Despite of Iraq turmoil, Gulf hasn’t lost investors’ focuses yet

For years, the rich oil states of the Gulf have struggled to insulate themselves from political turbulence in the rest of their volatile region. Markets’ reaction to the insurgency in Iraq suggests they may finally have succeeded.
Saudi Arabia and Kuwait face the potential disintegration of a country on their borders. At the very least, the turmoil in Iraq looks set to widen the Sunni-Shiite divide which has poisoned politics across the region.
But in contrast to past episodes of instability in the Middle East, the Gulf’s financial markets are mostly reacting calmly. Foreign investors have continued to plough hundreds of millions of dollars into Gulf bonds. There have been no signs of pressure on Gulf currencies’ pegs to the US dollar.
Stock markets have dropped, but traders largely see that as a natural adjustment after big gains earlier this year, not a panicked response to geopolitical risk.
The calm reflects the Gulf’s progress in building up its financial resources on the back of high oil prices as a defense against regional instability, as well as its success in containing domestic political fallout from the Arab Spring uprisings over the past three years, economists and fund managers said.
Jason Tuvey, Middle East economist at Capital Economics, a London-based consultancy, said, “I think people now see the Gulf as well insulated from the politics around it.” He added that apart from Saudi Arabia’s Eastern Province, which has seen some low-level unrest among its Shiite minority, it was difficult to see how events in Iraq could have any direct impact on Gulf states. If there is any impact, governments have the monetary and security resources to deal with it, he added.
The region has been buffeted by a string of geopolitical shocks since early 2011, when revolutions in Egypt and other Arab states briefly raised the possibility of similar unrest within the Gulf.
Five-year Saudi Arabian credit default swaps which insure against the risk of a Saudi sovereign debt default, and are therefore an indicator of foreign investors’ jitters about the Gulf — shot up to a peak of 140 basis points in February 2011.