Stock markets across the Arab world experienced unprecedently sharp losses when trading began following the Id al-Fitr holiday earlier this week. The seven stock markets in the oil rich Gulf states shed around $150 billion of their capitalization in the course of the week.

The market in Saudi Arabia sank by 7 percent. In Egypt, the key index fell by around 16%. One Saudi economist quoted by Agence France Presse described the latest developments as a “catastrophe.” For a number of reasons, the Arab world may well prove particularly vulnerable to the world economic downturn. This fact has political implications for the region, which are already being glimpsed and acted upon by various regional forces.

The first and most obvious reason why the Arab world is particularly vulnerable to the financial crisis is that a disproportionately large amount of Arab wealth is invested in global stock markets. Since the 1970s, the Arab world (or parts of it) has enjoyed a long windfall of oil wealth.

Oil wealth is the main source for Arab sovereign wealth funds. Arab sovereign wealth funds, with a combined value of more than $1 trillion, are important investors in what are now being exposed as some of the most vulnerable sectors of global finance.

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