Looking up

Can the Middle East really buck the global downturn?

By Elissar Mirza

The last year has generally been a very good one for Middle Eastern economies. According to World Bank figures, high revenue oil producers the UAE, Bahrain, Kuwait, Qatar and Saudi Arabia saw their petro-profits rise by 13 percent to US$382 billion in 2007. This in turn provided the catalyst for continuing growth in the travel, construction and financial industries. Factor in the influx of foreign companies setting up shop in the region and its easy to see why the region’s business community might be feeling exceedingly pleased with itself. But things can change quickly in the fickle world of international markets. The latter stages of 2007 saw the US sub-prime mortgage scandal kick off a wave of uncertainty, the final effects of which we have yet to see. Already many of the largest US banks have posted multi-billion dollar losses and a number of high-profile CEOs have been forced to walk the plank (but not of course before picking up some generous payouts). As I write, the markets have just experienced their biggest single day fall since 9/11 and the US Federal Reserve has taken the drastic move of slashing interest rates by three quarters of a percent.

The forecast for 2008 remains murky at best. Analysts are predicting a global downturn as a virtual certainty, while some are concerned enough to warn of recession. Such a turn of events could apply a brake to the Middle Eastern juggernaut, slowing it considerably if not stopping it outright. But such is the unassailable confidence of the region’s business community that a many think it can ride out any rough patches without significant ill effect.

Your first response to this attitude might be that it is either deeply naïve or wildly hubristic. After all, regardless of how well things are going over here, no market is an island. But those predicting a positive outlook aren’t alone. No less than the World Bank has forecast that regional GDP will continue to grow, though increases will be less pronounced than last year’s. The UAE and Qatar are posed for the biggest rises, with forecast increase in GDP of nine and 9.8 percent respectively.

Some are even confident enough to suggest that a global downturn may even spell good news for some Middle Eastern business interests. Speaking to Arabian Business, HSBC economist Simon Williams said, “If anything, there might even be some advantages for the capital rich Gulf investors looking for overseas investment opportunities. A slowdown would bring asset prices down allowing additional investment opportunities.” This is a process that is already underway. Abu Dhabi Investment Authority has already bought a 4.9 percent of Citi, the US’ largest lender, for US$7.5 billion. Having already posted a US$18 billion writedown for the last quarter of 2007 the American bank is now looking for a further cash injection of around US$10 billion. Sovereign wealth funds have also grabbed stakes in Merril Lynch, UBS AG and Morgan Stanley. Oil, that other staple of MidEast wealth also looks to be remaining strong through the coming year. Prices may fall away from the mythical US$100 a barrel mark they hit last year, but a major drop doesn’t seem to be on the cards.

But it is impossible to ignore that, despite the many positive signs, the Middle East remains part of a global economic ecosystem. While US markets were in freefall, guess what was also happening over here? The Saudi stock market, by far the largest in the region, dropped almost 10 points in a single day. This tumble comes on the back of an overall drop of 21 percent from its highest point this year. Similar effects have been seen across the region. If recession bites hard overseas, are the tourists and investors upon which so much of the new Gulf economy depends still going to flock to the region? There is no denying that the Middle East is well placed to ride out the turbulent waters ahead of us. It is also worth remembering that the Titanic was believed to be unsinkable.