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The attacks on Mumbai underscored the frailty of the world today. It is complex enough with the financial crisis at hand, but unduly challenging if you throw terrorist attacks on top. Strike while the enemy is weak seems to be the rule of thumb here.

India, one of four BRIC countries -- Brazil, Russia, India and China -- has come a long way since the 9/11 terrorist attacks which shook the world. India’s main market index surged 390 percent since 2001 through September of this year and that is factoring in the sizable correction in 2008. Economic growth has averaged eight percent in that timeframe. Brazil, Russia and China posted equally impressive gains of 345 percent, 639 percent and 500 percent in the same period.

All four of these BRIC countries have been forced to take a big pause or as Florence Eid, Managing Director of Passport Capital noted during a speech with business executives this week, “The train may be stopped, but it is still steaming.”

This is not dissimilar to the story throughout the Middle East. Stock markets in the region are down between 30 and 70 percent in 2008. That is not insignificant because an estimated $1 trillion of market capitalization was wiped out in short order.

The concern through the first half was too much liquidity chasing too few products. The story almost put to bed in the second half of the year is all about a lack of liquidity to fund the $1 trillion of projects now on the books in the region.

It is in that spirit that Saudi Arabia’s central bank decided to move decisively with a cut of one percent to its main lending rate.

“This is no time for inching right? We have seen 100 basis point cuts right around the world,” said Eid, “The Saudi Central Bank is acting in the very same manner. There is no time to wait. There is no time to reflect what is going on. It is time to move and they moved fast.”

It is the same reason Abu Dhabi stepped up support for Dubai’s property sector. The federal government provided $13 billion to form the Emirates Development Bank and absorb the assets of lenders Amlak and Tamweel. This was quickly followed by the creation of a new national entity Abu Dhabi Finance. No one wanted to see this train parked in the station too long -- with or without steam. Some noted this might mark the beginning of the end to the property drops we have witnessed over the past two months. Let’s see if the risk premium of two percentage points above LIBOR will come down as a result.

While some may be writing clever headlines about “Crumbling BRICS” or “BRICS on shaky ground,” one should definitely rollout the master blueprint. The Paris-based think tank of the industrialized world, the OECD put it into context recently, projecting that the 30 member countries will contract by 0.3 percent next year. In sum, all, ALL of the growth for 2009 will come from the BRIC countries and their faster growing brethren. China, India and the Middle East may be lucky to eek out six percent economic growth next year, but that is six percent better than we are seeing elsewhere right now.

Earlier this year at the World Economic Forum annual meeting in Davos, there was a great deal of buzz around the concept of de-coupling, that the fast growing economies would break free from the shackles of their slower growing counterparts in the G7. That theory was given far too much airtime, since countries like Saudi Arabia, China and India are still very dependent on Western demand and Western investment. This co-dependency was enough to knock at least two percentage points of growth off for each country this year.

Tony Angel, Managing Director of EMEA for Standard & Poors, at the same gathering of business executives said the relationship between the G7 and the rest of the world is tighter than ever. One lesson we learned from this mammoth downturn is that emerging markets are “embedded in the world economy.” That too, said Angel, is a good thing since it is “time to move on from a uni-polar world.”

Companies of the emerging market countries have moved well down the track this decade. The names of SABIC (Saudi Arabia), Lenovo, Haier (Chinese), Tata, Ranbaxy (Indian) and Embraer (Brazil) should all sound familiar to those of us in the business. All six have emerged as major players either through their global growth or by acquisition of global counterparts.

With a bit of research, I found that the term “emerging markets” was coined in 1981 by World Bank economist Antoine van Agtmael. So, in less than three decades these economies have become not only magnets for foreign direct investment but as capital generators in their own right.

They have their own set of challenges; the risk of a harder economic landing is there and the train may be paused at the station, but demographics and growth are on their side.

The noise represents the sound of expansion -- big pylon drivers bang away day and night as yet another tower looks to fill more space in the Dubai skyline.

Depending on where you are staying, big shadows are cast from these vast skyscrapers which block the bright sunlight of the Arabian Gulf. But visitors to the region in search of high growth and opportunity are finding that even the best intentions and strong will cannot overcome what is a Western-led financial crisis.

The finance minister of the region’s most populous country, Egypt, is striking a more cautious tone right now after posting the best economic growth in two decades. Youssef Boutros Ghali is an old hand in Egyptian politics and he told Marketplace Middle East he is only hoping for the best.

When asked if Egypt can hold onto at least five and a half percent growth after hitting more than seven percent last year, Boutros Ghali hedged his bets: “I am keeping my fingers cross. We have not seen the end of this problem. We have not seen the end of this crisis. My suspicion is there are surprises lurking in the shadows. ”

There are signs of concern from most camps throughout this broad region. Just two months ago, the International Monetary Fund was predicting growth in excess of six percent. That is low by regional standards, but certainly not recession. The challenge is the pillars that were projected to support that growth -- oil, property development and financial services -- are in the danger zone.

