World Economic Forum Will Meet On ME

APS Review Oil Market Trends, March 17, 2008

The World Economic Forum (WEF) on the Middle East will hold special sessions in May on Iraq, Lebanon, Iran and Syria, and will make a special effort to see how to get round the present gridlock in Palestine, trying to take into account November's presidential elections in the US. Many senior leaders from around the region and further afield are due to attend the meeting in Egypt's Sharm el-Shaikh.

UAE President and Abu Dhabi Ruler Shaikh Khalifa bin Zayed al-Nahyan has been invited to attend the forum. Leaders who have accepted invitations include King Abdullah II of Jordan, King Muhammad of Morocco, President Hamid Karzai of Afghanistan, and President Gloria Macapagal-Arroyo of the Philippines. Tony Blair will be there in his capacity as the Middle Quartet's ambassador to Palestine. France and Germany will attend at a senior level to promote the EU's new neighbourhood relationships with Arab states as the existing EU Associate status becomes out of date.

The three-day forum will have several substantial political strands, looking at the major trouble spots in today's Middle East, but in addition it will examine how three significant forces are driving major political and social change in the Middle East. It will look at the social effects of the hyper-linked world, in which technology will allow all groups of people, but particularly the young and women, to self organise on issues they care about and consolidate their positions, regardless of any remaining censorship. It will look at the implications of China's expected rise to extraordinary power, creating a bi-polar world. China's huge commitment in the region as the world's second largest consumer of energy will be part of the future close mutual relationship which is just starting. The third force the forum will examine is how the Middle East is becoming more sustainable in its environmental and energy usage. It will take a look at how plans for large economic and population growth can be supplied with adequate water, and the strain the new demand will put on desalination capacity.

The WEF says it is working closely with the Arab Business Council (ABC) to develop further points on the agenda, which will include how Sovereign Wealth Funds (SWFs) should operate, and the importance of starting better and more corporate social entrepreneurship in the Middle East.

The US-GCC Link: With each passing day, the US dollar seems to set new lows and oil prices new highs. Both trends are important for the Arab Gulf Co-operation Council (GCC) region. Both are inflationary. And now they may be propelling each other. Of the six GCC states, only Kuwait's dinar is pegged to a basket of currencies. The other five have kept their currencies pegged to the dollar.

As the dollar declines, those concerned to maintain purchasing power internationally, in non-dollar terms, are looking for higher dollar commodity prices. Oil goes up as a result. Because it is not just a physical commodity, but a traded financial asset, that movement can be exaggerated by speculative behaviour, rather than underlying market supply and demand fundamentals. As oil prices climb, they reverberate around the global economy, both in respect of inflation and economic growth.

Although the stagflationary mechanisms of decades ago appear to have been broken by globalisation - so that neither does inflation rise so much nor growth fall so much - still at current levels there is bound to be some impact among importing countries. And then, because the US economy is already weak, and the Fed has signalled - somewhat strangely - that it is more concerned to avoid recession than to deal with inflation, it is the depressive effect on the economy which resonates more. The markets then believe that the Fed will be even more inclined to lower interest rates. The dollar goes down as a result. It is a vicious circle, particularly for the US and the GCC states.

Remarking on the ominous relation between these markets in current circumstances, Jane Kinninmont, Middle East editor at the Economist Intelligence Unit, says: "Maintaining such high oil prices could increase the risk of a US recession and thus put more downward pressure on the US, and Gulf (GCC), currencies".

Hany Genena, senior economist at Gulf Finance House in Bahrain, talks in terms of "petrodollar monetisation" and the "money multiplier" as other, key contributory factors to the inflationary momentum. The lower dollar not only translates into higher import prices, but motivates economic growth, which itself typically advances inflation anyway.

Abdullah Sharafi, a local economist and businessman, notes: "more investment is flowing in and also tourists from the non-dollar countries [who] find this place a bargain". Higher oil prices propel liquidity, income and growth. Because the GCC governments do not react by curbing government expenditure or raising taxes - the "orthodox" response to moderate the economic cycle - both growth and inflation are likely to escalate.

Fiscal policy tends to be pro-cyclical rather than counter-cyclical, as governments tend to compensate citizens for inflation by increasing wages. That itself is inflationary, since it feeds demand relative to the supply of goods and services. What is worse is that monetary policy cannot counter-act either, since regional interest rates are tied to those of the dollar, and are plainly too low for the booming economic environment in the GCC region.