DUBAI: Political unrest in the Gulf threatens private sector spending and investment but thanks to high oil prices, governments have enough financial firepower to prevent their economies from slowing sharply.
The direct economic impact in terms of lost output has been tiny. But the protests have highlighted the potential for more trouble if political issues are not resolved, and this is dampening the mood in the private sector.
However, high global oil prices -- themselves partly due to unrest in the Gulf and North Africa -- are boosting energy sectors in the region and giving governments enough cash to spend their way out of trouble.
"The increase in oil prices will significantly add to growth dynamics both directly and through the wealth effect," said Marios Maratheftis, regional head of research for the Middle East, North Africa and Pakistan at Standard Chartered in Dubai.
Banking institutions hesitant
The unrest in Gulf states erupted when banks in some countries such as the United Arab Emirates were still hesitant to lend in the wake of the global credit crisis and local debt problems.
As a result, prospects for foreign direct investment in the region "have deteriorated, in the short term even in those countries that have not seen significant levels of protest", said Simon Williams, chief economist at HSBC Bank in Dubai.
"Foreign capital will be more difficult and more costly to access until the market is persuaded that the long-term order has been restored."
After the global crisis, foreign direct investment tumbled by over 70 percent in Saudi Arabia and the UAE in 2009, and by 86 percent in Bahrain. More recent data is not available, but political jitters are delaying a recovery of investment in Bahrain and possibly in other countries.
"I have an investment project that I'm working on which has been delayed by these events for a whole month," said a long-term investor in Bahrain, who declined to be named. "I have to wonder whether Bahrain is the best place for it, compared to Dubai for example."
Bahrain, a regional financial centre where the Sunni government used tanks to crack down on Shiite-led protesters, has been by far the worst-hit economy. Around 24 people died in a month of unrest which brought in Saudi troops, closed banks and shops and triggered capital flight. Economic losses reached $1 billion or about 20 percent of quarterly gross domestic product, NCB Capital estimates.
But not all the capital flight from Bahrain, estimated at tens or possibly hundreds of millions of dollars, left the Gulf; some of it simply moved to more stable countries in the region, benefiting them in the short term at least.
Debt insurance costs for Dubai, viewed as a safe haven in the Gulf, are tighter than they were before the unrest at 389 basis points, down from February's three-month high of 459 bps.