Autumn 2015

TERROR RISK: Aftershocks

Man in camoDoes the bombing of a Kuwaiti mosque in June herald an increased terrorism risk in the Gulf countries? If so, how should regional investors respond? George Mitton reports. At dawn on Friday, June 26, a young Saudi identified by Kuwaiti authorities as Fahad Suleiman Abdulmohsen al-Gabbaa arrived in Kuwait by air. A few hours later, he killed himself and 26 others in an explosion at Al-Imam Al-Sadiq mosque, one of the oldest Shia mosques in the country. A further 227 worshippers were injured. The atrocity, claimed by an affiliate of the Islamic State, has prompted a crackdown in Kuwait and set the majlis network in the Gulf countries astir with speculation. Across the region, people are wondering, are the other Gulf countries at risk of more terrorist attacks in the wake of the Kuwait bombing? Has political risk risen in the Gulf? “In our view, it is a new risk which needs to be taken into account, especially for investment coming from outside the region,” says Muhammad Shabbir, head of equity funds and portfolios at Dubai-based asset manager, Rasmala. “This is just the beginning. If the trend continues it is worrisome.” Shabbir says the attack was significant because it was the first of its kind in Kuwait. Barring political disturbances in Bahrain and a spate of attacks in Saudi Arabia’s eastern province, which has been troubled by terrorism for some time, the Kuwait bombing was the first attack to shake the largely calm and peaceful GCC nations. The concern is that more attacks of this nature, which are seen as aftershocks of the turbulence in war-torn Syria and Iraq, will disturb the peace in the Gulf countries. “This thing is getting closer to home,” he says. “A threat closer to home needs a bigger response. The worrisome thing is the responsiveness of the governments is simply not there.” Shabbir concedes that the Kuwaiti authorities have responded in their own way, for instance by requiring DNA tests of all citizens in a counter-terrorism effort. He adds that there is likely to be a good deal of behind-the-scenes activity as the authorities try to root out nationals who subscribe to what the Kuwaiti interior ministry called an “extremist and deviant ideology”. (Since Shabbir was interviewed, Kuwait said it has charged 29 people for involvement in the attack.) Some of the scrutiny will likely focus on the bedoon community in Kuwait, formerly nomadic people who are officially stateless. The Kuwait interior ministry named the driver of the car that brought Al-Gabbaa to the mosque as Abdulrahman Sabah Eidan Saud, an “illegal resident”. However, Shabbir argues that a more visible response is needed to reassure investors both in and out of the country. “What is more important when it comes to investing is you have to control the perceptions,” he says. “You need to engage in counter-propaganda, a counter-narrative. That’s where I see that the activities are either not happening or not obvious.” In Shabbir’s view, the Kuwait attack signals that political risk has become one of the key concerns in the Gulf countries. This region had been considered an exception to the maxim that emerging market investing entails political risk, but Shabbir says if troubles continue, the GCC “will no longer be an exception”. COUNTERPOINT
Not everyone is so worried. Though he admits the short-term effects of the bombing can only be negative for regional investors, Akber Khan, director of asset management at Al Rayan Investment, says long-term fundamental factors aren’t affected. Other factors combined to limit the effect of the Kuwait bombing on regional markets. It took place during Ramadan in summer, a period when many businesses were running on reduced hours and many expatriates were on vacation. Trading volumes are typically lower in what is often a summer lull, hence the equity market response to the atrocity was muted. In addition, the Kuwait stock market has been seen as unattractive for some time, says Khan. “Non-domestic institutional investors have virtually no exposure to Kuwait,” he adds. “From an economic perspective, it’s been largely ex-growth for
a while.” The counter to Khan’s point is that terrorists do not need to enlarge their field of operations far from Kuwait to cause a much greater outcry. Should terrorists manage to orchestrate a bombing in, say, Dubai Mall or in the Kingdom Centre in Riyadh – a more difficult task than the Kuwait bombing because both places have extensive security in place – the effects would be far more shocking.  Ironically, a taste of what could happen came the very same day as Al-Gabbaa blew himself up in Kuwait, when a Tunisian terrorist opened fire on tourists in a resort in Sousse. Newspapers are predicting that the already beleaguered Tunisian tourist industry will be crippled as tour companies cross Tunisia off their safe lists and all but the most adventurous travellers stay away. What if a similar shooting happened at a beach resort in Dubai? Khan agrees that such an atrocity would have significant effects on visitor numbers in the UAE, and says he has warned investors for years that terrorism is as much of a concern for the Gulf countries as it is for the US or UK – which, let’s remember, have each been victim to horrific terror attacks in recent years. He adds, though, that the residents of the Middle East are more resilient than people realise. “Tell me a three-year period since World War Two when we haven’t had a conflict in our region,” he says. “There isn’t one.” In addition, analysts may be underestimating the extent to which a global transit hub such as Dubai could bounce back, should it be targeted by terrorists, he says. “Dubai is the fourth-most-visited city in the world, now not that far behind the leader, London. After the Tube bombings [in London on July 7, 2005], yes, there was a period when visitor numbers dropped, but the tourists returned and that unprecedented and tragic event is now history.” ELSEWHERE
It’s certainly true that nowhere is entirely safe from terrorism. The US endured 9/11. France suffered a shooting at the offices of the satirical magazine Charlie Hebdo. The president of Brazil was recently asked if she had done enough preparations to prevent Islamic State terrorists disrupting the Olympics in Rio de Janeiro. It is also worth remembering that terrorist attacks are not a new phenomenon. Before the bombings on London’s public transport in 2005, the British capital endured years of threats and occasional bomb attacks by Irish republican terrorists. As Khan explains, the city survived these attacks with its reputation as a global financial hub intact; perhaps Dubai could do the same if it were put to the test. Nevertheless, the threat of Islamic State and its affiliates is unsettling to investors in this region. Anecdotal evidence from the majlis network in the Gulf suggests rumours and speculation are especially frenzied at the moment. The key concern is how to keep peace between Sunni and Shia at a time when Sunni militants seem to want to provoke an internecine war. Complicating matters is the Saudi-led bombing campaign against Shia Houthi rebels in Yemen, who have in the past received support from Iran, a Shia-majority country. Ever since the fall of Saddam Hussein, Iraq has been wrought by sectarian conflict between Sunni and Shia, as has Syria. One consequence of the increasing attention brought to this issue by the Kuwait bombing is that local investors may become more anxious, perhaps withdrawing their money from local assets to hold it either in cash or foreign assets. It is too soon to tell if this trend has developed, but it is certainly one to watch. ©2015 funds global mena

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