The five factors that will shape the Middle East in 2008

05 December 2007

With oil around $100 a barrel, this doesn’t look like the moment for government and business in the GCC to prepare for the worst.

But there are signs that there’s a year of trouble ahead that will disrupt the region’s long boom.

The regional balance sheet is still positive. GCC GDP has more than doubled in five years. Its six member states have recorded a combined balance of payments surplus of around $700 billion in the same period.

There are five factors, however, that will test the GCC and the wider Middle East in 2008.

  1. Inflation
    I will start with the most benign. Inflation is an irritant, not a toxin. But in parts of the GCC, the cost of living has risen by more than 15 per cent in 2007. Consensus forecasts suggest further big price increases are coming.

  2. GCC labour issue
    This leads on to the GCC labour issue. For businesses, the main management challenge is retaining valued employees and replacing them when they leave. GCC companies that say their annual foreign labour turnover is less than 15 per cent are either lucky or lying. The UAE government’s decision to award a 70 per cent pay rise to its employees shows the public sector has problems too. The additional challenge for GCC authorities is the growing propensity for workers to strike for more pay.

  3. Declining dollar
    The third factor is the declining dollar. Most GCC companies and individuals would love an immediate 20 per cent revaluation against the US currency. Policy thinkers believe it’s the only way to deal with inflation and labour market pressures. But the view from the top is less clear. About 30 per cent of Abu Dhabi’s assets are in dollars. Even a modest revaluation of the dirham would involve a balance sheet write-down of tens of billions of dollars. That is why forecasts that the GCC summit on 2 December will agree a co-ordinated exchange rate move are probably misplaced. Revaluation will come, but not as soon as many suppose. There are two more pressing issues.

  4. World economy
    Factor four is the world economy. High energy prices, the credit crunch, a malaise in the US housing market and the horrors in the balance sheets of major banks are combining malevolently. There could be a major global economic setback in 2008 that will hit the Middle East as well.

  5. Iran
    Which takes us to the fifth and most challenging factor: what to do with Iran. GCC leaders have made every effort to prevent yet another Gulf conflict. But they are losing hope that a peaceful resolution to the Iranian nuclear crisis is possible. In private, ministers accuse Iran of destroying the Palestinian unity government, intensifying the crisis in Lebanon and financing extremists within the GCC itself.

The GCC summit next month will provide clues about which of the five factors will be the region’s priority. If it’s Iran, it could be war next spring.

Attacking Iran is riskier for everyone than the 2003 Iraq invasion. But, the GCC is beginning to see no sound alternative. Saudi Arabia and the UAE hosted Iran’s President Ahmadinejad in 2007 in an attempt to win him over to moderation. In November, the GCC floated a joint nuclear development plan. They have been rebuffed and are concluding Iran wants a nuclear bomb, a development that is as unwelcome in the GCC as it is in the West. Iranian meddling in their domestic affairs is the fatal, final straw.

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