This, however, will probably not stop fresh inflows of investment by currency speculators trying to make easy money, despite the official regional commitment to the existing dollar pegs.

The failure of the region to convince markets that a currency revaluation is not about to occur will continue to stifle credit market activity in early 2008.

US rate cuts will also feed through to the region in other ways. The most significant question will be whether they can stem the sharp increase in interbank lending rates that is starting to hit Middle East project and corporate lending. If the US Federal Reserve succeeds in appeasing the banking market by reducing lending rates and further fallout from the sub-prime crisis is limited, spreads are expected to drift back down again and the raft of delayed debt issuances will be offered to the market as quickly as possible.

If the banking market remains nervous, Middle East debt issuers such as Emirates Aluminium (Emal) and Dubai Electricity & Water Authority (Dewa) will have to wait longer before reviving their plans for funding.

The first deals of 2008 will be instrumental in shaping the financial sector's thinking on which direction margins will move, although the banks will be keen to keep them as high as possible after margins were squeezed down to what were seen as unsustainable levels over the past few years.

Funding costs

Either way, margins are expected to be higher in 2008 than in 2007, which could force many borrowers - whether corporates or project companies - to re-evaluate some of their models.

Most deals will be pushed through the market if they have to be, but borrowers will have to get used to interest costs that are at least slightly higher than expected.

The market drift towards higher pricing could stimulate the development of structured products such as securitisation, following Middle East businesses completing some of the region's first deals of this type in 2007. The drive towards more truly asset-backed debt financings is likely to be more appealing to companies looking to trim some basis points from their funding costs.

Dewa's $1bn securitisation demonstrated the potential for this type of deal when it used future utility bill income as an asset with which to lower its risk weighting, and thus the interest it paid on this type of debt.

For the region's financial institutions, consolidation and expansion will continue to play an important part in strategic thinking, although making full cross-border acquisitions is likely to be the elusive goal.

Purchasing stakes in other regional banks is likely to remain the most pragmatic route to expansion, although some banks will try a piecemeal organic strategy.

Some time in 2008, the UAE will eclipse Saudi Arabia as the biggest banking market in the region. The Saudi banking sector is also expected to underperform this year.

Banking in numbers

• $446bn - The total value of assets of UAE banks forecast for 2008

Source: MEED