As I was waiting for a car to take me to chair the Leaders in Dubai conference this past week a banker from Bahrain shared his thoughts with me: “We don’t know where we are going,” then drawing on the metaphor of the car he was about to jump into he said, “That is my biggest fear after knowing only growth for a decade.”

It was a brief encounter, but certainly summed up the sentiment. A great deal of information is shared in the lobbies of hotels, at the coffee bars and, yes, in the taxi queues. I always find the lobby of the Emirates Towers Hotel the best hub for gathering sentiment. A year ago while taking in an espresso there, the talk was dominated by private equity players from Europe and Asia ready to fund the latest project. Today, the discussion is about which projects get completed and which ones get mothballed.

This is the modern form of the ancient agora where real time information and gossip from business peers replaces efforts by government leaders to manage expectations.

Those participating from outside the region at Leaders in Dubai were not providing the answers or inspiration that many were looking for. James Wolfensohn, the former head of the World Bank said no corner of the world will be left untouched. He pointed to outstanding derivative trades that still need to be unwound that hover over the banking sector like a dark cloud. “I can only say we are in a tough situation” said the veteran banker.

On the trip back to Dubai Marina on the Sheikh Zayed Road, one scans the skyline to see what has been completed to date and what is still under construction. This is one of those places where it is difficult to tell how much capacity is too much. There are a lot of rental signs in place which seems to square up with a report from HSBC that house prices in Dubai and Abu Dhabi fell for the first time. That seems only logical after a four-fold surge over the last decade.

Right now, global markets are not being built on logic, but on fear. That is what has taken the Dow Industrials below 8000, oil below $50 a barrel and property prices in some markets around the world down 20-30 percent.

When we were in school doing our maths, our teachers always instructed us to use a pencil and not a pen in case we made mistakes. It was impossible to erase a miscalculation back then. Those who are making economic and energy forecasts right now might be wise to do the same.

As the results began to roll in with Electoral College votes taking Barack Obama over the magic number of 270, SMS and email messages were not far behind. “We won!” was the exclamation from an American colleague. “I am so excited, I can’t sleep,” was the next from an international friend who took a special trip to Washington to witness history. That back and forth messaging started with “You have the coolest President ever.”

It is not dissimilar to the coverage and the official accolades that were aired on CNN the day after the big vote. Many in the world see the President-elect as the great unifier, someone leaders from Asia, Europe and the Middle East can relate to and see eye-to-eye with.

Expectations are sky high and there is some danger inherent in that. The dollar rallied briefly, which kept oil prices near $70 a barrel and battered stock markets in the region moved up with only measured optimism. That spirit faded quickly, with investors looking at the task ahead and reservations about his perceived position on taxes and trade.

The new team knows the honeymoon period will be limited. Cabinet posts are being filled. There is a global emergency economic summit on November 15th in Washington to prepare for. The world is looking to the President elect for leadership on a new financial architecture, bringing new countries into the G-8 and revitalising or sidelining the International Monetary Fund and/or the World Bank.

If one adds up the current budget deficit, the bank bailout package, money put forward for Fannie Mae and Freddie Mac and allocations for Iraq, Mr Obama is looking at a shortfall of $1 trillion or more. That is a huge hole to fill no matter who runs his Treasury department and the Office of Management and Budget. If he manages his White House in the same fashion as he ran his campaign, we have a lot to look forward to. For a 47 year old junior senator from Illinois, he is long on poise and foresight, which many in region would privately say over a dinner, coffee or tea has been in short supply over the past eight years.

President Obama will take office during a time when the axis of the world is tilting east. Even during this downturn, global economic growth is being powered from the Middle East to China. Growth and natural resources are key components of power. At this juncture, the U.S. is falling short in both categories. It seems only natural that governments with reserves of some $3 trillion will seek a larger seat at the table of a new G-14 or G-15. That will take some fancy footwork from the new President because other existing members in the group don’t want to dilute their power.

Since the Dubai Ports deal imploded in the winter of 2006, the sovereign wealth funds and the recipient countries have accelerated a dialogue to agree on a set of guidelines for that investment. While on the campaign trail, Senator Obama expressed concern about the influence of those funds, but it is unclear if President Obama will act in a similar fashion.

The current U.S. Deputy Treasury Secretary Robert Kimmitt told Marketplace Middle East his recent five country tour of the region was an effort to “reach out to important actors elsewhere, including the Gulf.” He does not believe the new president will try to roll back voluntary guidelines, the so-called Santiago Principles, for sovereign wealth funds. Those funds Kimmitt says will be “welcomed by the new administration as they were by the current administration.”

While U.S. officials and British Prime Minister Gordon Brown toured the region, Sheikha Lubna al Qasimi was in Washington to meet with officials and help take the temperature for the U.A.E. ahead of the transition. You may recall she was the spokesperson during the Dubai Ports deal when she was Economy Minister of the United Arab Emirates. The dispute over six port operations in the U.S. was one of those nasty flare-ups where political expedience overrode long term relations.

