Nervous times for diplomacy and business in the Gulf

The latest research report from Riyadh Bank forecasts an 11.5 per cent increase in spending by the Saudi government to $116 billion in 2007, despite a fall in average oil production from 9.1 million barrels per day to 8.4 million and a $3 per barrel decline in average oil prices.

Economists have commented on many occasions that the exceptional five year upward rise in oil prices has left Gulf oil producers flush with cash that they could use to support their economies through any geopolitical crisis period.

However, as regional stock markets have demonstrated recently there are limits to what government support can achieve. For the Gulf stock markets have all crashed with government spending on an upward track.

Real estate reality

The next vulnerable asset class just has to be real estate. AME Info's columnist Dr. Marc Faber has pointed out that real estate declines generally follow emerging market stock market crashes within 12 to 18 months. On that reckoning local real estate could have a testing period ahead.

Dubai real estate firm Tameer Holding has just said that competition between developers is becoming intense due to a high number of projects vying for buyers. This appeared to sound a warning note on the eve of the International Property Show Dubai 2007 which opens April 3-5.

Certainly any further deterioration in the geopolitics of the region might prove to be the catalyst that tips the booming property market over the edge. Such a development would also spook stock market investors and send them running for the exit door again.

Diplomatic hope

However, nothing is for certain in geopolitics and diplomatic commonsense can find a way out of even the most convoluted and difficult circumstances in international politics.

The risks after all are not only to regional stock and real estate markets. Oil prices have already hit a six-month high over the past week and could spike past the $100 mark if a major crisis develops. And that would immediately hit global stock markets with a repeat of the falls seen in late February, or something rather worse.

But the Gulf States are cash-rich from the oil boom and can be expected to maintain and increase government spending to combat a local downtown. Indeed, regional business may be rather better placed for a quick recovery than in some other countries where budget deficits demand foreign borrowing that may not be so easy in the near future.