The inability of banks and investors to properly gauge the risks they have been taking in recent years, and the failure of governments to regulate them, has been largely blamed for the financial difficulties the world is now having to deal with.

All models of assessing risk have their problems, but the surprise that most investors felt over how far and how fast asset prices fell in 2008 highlights a problem with which they are only now getting to grips.

“Investors became over-reliant on ratings as the only way of establishing risk in many asset classes,” says John Drzik, chief executive officer (CEO) of US-based management consultant Oliver Wyman Group.

“The problems were not being looked at through enough lenses. Our time horizon for looking at risk was too short term.”

The result is a world economy in the middle of its worst financial crisis in 70 years, with most advanced economies in recession and the prospects for others deteriorating rapidly. In its World Economic Situation & Prospects report, the UN forecasts that growth in the world economy will slow to just 1 per cent in 2009, from 2.5 per cent estimated for 2008.

At that rate, world income per capita will fall this year. But if the global credit squeeze is prolonged and confidence in the financial sector does not return quickly, the report says, the global economy will shrink for the first time since the 1930s.

The prospects for the Middle East are not as bleak as for some other regions, but it is still likely to be a period of retrenchment and, says the UN, growth will be at its lowest rate in seven years.

For companies and governments in the region, the range of economic and political risks that will stem from this downturn is becoming clearer.

According to UK risk consultant Control Risks, the region will offer the full spectrum of problems to foreign business this year, from corruption in Egypt and fraud in the UAE, to the risks to businesses’ reputations from operating in Iran and Sudan, political instability in Lebanon and security threats in Algeria, Iraq and Yemen.

The main concern for most Gulf governments, insulated to some extent by their oil revenues, will not be any political or social unrest, but how to maintain funding for their major development projects.

The World Economic Forum (WEF), which issued its Global Risk Report 2009 in mid-January, points to several other potential areas of concern for the Middle East. It says a slowdown in the Chinese economy is more likely this year, which could cause problems for some Gulf economies.

Although China’s large domestic market will help compensate for the loss of exports due to the recession in the US and elsewhere, as factories scale back or shut down, it will mean lower demand for oil and petrochemicals products from Gulf suppliers, which could lead oil prices to fall even further.

The fiscal crisis could also deepen, the WEF warns, exacerbated by the bail-out packages and fiscal programmes governments around the world have launched in an effort to jump-start growth.

And asset prices could fall even further. Although prices for real estate, equities and corporate bonds all declined dramatically in 2008, economists say there is plenty of scope for further falls in the value of a broad range of assets.

“There is continued high risk for a decline in asset prices,” says Daniel Hofmann, group chief economist at Switzerland’s Zurich Financial Services. “It is not the end of the road as far as asset prices go. There will be more assets to depreciate and write down, and we have not seen the end of that.”

For the Gulf’s state-run investment funds, which are already nursing large losses from their investments, this is unwelcome news.

One area of particular concern for the region’s more open economies, such as the UAE, is the danger that the trend of greater globalisation could come under pressure as governments try to protect their domestic industries.

If the US economy does not improve by the second half of the year, President Barack Obama will come under pressure to introduce more financial regulation and other protectionist measures.

According to the WEF, there is also the risk of more inward-looking policies from emerging economies in reaction to the current financial turmoil.

“We are all suffering, but the people who will suffer most are those in emerging and developing countries,” says Hofmann.

For countries relying on global trade flows, the heightened risk of piracy in waters in or around the Gulf also remains a concern. “The Gulf of Aden and the Indian Ocean are vast expanses of water and it is difficult for warships to police such a large area and combat pirates using fishing vessels,” says Paul Beat, Middle East director at Control Risks.

The danger for Gulf economies is not just how exposed they are to the global downturn, but how many policy options they have to address it. According to Control Risks, the UAE is among a group of countries that have high exposure, but also a high capacity to cope, meaning it is likely to be able to ride out the worst of the crisis without suffering too many political or social problems.

Saudi Arabia has relatively low exposure and with high oil revenues, despite the current low prices, it has the capacity to deal with the global slowdown. In economies such as Egypt, which has low exposure to the global downturn but also little capacity to adapt, routine business risks and domestic considerations will dictate how it copes with any problems.

In its report, the UN recommends the implementation of “massive, internationally co-ordinated fiscal stimulus packages that are coherent and mutually reinforcing” to improve the prospects of the global economy.

Similar co-ordinated efforts are needed to tackle climate issues. Poorer countries are likely to be worst affected by climate change in the coming years, says Raj Singh, chief risk officer of reinsurance giant Swiss Re. He points in particular to higher risks around water supplies and a reduction in the amount of arable land, both of which are already serious issues for many Middle East countries.

Governments are due to meet in Copenhagen at the end of the year to discuss these issues and agree a successor to the Kyoto Protocol, the international agreement to reduce carbon emissions, which was signed in 1997 and came into effect in 2005.

But if the problems get worse, there is a real risk of social unrest in some economies.

Alongside all the potential problems that could surface this year, there are a few positive signs for the region. With a new administration in the White House, the chances of a conflict between the US and Iran appear lower, and violence in Iraq should continue to fall off. In the meantime, the other political risks are familiar ones.

“The primary concern for the Gulf is a nuclear Iran,” says Beat. “For the rest of the region, the Palestine/Israel conflict has flared in Gaza, and that is a major cause of destabilisation in the Middle East.

“It is now a priority for the US to withdraw from Iraq with honour and stability. This is driven by the Pentagon, but it is furthered by President Obama.”

For those countries whose currencies are pegged to the dollar, and receive most of their revenues in dollars through oil sales, the risks of a major fall in its value are also lower now than they were 12 months ago, according to the WEF.

Predictions such as these are fraught with their own risks, particularly given the inability of most economists to foresee the extent of the financial chaos that took hold in 2008.

However, the WEF has had a better record than many in recent years. In 2008, its report highlighted the issue of systemic financial risk as the most immediate and severe issue facing governments, and pointed to the chances of a collapse in asset prices and a liquidity crunch.

Whether or not the latest set of warnings prove to be equally prescient, it is clear that the governments of the Middle East would be well advised to prepare for more turbulent economic conditions this year.