She calls the Doha Development Round “a critical path” forward and requires “global responsibility” to reignite the process. As the dust settles in Washington, there is talk already of the new administration wanting to take a “timeout” from signing more free trade agreements. There are four in the region with the United States, but those with Egypt and the United Arab Emirates stalled after Fast Track Authority expired last year. Sheikha Lubna added there is an important role for the new administration to work with allies on bi-lateral trade. It hit $14 billion last year, which is higher than many who already have free trade agreements in place.

While President Obama will have no time to waste when dealing with the financial challenges at hand and the role of sovereign funds in that effort, his trade stance will probably evolve during his first year in office. Expectations are high and trying to deliver too much too soon not only increases the risk of failure but also seems to run counter to his style on the campaign trail.

After a relatively slow response to the gravity of the credit crisis in September, central bankers around the world are utilizing some serious fire-power to counter a global slowdown.

The U.S. Federal Reserve led the way with a sizable half percentage point cut, bringing the discount rate down to just one percent. U.S. Fed Chairman Ben Bernanke noted the bank is prepared to bring rates even lower to unlock lending to consumers and businesses.

Three regional central banks -- Kuwait and Bahrain -- followed suit cutting their key rates to help rekindle confidence, while a handful of Asian central banks, most notably China, did the same.

The timing is crucial. Countries are quickly trying to sing from the same hymn sheet before they gather in Washington on November 15th for an emergency summit, shortly after a new president has been elected in the United States. The meeting will be held under the auspices of the G20, which includes emerging markets countries from Asia to Latin America, with two Middle Eastern members, Saudi Arabia and Turkey.

Leading up to the U.S. elections, John McCain’s campaign used Joe Wurzelbacher, affectionately labelled “Joe the Plumber,” to contend that Barack Obama’s tax policy would hinder small business. The Toledo-based plumber was worried that he will have fewer options in his tool box to expand.

The tool box is an apt analogy for the world’s central bankers. They have used outright capital injections and share purchases of banks, cut interest rates on multiple occasions and now are looking to construct a new financial architecture to monitor and govern financial markets. They will have very few tools to reach for if commercial banks don’t start loosening up lending.

Seeing there is the same liquidity shortage in other countries, the U.S. central bank will provide $30 billion each to Brazil, Mexico, Singapore and South Korea. Hard money is being supported by a great deal of high profile diplomacy.

Robert Kimmitt, Deputy U.S. Treasury Secretary, concluded a four country Gulf tour to Saudi Arabia, the United Arab Emirates, Qatar and Kuwait in an effort to enhance dialogue with those who manage sizable sovereign wealth funds. Kimmitt said that these fund managers are “actively looking at U.S. opportunities.”

In this climate, there is less emphasis in Washington on who owns the Chrysler Building in New York (Abu Dhabi) and the debate over Dubai World and its attempted ports purchase seems a distant memory.

Not to be outdone, U.K. Prime Minster Gordon Brown crossed paths in the air with Kimmitt for his own tour. It is pretty smart business. Middle East sovereign funds have an estimated $2 trillion under management and can serve as key players as both equity and bond investors when it is needed most.

It is a bit too early to tell which way the funds are leaning today. On our programme we have been exploring the high profile investments into China and Southeast Asia over the past year by sovereign funds and Middle Eastern companies.

Saeed Ahmed Saeed Chief Executive of Dubai based property group Limitless said Asia provides “all the opportunities that would be expected as a return on investment.” Four out of ten of his international investments this year have gone to Southeast Asia. I used the example of Limitless, because it will be fascinating to see where the money will gravitate in the future which depends on how this financial drama will unfold in the coming months.

According to Morgan Stanley, their benchmark emerging market index has dropped more than 40 percent in the past month alone, but over the last decade the markets that make up the index far outpaced their peers in the U.S. and Europe. The reason is quite simple; many of these governments had to learn a difficult lesson ten years ago during the financial crisis which swept through Asia, Russia and Latin America. They are better prepared today than ever before.

Let’s hope that in a post-election environment and after pulling out a lot of arsenal to combat the slowdown that the Group of 20 can offer concrete solutions that work for all the members to move forward.

Two groups, one that already has 13 members, the other which looks poised to comprise 13 members, could potentially help stabilize and redesign the global architecture for the 21st Century. This all sounds quite grand, but the truth is the world is in need of some rebuilding in the aftermath of the tornado which swept through global markets in the past month.

Let’s start with the group that is under construction. The G7 plus Russia seems horribly outdated. In the words of French President Nicolas Sarkozy after his meeting with George W. Bush at Camp David the world cannot “continue to run the economy of the 21st Century with instruments of the economy of the 20th Century.”

Sarkozy is referring to the so-called Bretton Woods institutions, named after the city in New Hampshire where they were created before the end of World War II. I was surprised that neither of those institutions -- the International Monetary Fund and the World Bank -- was given a mandate at their autumn meetings to re-engineer their structures to be the streamlined home for dialogue, financial regulation and monetary policy.

