The GCC’s Family Fight Fractures

Qatar shares were down 12 percent on the MSCI index in the first half with banks abandoned in particular as Bahrain, Saudi Arabia and the UAE suspended commercial and diplomatic ties with a US nod due to alleged terrorist and Iran sympathies. The Gulf neighbors issued a list of demands to reverse course, including shutdown of the Al-Jazeera TV network, as royal family members scrambled abroad to press their cases in world capitals. Kuwait, which earlier had pulled out of the joint dollar peg, offered to mediate the dispute as economic and monetary union progress remained on hold with hydrocarbon export price slippage. Sovereign bond yields rose 50 basis points on the rupture as the Al-Thani family moved to reassure the 2 million population that the wealth fund with $300 billion in assets would maintain normal trade and public services and World Cup 2022 infrastructure projects. However essential imports have come by Saudi Arabia’s land bridge and Dubai’s Jebel Ali port as Qatar Airways was banned in the region. The investment authority previously had taken over equity stakes in a half dozen major conventional and Islamic banks, which now may be sold if the crisis lingers, along with flagship real estate holdings in Europe including London’s Shard tower. The 2009 lifeline to Barclays Bank in the UK has also come under scrutiny as its top executives may have misrepresented the deal, according to fraud investigators. They may also consider local misconduct signs in the transaction, after the corruption cloud was finally lifted over the World Cup bid following years of FIFA probes which resulted in mass resignations. US Secretary of State Tillerson, with close personal connections to leaders from his Exxon-Mobil CEO tenure, has also tried to bridge the divide which may extend beyond the short term and place GCC integration in indefinite “limbo,” in the words of UAE’s foreign minister. Tiny Oman has also been put in the crossfire, with its MSCI component off almost 20 percent, as it allies with neither camp in the wake of a Fitch Ratings outlook downgrade to negative with a forecast budget deficit at 12 percent of GDP this year with recession. New taxes and energy ventures should support the “A” rating, but it will follow OPEC supply restraint as bank liquidity is squeezed, the agency noted.

Saudi Arabia in contrast was up 5 percent at mid-year after MSCI mooted a chance for core universe entry in a future review on greater non-GCC institutional investor access. Enthusiasm also accompanied the King’s formal announcement of Prince Mohamed bin Salman, architect of the 2030 reform plan and Aramco proposed IPO, as heir. He is younger generation but a conservative foreign policy advocate who has backed Qatar’s isolation and the Yemen civil war intervention against Iran-aided Houthi forces. Aramco underwriters have already been tapped and foreign listing venues could include New York, London and Hong Kong. A 5 percent chunk will be floated and the Prince estimates capitalization at $2 trillion, although experts believe valuation will turn out to be $500 billion lower if full accounts are disclosed. The frenzy will be at the opposite extreme of syndicated loans, which have fallen 65 percent to under $20 billion, a 4-year low, as external bond issuance tries to crack the traditional fold.