Your chairman's letter: be realistic about 2007

The biggest issue facing regional business in 2007 is the oil price. For after five years of rising oil prices, it is possible that the average oil price could be lower in 2007 than 2006.

Nothing is for certain. We have to balance the impact of a slowdown or recession in the world's largest oil consumer nation versus a possible geopolitically induced spike in the oil price. Yet we have lived with the latter possibility for some time, while the weakening of the US economy is an entirely new factor.

The Middle East stock market crashes of 2006 should also have served as a wake up call for the perpetual optimists. Good times do not continue for ever, and when the reversal comes it may be sharp.

2006 stock market lesson

As with the stock markets any booming economy tends to run ahead of itself, and those sectors that have experienced the greatest booms are the most vulnerable. Real estate is the obvious regional candidate, and indeed generally follows stock markets downwards with a 12 to 18 month time lag from the peak of stock prices.

On this reckoning oil price weakness could be combined with an investment cycle downturn that is already in the system. The knock on effect from this sudden liquidity squeeze would be painful after so many good years.

On the other hand, there may be enough life left yet in the oil price boom and real estate could survive another year untouched by the regional stock market crashes. But these are times for greater caution and over ambitious expansion near the top of the business cycle is not normally a recipe for success.

Competition and inflation

Certainly many regional business sectors are now highly competitive, having attracted in new entrants during the boom times. Costs are also spiraling higher, with rental inflation putting upward pressure on salaries and the cheap dollar inflating import prices.

Profit margins are thus coming under pressure, with possible relocation to cheaper Middle East cities constrained by geopolitical realities. This is the normal pattern for a boom-to-bust business cycle in an emerging economy with inflation and capacity constraints eventually choking a boom to extinction.

That it might be different this time is the rejoinder of the soon-to-go-bust down the generations, and your chairman makes no apology for recommending prudence and restraint in 2007. For so often succeeding in life is a matter of keeping your head while others around you are losing their own.