Sometimes it takes a crisis to prompt action and that is where we are today. At the Gleneagles Summit in 2005 Tony Blair formally invited leaders from the G5: Brazil, China, India, Mexico and South Africa to begin outlining the blueprint for the new G13. According to many who attended that meeting, the new emerging economic powers thought the rule book was already written before they showed up in Scotland. That blew over like a cold wind off the Atlantic and talks have stalled ever since.

The French President, who cut his teeth in the Ministry of Finance, is sensing a window of opportunity to move into action. While the current occupant of the White House may not be keen on building a new institution (and some may argue more bureaucracy) the future occupant just might be. And if a President Obama or President McCain doesn’t like the idea, come January there may be enough coal in this engine to leave the station anyway.

As it now stands, the G13 will meet sometime after the U.S. election. UN Secretary General Ban Ki-moon has offered to host this gathering at the organization’s headquarters, perhaps as a bid to eventually put the remit for this fortified group under the United Nations umbrella. That certainly needs to be decided over time. But it seems clear that the G7 (G8 with Russia) needs to design something concrete, and stand ready to build in a regulatory framework to take decisions on capital flows and new financial instruments (like mortgage backed securities) and the role of sovereign funds.

On the latter subject, it seems that if President Sarkozy and others are getting positioned to bring the developed and developing powers together it might make sense to consider a seat for the Middle East, representing both the sovereign funds and the oil producers. I never thought the number 13 was lucky; in fact I, like many in the world, remain superstitious about it. G14 has a nicer ring to it anyway.

This week U.S. Treasury officials will tour the major economies of the Gulf in an effort to enhance the dialogue between Washington and the major sovereign investors. Riyadh, Doha, Abu Dhabi, Dubai and Kuwait are all on the itinerary. Rather quietly at the IMF meeting in Washington, 24 so-called Santiago Principles under the International Working Group of Sovereign Wealth Funds were presented at the gathering. The timing is fortunate. In a period where markets are swinging five percent in either direction, it is always good to have a pool of $3 trillion available in the shape of potential emergency lenders and long term investors. The Santiago Principles can provide the political cover for those still worried about their intentions.

While the grand design of the G13 remains on the horizon, that other group of 13, OPEC, is trying to speak with one voice to recoup some dramatic losses. In a span of only 14 weeks, prices have dropped 50 percent. Three digit oil ($100 and above) seems long forgotten and the President of OPEC Chakib Khelil, has talked about protecting a price band of $70-$90 a barrel.

The secretary general of OPEC, Abdalla Salem El-Badri, during a speech in Moscow this past week outlined the cartel’s plan to expand production by five million barrels in 2012. That, he says, will require $160 billion of investment. If prices go back below $70 and stay there, I would not bank on all that coming on-line.

While the G7 is not eager in principle to have an official dialogue with a cartel, a G14 with a seat for the Middle East included in the mix, most likely would. That would not only be lucky, but prudent as well.

A fifty percent correction in four months! At first glance you probably think I am referring to regional equity markets. Think again.

Before one can say West Texas Intermediate, crude prices have gone from a hefty record of $147 a barrel way down to the $70 range. It may have taken too long for the G7 countries and their new partners to come together with a defined rescue package. That is on the books. The world has now decided to focus on a new chapter titled "Recession 101".

The gathering of 185 countries at the International Monetary Fund and World Bank meetings in Washington provided the outline for this new chapter. Take note of the tone by Olivier Blanchard, Director of Research for the IMF.

"Growth in advanced countries will be very close to zero or even negative until at least the middle of 2009," says Blanchard, "We predict that even the fast developing countries will grow at a substantially lower rate than they have in the recent past, 7 percent in 2008, and 6 percent in 2009."

Slower growth is not the surprise; the speed of the fall and depth of the drop are. Blanchard’s ultimate boss at the IMF, Dominique Strauss-Khan, says the institution was quick to dispel the concept of de-coupling, that no part of the world was immune to the downturn. I think most would admit today in fairness, that no one really thought that this banking crisis would be so horrific.

It has Middle Eastern central bankers cutting interest rates. Saudi Arabia lowered its benchmark rate by a half percentage point after the likes of the UAE, Bahrain and Kuwait pulled the trigger the week before. Enemy number one was inflation at the peak of summer, which was replaced by slower growth. Both surely have been substituted by lower oil revenues.

Let’s take the largest producer; Saudi Arabia. At $147 a barrel, the Kingdom brought in oil revenues of more than $1.3 billion. At $70, that quickly becomes $637 million. That is a lot of money; more than a population of 28 million can spend of course, but a great deal less than a quarter ago.

According to Saeb Eigner, founder of investment group Lonworld and author of "Sand to Silicon", most Middle Eastern oil producers have been prudent with their revenue targets. In five short years they wiped out budget deficits accumulated, in part, by financing the first Gulf War. In most cases, $40-$50 has been the yardstick. It would be more interesting to discover what targets they penciled in on the margins after seeing prices trade well over $100 for a half year.

