What does the IMF economic warning mean for the Gulf States?

IMF officials gathering for their annual meeting this week in Singapore have spoken with rare frankness about the condition of the world economy.

The IMF warns of the risk of a 'disorderly decline in the US dollar' resulting from the liquidation of US Treasury Bonds by Asian and oil producing countries. It also notes that a rapid cooling off of the US housing market could produce a serious slowdown in the US economy, impacting the whole world.

However, as usual the IMF comes out in favor of a rosy scenario with a 'relatively stable dollar' and 'favorable developments in both growth and inflation'. It points out that global markets have proven resilient to many corrections in recent years, such as the dot-com crash.

More corrections possible

Yet it is unusual to have the IMF saying: 'International financial markets could undergo more severe corrections, especially because markets appear to be pricing in the baseline growth scenario, with little provision for risk.'

For the Gulf States an economic slowdown from US housing would be unwelcome as a sharp downturn in demand for oil might send oil prices plummeting as in the Asian Financial Crisis of 1998.

At that time oil prices dipped under $10 a barrel. And it should be remembered that the long-term average oil price is $24 and that cyclical commodity markets tend to correct to at least this point. This is a question of the technical analysis of markets and not meant to be alarmist.

Now in a crisis the Gulf States would not slash public spending. Oil revenues of the past five years have left the coffers brimming with cash, and there is more than enough to carry their economies through a period of lower oil prices.

Business confidence

However, business confidence would suffer, and Arabian stock markets - which have crashed dramatically over the past 12 months - would take another hit. This would also likely spill-over into the booming real estate markets of the region which have become more highly leveraged in recent years.

So from the Gulf States' perspective it is to be very much hoped that the IMF's golden scenario proves correct. However, the IMF is hedging its own book in its latest statement with a reminder of that 'there are risks to the global economic outlook that have tilted to the downside'.

Hence a little caution and consolidation after a great boom period for the Gulf States would seem the wisest counsel. And the weakness of the oil price over the past seven days is surely the strongest indicator yet that this approach will be vindicated. For the oil market will experience more weakness at some point, even if it remains in a long-term cyclical bull market.