Contradictory signals leave Middle East business in confusion

Anybody looking at the business scene in the Middle East right now can be forgiven for scratching their head and looking a bit confused. The evidence of a booming economy is everywhere to be seen, particularly in the cranes towering over Doha and Dubai.

But beneath the only too apparent boom, people are also becoming a little nervous. They fear that what goes up must come down, and that some of the warning signals are becoming clearer.

First, the most obvious problem is that the boom might be overstretching itself. Can the regional economy really support this level of infrastructure in the future? Will all these projects achieve an economic return? Are they all adequately funded?

Project doubts

Secondly, there are increasing concerns about the business acumen of some promoters of the more recent projects. Are they late comers scrambling to get a piece of the action before the boom falters? Or are these genuine businessmen with an eye to the main chance?

Thirdly, the oil price is now falling. Indeed, the oil price has fallen by more than 20 per cent from its hiatus over the summer. Now everybody knows that it has been the oil price explosion that has propelled the current local business boom. So if the oil price cools will the boom not cool with it?

Fourthly, the now universally accepted US housing bust threatens to dampen growth in the world's largest economy and biggest consumer of oil. This is not a macroeconomic factor that can be turned around quickly, and its main impact for the Middle East will likely be a continued decline in the oil price.

Geopolitical risk

Unless, that is, geopolitical factors emerge that push oil prices back up again, just as the war in the Lebanon did this summer. The problem here is surely that an oil price spike would likely mark the peak of the cycle and then the risk would be very much to the downside.

In this context, it is perhaps understandable why the local stock markets of the GCC have failed to rally very significantly so far this autumn. Markets have a nose for the future and do not like what they sense is around the corner.

On the other hand, a buying opportunity may soon emerge in local markets if pessimism gains further ground. For oil resources remain hard assets in a world of diminishing supply, and the rebound in oil prices would likely be very strong after a US recession.