Viennese Waltz

Oil ministers representing13 members of the OPEC cartel will hold what they call an extraordinary meeting in Vienna this Friday. They already agreed in September to trim production by a half million barrels a day. Not long before that, swing producer Saudi Arabia agreed to boost production in June to cap prices that were on their way to $147 in July. Back then, oil minister Ali al-Naimi said there was not an oil shortage, but the market was not factoring in a slowdown in demand. Not surprisingly, he was correct.

This leads us to the old debate within OPEC between the price hawks and doves. Saudi Arabia has always tried to counter balance members Iran and Venezuela, who have sought maximum revenues per barrel. The Kingdom has taken the view there is a breaking point where price undercuts demand. After we have witnessed the first hint of recession, one sees what the slippery slope looks like. OPEC has already cut its 2009 forecast for daily demand by a half million barrels a day.

This crisis did start in America. It has crossed the Atlantic hitting Britain and the European Union with full force. Export driven markets from China to Southeast Asia are feeling the pinch, with growth off one to two percentage points depending on the economy.

The real fear it seems is not $70, but what many privately say could be just around the corner. If one can see prices tumble by 50 percent, then another 20 percent is not outside the realm of possibility with investors still climbing a wall of worry.

Who says we are not connected? What clearly is a banking crisis in the United States and Europe has spread like a bad virus throughout the emerging markets of this world, the Middle East being no exception.

In a span of a week, the Morgan Stanley’s emerging market index was down 23 percent. Equity markets from Shanghai to Sao Paolo fell in lock step. It is a pretty nasty tally in the region. Prior to the concerted effort to cut interest rates, Cairo, Saudi Arabia, Dubai and Doha were all down 50 percent or more from their peaks in 2008. Hot money flooded the region to tap into growth, but left local traders and investors stone cold on the way out.

The economies of the Middle East are growing nicely, regionally about seven percent this year. Oil revenues with prices between $85 and $90 a barrel are still strong by historical standards. So why are the major markets of the region drowning in a Sea of Red?

The simple answer is these economies cannot stand alone in isolation with all the chaos around them. They surged in part because investors are enthusiastic about the future. There was a double-whammy if you will since many of investment funds put money in thinking that the Gulf economies would soon abandon their pegs to the dollar. When leaders in the Gulf decided not to scrap that dollar peg, even after a fall of nearly 30 percent over the past few years, foreign investors looked for the exit.

All together now

It took too long for the central bankers of the world to grasp the enormity of the problem. After much delay, the major G-7 central banks cut interest rates by a half percentage point to send a signal of unity. A handful of the region’s central banks followed suit, with rate cuts of different proportions, due to the formal link with the dollar. At this juncture, it is the fear of a liquidity crunch, not inflation that is driving sentiment.

I am old enough to remember the power of speaking with one voice. That art, crafted in large part by Alan Greenspan, has been lost when it has been needed most. The February, 1987 Louvre Accord is a prime example. The G-7 gathered to send a signal that the dollar had fallen too far and they backed it up with coordinated intervention to make the point. A similar response came after the October, 1987 crash. In today’s much larger economy, intervention packs a softer punch, but unity is essential. Market traders usually lose a lot of money betting against central banks.

The recent meeting of leaders from Germany, France, Britain and Italy to discuss the banking crisis was a perfect illustration where coordination was in short supply. They met, went their separate ways and all had a different view of the meeting and their own individual plans to move forward. This does not bode well for the European Union or the future of the single currency. This trend also does not say a great deal about enhancing the roles of the International Monetary Fund and the World Bank. One of the two institutions could serve as the global unifier, where a set of rules for 21st century trading and capital flows can be not only debated, but agreed to and most importantly enforced. This could be the new home for an expanded G-7 that includes: Brazil, Russia, India, China and a seat for the Middle East – especially with all its liquidity.

All told there is an estimated $1 trillion dollars of development projects throughout the region. Sovereign funds in the Middle East have a reported $1.5 trillion dollars under management. That is a lot of capital. While some of that money was used in the past two weeks to inject money into their local markets and banks, it could serve as a great source of funds for Wall Street and for European markets.

This major market correction, if we want to limit the description to that, is a big test for the central bankers of the Middle East. They have been working to expand their tool kit to control money supplies, battle record inflation and keep a lid on borrowing for all real estate projects which sprout up like mushrooms in the desert.

At Cityscape in Dubai, the Middle East developers showed off the latest wares with stands costing up to a reported $8 million dollars each. One new planned development outside of Dubai called Jumeria Gardens has a price tag of some $95 billion dollars spread out over a dozen years. Think about it, that is more than the $87 billion dollar bailout by the British government of their banking system.

But there is a problem in the Middle East that is similar to the challenge throughout the world – there is a lack of confidence in western banks. The sovereign funds came on strong at the end of last year with some high profile investments. After falls of 50 percent or more, they too are in no rush to jump back into this market. Until the expanded G-7 can come together, Middle East investors and sovereign funds seem content to deploy assets closer to home.

It was a surreal experience, standing outside a brand new conference center in the spruced up port city of Tianjin, China preparing for live cut-in.

