When will the global financial crisis impact on the Middle East?

Meanwhile, Deutsche Bank unveiled a thumping $4bn first-quarter loss due to write-downs 'related to leveraged loans and loan commitments, commercial real estate and residential mortgage-backed securities'; and this from one of the big banks least impacted by US sub-prime lending.

That the crisis in the financial sector is beginning to be felt elsewhere in the global economy is increasingly clear. Real estate prices are sliding fast, consumer and business confidence is waning and the Queen of England has just cancelled her diamond wedding party for fear of appearing ostentatious during a recession.

Even oil prices are showing signs of fatigue, despite the ever weakening US dollar, which shows no indication of picking up. On Monday crude tumbled 3.8% in New York, the biggest drop since March 19, as analysts expect a US report this week will show inventories are up.

Oil prices to fall?

Could this be the moment when the contagion from the financial sector and US real estate collapse begins to impact on the Middle East through the oil price? Certainly local stock markets have been weakening in anticipation of some knock on effect from the global crisis.

There are also seasonal factors at work here, with oil demand traditionally taking a downturn as the spring arrives. But all eyes are on the US, the world's biggest consumer of oil, for news that oil stocks are growing and therefore that demand is slowing.

Normally commodities do follow the business cycle, albeit they move down late in the cycle. For as manufacturing and business activity cools then there will be less commodities consumed, but forward orders mean that prices will stay high until actual consumption really starts to fall.

However, the past precedent from the 1970s commodities boom suggests that prices can still stay high despite a lurch into stagflation in the global economy, with high inflation combined with low economic growth. Ergo the second half of the 1970s saw tough times for business but the commodities boom continued until the famous oil and gold top in early 1980.

No sub-prime

With the whole of the Middle East in total having less exposure to the $200bn of sub-prime write-offs so far than the average US bank, the region has escaped the direct impact of the financial crisis. Indeed, some of the subsequent investments in US banks by local sovereign wealth funds may mean that the Middle East is a net beneficiary in the long term.

Where the region is exposed is through its dollar-pegged currencies, which mean that local currencies are devaluing alongside the US dollar. This partly explains the inflation in oil prices but it is also producing some of the highest general inflation rates in the world and destroying the economics of expatriate labour, while over-egging real estate investment to the exclusion of other sectors.

The risk is that this boom will turn into a nasty bust sometime in the future in a repeat of the Asian Financial Crisis. But for the time being the Middle East looks a safe haven in the global financial storm.