Persian Gulf governments are trying to shore up confidence in the region's so-far insulated economy, but the oil-fired boom is looking vulnerable amid the global-financial turmoil swirling around it.
In recent years, high oil prices have fed a binge of government spending and investment. At the same time, rulers of the Arabic-speaking Gulf states have pushed to diversify their economies away from petroleum. They have spent billions of dollars to build, often from scratch, industries such as financial services and tourism.
Now, all that is facing a three-pronged assault. Oil prices are falling. International credit markets have all but ground to a halt in recent days, drying up an important source of funding for companies and governments. And, suddenly, the region's push into the financial-services sector is starting to look like a liability as stock markets tumble.
"A week ago, I'd have said we were weathering this," said Sheik Mohammed Bin Essa Al-Khalifa, chairman of the government-backed Bahrain Development Bank and chief executive of the Bahrain Economic Development Board.
He said the country's central bank assured the government this week that the banking system is sound. But "it's too early to tell" what effect the crisis will have in Bahrain, he said.
Bahrain served as the region's banking center for decades before new financial players such as Dubai and Doha, Qatar, pushed into the industry. Now, all three are vying to become regional financial hubs. In Bahrain, financial-service contributes more than a quarter of the country's economic output, according to official figures.
"So far, the fallout seems to be containable and our industry is strong," said Sheik Salman bin Hamad bin Isa Al Khalifa, Bahrain's crown prince, in a palace interview. But "as with all things, we will need to wait and see," he said.
Kuwait's central bank governor and Qatar's finance minister both told reporters this week that the region isn't overly exposed to the financial storm buffeting New York and London. Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai, one of seven emirates that make up the United Arab Emirates, was quoted Thursday by the pan-Arab daily Asharq Alawsat saying that the U.A.E. economy "will not be affected by this crisis."
Investors aren't buying those assurances. On Thursday, most Gulf stock markets ended lower, dragged down by banking and financial-sector shares. The region's main bourses are sleepy affairs, and the Muslim holy month of Ramadan means trading likely is lighter than usual, exacerbating volatility. But Thursday's losses cap weeks of softness as local and international investors reassess the region's economic prospects. Dubai's main index fell 3% to 3922.64 Thursday, down nearly 34% this year.
The Kuwait Investment Authority, the government investment agency that has been an active overseas buyer, said earlier in the week that it was looking to invest in funds active in the local market. The move was seen aimed at propping up the Kuwaiti bourse, which is up 0.8% this year.
The Gulf -- like much of the rest of the world -- is also suffering from a credit crunch. Local banks have lent heavily in recent years to finance the region's boom. Recently, funding costs have risen, in line with international credit markets.
The biggest risk for the region remains lower oil prices. "If global demand slows and the world economy takes a turn for the worst, there is no doubt in my mind that we will be affected in some way," Bahrain's Sheik Salman said. "The question is by how much."