In my earpiece I could hear what many people around the world were watching. U.S. Congressional leaders lined up in front of a "political scrum" to tell everyone that they were making progress on a $700 billion rescue package. They wanted to both illustrate their unity while at the same time declare their disdain for having to go to their constituents for money. This interplay came before the first bill was voted down in the U.S. House of Representatives.

My eavesdropping followed a thirty minute plenary speech and Q&A session with Chinese Premier, Wen Jiabao at a gathering of the so-called New Champions of the World Economic Forum. If one wanted to find a starker contrast of ascent and decline, you saw it in person and heard it through the earpiece. Washington legislators were crunching together a package to restore confidence while at the same time the next president with massive debt burden.

Mind the growth gap

These are the new realities of today’s economy. The Chinese Premier hosted a meeting in his hometown, while the U.S. begins a hard road back after years of borrowed time after bankers sold products few understood. In the halls of the vast conference center, many were talking about the "tilt to the east."

CNN cameraman Charlie Miller and I travelled from Tianjin to Beijing to capture the post-Olympic mood and reaction to the banking legislation that was stalling on Capitol Hill. We went to Tiananmen Square on Chinese National Day to tape a segment. Visually the energy of the economic expansion underway hits you.

The U.S. is still growing a respectable 2.8 percent; Europe a less respectable 1.5 percent and the Middle East to Asia 7 percent. China is worried about slowing down to 9 percent. This growth is the primary reason business leaders from this new belt of growth are looking to each other for opportunities. It is why Airbus, for example, which unveiled its assembly plant in Tianjin during the meeting, has an operational support hub in Dubai and is building a plant in Tunisia.

While this is the future, the New Champions cannot divorce themselves from the past. In a panel that I chaired, business leaders talked about financing infrastructure in the Gulf, while raising the sensitive issue of co-dependency with the United States. All told, foreign investors and governments have an estimated $3 trillion invested in U.S. assets -- bonds, buildings and banks. As the dollar has sunk over the past three years, so too did their portfolios.

These investors want the rescue package to help restore confidence, but at the same time, they are not eager to jump bank into the U.S. market in pursuit of value. In an interview, Sameer Al Ansari, Executive Chairman of Dubai International Capital said he has held reservations about the financial sector in the U.S. for months. In his words, “It just feels to us that things are going to get even worse, so it is time to be careful.”

The bottom line? Many who do not need to add political considerations into their investment decision making are keeping their powder dry.

Super-nationals

This leads us to the role of the sovereign funds. They have an estimated $2.5 trillion to invest. That is a vast liquidity pool that could buffer the downturn coming on both sides of the Atlantic. Victor Chu of First Eastern Investment Bank called them the super-nationals, government funds that have to look well beyond their borders to, in some cases, serve as lenders of last resort.

“They are the people with the capacity. They can act with speed and they can act with financial and strategic returns,” Chu said, “Sovereign wealth funds have a super-national interest to try to make sure that international markets are back on the right track otherwise we will see a domino effect of major failures,” he continued.

We all know the worn out phrase, "money makes the world go around." It is fitting today as we witness how interconnected everyone is at this level.

As one Gulf banker concluded in our session, if Uncle Sam calls, they will have to pick up the phone.

Henry Paulson, who cut his teeth in one of the toughest shops on Wall Street to rise to the top at Goldman Sachs, finds an entirely different dynamic on Capitol Hill these days.

One can charge ahead like a locomotive with great steam within the confines of your own company, but garnering support from both sides of the aisle in Washington during the eye of the storm is a whole new ball game. Secretary Paulson has teamed up -- quite artfully -- with Federal Reserve Board chairman, Ben Bernanke, despite their different personalities and backgrounds, one being a financier, the other an academic.

Cries of “financial socialism” emerged from their Capitol Hill committee appearances for the $700 billion bailout package which has the U.S. government, and therefore the U.S. taxpayer, assuming all the risk for the gambling undertaken by Paulson’s former circle of bankers.

While this remains a U.S.-led banking crisis, it is difficult to find a calm port in the storm. Bankers in Britain and continental Europe are still trying to count up their exposure. This week, the central bank in the United Arab Emirates set up a $14 billion pool of funds to free up lending, primarily in Dubai. Here in this column we have talked about the $1 trillion of projects now on the books in the region, a third of those sit on the sands of the U.A.E. The government is not eager for lending to freeze up and construction to grind to a halt.

The market panic, which has gripped every investor in the past two weeks, hit as it became clear that a re-evaluation of Gulf currencies against the dollar was not a priority. As a result, foreign capital quickly exited the region when the sell-off spread. Most equity markets in the Middle East are down by a third from their peaks.

It is a rare instance when the world’s financial disorder finds its way to the floor of the United Nations, but that was the case at the General Assembly where U.S. President George W. Bush told leaders that Washington was taking the “bold steps” necessary to turn the tide on the crisis. French President Nicolas Sarkozy, following up his recent efforts on the global diplomatic scene in Georgia and with the E.U. Med effort, is looking at the bigger picture.

