Floating on a sea of liquidity in the Oil States

One curious fact to emerge from the presentation by Standard Chartered Bank's Chief Economist Dr. Gerard Lyons to a power breakfast at Dubai's Burj Al Arab was his revelation that last year's $218 billion surplus made this region the world's biggest saver.

Indeed, a prime reason for the strength of the US dollar in 2005 - rather contrary to market expectations - was the flow of petro-dollars back into the US to buy treasury bonds. Yes, Chinese flows of dollars are still important, but they are not as significant.

Too much money

Incredibly then, for all the construction development that is visible in places like Dubai and Qatar, a lot of money is still flowing out of the region for investment overseas. For the truth is that local economies just can not absorb this kind of capital surplus.

Take the UAE as an example. Standard Chartered estimates that oil revenues were up by 37% last year to $35 billion, and will hit a new high this year. It is hardly surprising therefore that the UAE has witnessed a stock market and real estate boom, but no economy could take this kind of a capital injection in one year.

In fact the recent fall in the UAE stock market suggests that investors might have got a bit carried away in 2005, pushing valuations beyond sustainable levels. But with this depth of liquidity sloshing around anything more than a correction is surely unthinkable unless oil prices plummet.

Market dynamics

As the great English writer E.M. Foster noted: 'Money pads the edge of things'. And economies floating on a sea of liquidity are underpinned by huge equity, which changes market dynamics considerably.

Thus Standard Chartered Bank correctly argues that a real estate oversupply in Dubai can be handled without a collapse; for the main developers are state-owned and can hold property empty rather than slash prices; and mortgage debt levels are 3.1% of GDP which is tiny by any global standard.

On the other hand, business is not always easy in such booming market conditions. Competition can be fierce as new entrants join the market; operating costs can quickly surge out of control; and recruiting and retaining staff is a nightmare. But then, at least these are the problems of success.