UAE iShares Trust iShares MSCI UAE

By Nikhil Lohade

DUBAI--Prices of Persian Gulf stocks closed sharply lower on Thursday, joining a global rout of financial markets, as sliding oil prices have heightened concerns about the region's petroleum-dependent economies.

The stock market in Saudi Arabia, the world's top oil exporter, fell 4.5% to close at 6225.22 on Thursday, as crude oil prices plumbed multiyear lows. Dubai shares were down 3.4% at 2966.43, while neighboring Abu Dhabi's market slipped 3.2% to 4134.97 and Doha's main index dropped 3% to 9767.22. Other Gulf markets also finished in negative territory.

"Falling oil and weak leads from China and the global markets are all weighing on regional sentiment," said Sébastien Hénin, head of asset management at Abu Dhabi-based The National Investor. "Oil is the main problem given how much the region depends on it." The region depends mostly on oil and gas sales to finance the state budgets. But cheap oil has sharply eroded the Gulf states' ability to continue their massive spending at home, a driver of the local economies.

Saudi Arabia exports about 7 million barrels of oil a day, and the proceeds from those sales make up around 90% of the government's revenue. The kingdom was forced to run a record deficit of nearly $98 billion last year, and late last month it announced expenditure and subsidy cuts for 2016 as it attempts to cope with cheap oil. The 2016 budget sets the Saudis up for a period of fiscal consolidation, said economists at Capital Economics, noting the government appears to have assumed that oil prices will average $38 a barrel this year.

But oil prices have since fallen further, sparking concern the kingdom and other regional governments will have to adopt tougher economic measures to deal with falling oil income, traders say. Heightening diplomatic discord between Saudi Arabia and its allies vis-a-vis Iran is also weighing on sentiment as investors worry about escalating geopolitical tensions in the region, Al Masah Capital noted.

Petrochemical stocks were among the biggest losers across the region. In Saudi Arabia, the Gulf's largest stock market, shares of heavyweight petrochemical company Sabic were down 3.2% in price at 68.25 riyals ($18.2) on Thursday.

Most regional markets closed with sharp losses last year, as investors worried about the impact of cheap oil on the local economies. "While [Gulf Cooperation Council] governments have expressed their commitment to support growth in the non-oil sector by sticking to their current development spending plans and maintaining large deficits in the medium term, a prolonged period of low oil prices could force governments to reduce capital spending and benefits, and could put pressure on liquidity," analysts at National Bank of Kuwait said in a note to clients this week.

One option to bolster their coffers and improve liquidity, analysts say, is for Gulf countries to sell down their stakes in some of the large state-owned companies in important sectors such as oil and gas, as well as infrastructure. Some officials have indicated such moves were being considered, as governments look for ways to unlock cash.

Saudi Arabia is considering selling shares in its state-owned oil group Saudi Arabian Oil Co., according to Deputy Crown Prince Mohammed bin Salman, who heads the country's new economic council. "This is something that is being reviewed, and we believe a decision will be made over the next few months. Personally I'm enthusiastic about this step," the prince said in a recent interview with The Economist.

The prince, who is expected to unveil a comprehensive five-year economic plan for the kingdom in early 2016, didn't provide further details of how any potential initial public offering would be made. Saudi Aramco didn't immediately respond to a request for comment.

Write to Nikhil Lohade at nikhil.lohade@wsj.com

(END) Dow Jones Newswires

January 07, 2016 12:53 ET (17:53 GMT)

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