Can the Middle East escape the global economic slowdown?

That the major markets of the world are now sliding into an economic slump can hardly be doubted. Stock markets usually predict events 18 months ahead, and big market down-shifts portend bad news. And just look at daily lay-offs by large companies all over the world.

Maybe the world economy will spontaneously recover, as optimistic commentators believe. Then we have nothing to fear. But it is prudent to plan for the worst and assume that it will probably happen. So where does that leave the Middle East?

As ever the Middle East is somewhat contrary, and its economic cycle is often a mirror view of the rest of the world. This is partly because the rise in the price of its main commodity, oil, is one of the reasons why industrialized economies are in trouble.

But in the Middle East region there is a sharp distinction to be made between the economies of the Oil States and the rest. Generally a rise in income levels in the former rubs off on the latter some 12-18 months down the line, but ongoing conflicts and possible war scenarios complicate this picture in some nations.

Does everything therefore hang on the oil price? Partly 'yes', and partly 'no'. The fact that crude oil is hovering around the $25 mark at present does induce a nice warm feeling in the Oil States. Budget deficits will be lower or even eliminated in certain cases, that encourages spending on infrastructure, although most governments do not shift spending from boom to bust anymore.

However, the stronger oil price also happily coincides with a big shift in economic thinking among regional governments. Five years ago nobody had heard much of privatization in the Middle East, and the UAE did not even have a public bourse. Today governments are lining up candidates to go public by the dozen.

Top of the list are telecom companies, followed by electricity, but there is plenty of almost everything from airport management to public transport. These sell-offs are going to give a huge hike to regional capital markets by putting a lot more shares in issue and encouraging private share ownership and the creation of mutual funds.

Added to this is the liberalization of real estate and foreign ownership now being pioneered in Dubai. For once the oil wealth will not exit the region but be funneled by domestic capital markets and wealthy local families into companies and projects. That this should occur at a time when oil prices are strong is a very happy coincidence for all concerned.

Will the Middle East therefore escape a global slowdown? The answer is clearly 'yes'. Indeed there is an economic boom in prospect. Not that everyone will avoid contagion from the rest of the world. For example, some unlucky employees in the regional offices of multinationals under pressure may loose their jobs, or have already done so.

There is also a knock on effect in that foreign direct investment will suffer if the world's industrialized nations are short of cash for investment because their capital markets are in a mess. But that is also an opportunity for regional capital markets to emerge to replace foreign capital. And judging by the local bond issues now being set up for the autumn in the Middle East, this is definitely going to happen.

For by privatizing and modernizing its economy at the same time as an oil price upturn, the region will create a self-fulfilling investment cycle that will carry it through difficult times for the global economy. It's a good time to be doing business in the Middle East.