ibrahim Masood, who helps manage about $400 million at Mashreqbank PSC:

“I think there will be a resolution. However, assuming there is no resolution, the logical outcome would be deterioration in the standing of the U.S. as a borrower, so from a sentiment perspective you could see a volatile few days in the region.

“I don’t think the U.S. dollar would be under any severe weakness in the aftermath. So that leaves general sentiment and potentially higher U.S. dollar interest rates as factors impacting the region.

“This whole debt-ceiling business is a bureaucratic step, with a lot of background politics. It does not change anything on the ground, and so any fallout will be equally short term as well. A very volatile few days, if at all, then the attention will, I bet, shift back to the structural debt sustainability problems that the U.S. and even Europe faces.”

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