Sarkozy stated, “The 21st century world cannot be governed with institutions of the 20th century.” The French president is proposing a summit after the U.S. elections aimed at bringing together a cross section of the global economy, the G7 plus Brazil, Russia, India, China (the so-called BRIC countries) to discuss regulated capitalism.

Broadly put, the regulators have been far behind the pace set by the commercial bankers who have come up with a whole range of fancy products that were bought by many but understood by few. That should change and coordination amongst the new and old economic powers needs to improve. The risks assumed by America’s brand name banks should have shown up like flashing red lights on the regulatory radar; ditto for the futures trading that helped drive oil prices to a record $147 a barrel this summer.

The problem is the lack of a global regulator looking at the bigger picture these days. The International Monetary Fund, the World Bank and the Organization for Economic Cooperation and Development (OECD) all have their own briefs, but they have all been noticeably absent during this crisis.

There has been an effort to expand the G7 to include five fast-growing economies, the BRIC countries, plus South Africa. That effort has stalled with some members of the G7 feeling threatened by the emerging players. If there is a silver lining from this crisis, it may come in the form of a rejuvenated effort to see eye to eye on a new financial architecture. While they are looking at new blueprints and new models, it should be more inclusive if the fast growing sovereign funds of the Middle East have a voice. While no individual country in the region can claim a seat just yet, it is pretty difficult to ignore the petrodollars and the $1.5 trillion now on hand for global investment.

The word “contagion” is tossed around a great deal during these periods of intense selling and the word conjures up images of a bad case of the flu which is spreading from time zone to time zone.

It is not far off the mark. The World Bank officially describes contagion as “the transmission of shocks to other countries or the cross-country correlation, beyond any fundamental link among the countries and beyond common shocks”.

Bankers have found out this is no common shock. There was a widespread belief, and one shared by this writer, that the fast-growing developing countries would break out from the shackles of what really is a U.S. banking crisis. The impact of this crisis is directly felt in Europe, especially in London where there is a direct link between the City of London and the health of the British economy. Financial services make up a third of gross domestic product.

That is no surprise and the sluggishness of European and the U.S. economies has been on the cards for months. The Middle East, however, comes into this crisis with a different script altogether. Merrill Lynch’s Turker Hamzaoglu is bullish medium-term, predicting growth of 6.5 percent for the U.A.E. for example, down from the heady days of the last five years of an average 10 percent.

But the real regional concern surrounds the rapid run-up in property prices. Hamzaoglu says it is getting more difficult to manage, “It is certain that there was some kind of a speculation in the prices because I see it as a side effect of this whole macro imbalance in a way, high-inflation, high-liquidity environment, that the government or the central bank has very limited means to control.”

What is emerging is a so-called risk premium factoring in the amount of money borrowed to put more than $300 billion of real estate developments on the books in the U.A.E., a trillion dollars throughout the Middle East. At the same time, regional markets are no longer benefiting from the hot money from the U.S., Europe and Asia which was invested to capture some of the rapid growth.

Former Nomura Securities analyst Anais Faraj who recently relocated to Dubai says the reason for this current contagion is simply down to capital flows, “It is the same liquidity pool. Money invested from the Middle East into Wall Street is taking on big losses.”

Wait and See

Sovereign funds from Kuwait, Abu Dhabi and Qatar put the word out this week that there is no reason to jump and put additional money into U.S. or European banks. As Faraj noted, “No one wants to be a hero catching a falling knife.” All three of those funds have seen their investments slip 40-50 percent since they leapt in at the end of 2007 and early this year. Their forays into the British banks have held up much better.

Which leads us back to what one can expect going forward. The investment fund managers I spoke to see promise in the medium to longer term, but they add it is not a straight line up. The $60 fall in energy prices certainly will impact some of the sky high projections for revenues going forward. And everyone is keeping a watchful eye on the dollar.

The recent recovery in the U.S. currency was taking some of the heat off of regional policy makers to change course to counter record inflation. That concern will move right back onto the front burner and rekindle conversations on whether to peg to a basket of currencies before the launch of a single Gulf currency in 2010.

This story has many more chapters that need to be written, and the word contagion will be part of the text despite the rosy growth scenario still expected.

First it was Hurricane Gustav that had CNN and other television correspondents scrambling down to the Gulf of Mexico. Then, Hurricane Ike ploughed through the Caribbean, leaving 170 Cubans and Haitians dead and causing severe damage on its way to the Texas coast.

Hurricane watchers know that storms are named in alphabetical order, building drama and suspense as they gather momentum along their path. Usually when hurricanes hit they send shivers through energy markets with fears of supply disruptions and damage to refining facilities.

In that context, this hurricane season has been a bit of a yawn, not because the storms lack force, but due to another storm which hit markets well before hurricane season began. Let’s call it Hurricane Ali, named after the veteran Saudi Arabian oil minister Ali al-Naimi. He showed up on the weather radar at the end of June by increasing oil production by a half million barrels a day, using a gathering of oil producers and consumers in Jeddah to underline his point. While it took the markets nearly a month to feel his effects, Hurricane Ali was responsible in large part for a 30 percent drop in oil prices in the last two months.

Perfect Storm

Hurricane Ali was timed -- either with great calculation or great luck -- to coincide with two other forces in the market: an acute economic slowdown and sharp criticism of oil futures speculators. After seeing a peak of $147 a barrel, today setting a floor of $100 is proving difficult. Saudi counterparts within OPEC, Iran and Venezuela have argued for greater discipline within the cartel as well as adherence to a daily production quota of 28.8 million barrels a day.

OPEC’s communiqué from Vienna this week pointed to an oversupply in the market and noted that members should “strictly comply” with their production allocations. I would not bet on it, despite the group’s efforts. Calculating production and demand is not a simple equation when every day, new figures forecast falling growth.

We already know that consumers in the U.S. and Europe are driving less as a result of higher petrol prices. The airline industry, according to sector’s trade association IATA, will lose up to $5 billion due to higher fuel costs and fewer passengers in the air.

Both these trends are reflected in macro-economic figures as well. The European Commission has dialled back growth projections for this year to only 1.3 percent and is pointing to a “significant downward revision” next year. The Paris-based International Energy Agency once again lowered oil demand forecasts for this year and the next, and I doubt that will be the last of it as the global slowdown plays itself out.

Meanwhile, a report from hedge fund manager Michael Masters does its own share of finger pointing at commodity speculators for the upsurge and subsequent fall. Masters contends that $70 oil would be a more realistic level if fund managers would refrain from buying a basket of commodities through index trades. The U.S. Congress is still contemplating a whole series of measures aimed at curbing speculators.

Goldilocks Scenario

John Lipsky, first deputy managing director of the International Monetary Fund and a respected former Wall Street economist, is projecting that global growth will recover to 4 percent next year after a dip to 3 percent in 2008. The recovery will be driven in large part by players like China and India who are still seeing expansions of 7-10 percent.

That level of recovery would play well in the Middle East, with producers still seeing their coffers overflowing from three digit oil. OPEC members this week quarrelled over the best way to defend $100. The answer may be as simple as the Goldilocks fairy tale -- with production that is not too hot, not too cold, but just right.

If some perhaps have not understood what Abu Dhabi is up to before, they got a double dose of what the capital of the United Arab Emirates is planning.

In a span of just two days, “Team Abu Dhabi” announced a planned purchase of Manchester City Football Club, paid a record transfer fee for Brazilian footballer Robinho and threw $1 billion into the movie business.

The ruler of Abu Dhabi and president of the U.A.E., Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, in place for nearly five years, is pursuing a wide ranging investment strategy that is pretty hard to miss.

Let’s call the first batch, brand-driven investments -- a stake in Ferrari, the purchase of the Chrsyler Building in New York, the opulent Emirates Palace Hotel and the soon to be Guggenheim and Louvre Museums.

The second batch fit into what those in government call a "cluster development strategy" -- GE, EADS and the Carlyle Group match that description. Which leads us to the question, where do Manchester City and the $1billion movie fund Imagenation Abu Dhabi fit in?

Chasing football properties is a sport in itself throughout the Gulf. Dubai International Capital, a sovereign fund, has tried and stumbled twice. Gulf flagship carriers Emirates and Ethiad are big sponsors of Arsenal and Chelsea, with Gulf Air involved with Queens Park Rangers. Football is wildly popular in the region and buying a club makes a mark, no doubt.

The name Suleiman Al Fahim was the initial public face on the $360 million purchase, which by the way is not expected to close until September 15. The entrepreneur and star of his own reality television program was immediately being compared to Roman Abramovich, the Russian owner of Chelsea. The story according to those familiar with the deal is that this is really the work of Sheikh Khalifa’s brother Sheikh Mansour bin Zayed Al Nahyan who has shared a desire to buy an English club for more than a year.

The owner of the club, Thaksin Shinawatra, former prime minister of Thailand, knew there was interest in the club and put his long-time London representative Pairoj Piempongsant on the case to get a deal done. It looks like they will net about $100 million on their short-term investment. If all goes as planned, Abu Dhabi can say they are the first from the region to land an English club, but it does not mean this will be a big score for the emirate.

The five-year investment by the Abu Dhabi Media Company into Imagenation immediately puts the group on the map in Hollywood. Edward Borgerding, a former Walt Disney executive, launched this project and hopes the investment will lead to “a technology transfer of the best of class in production and business executives that will migrate to Abu Dhabi and open up production offices in Abu Dhabi itself.”

A look at the math has the group spending about $25 million per film with a target of 40 films. This is small by Tinseltown standards and seems designed to limit the downside risks in a business known for drilling a lot of dry holes.

We will know a lot more about the success of all these investments in about a decade, but it all sounds like the California Gold Rush of the mid-1800s. What was a pretty quiet corner of the U.A.E. will no longer remain that way. The government’s sovereign fund, the Abu Dhabi Investment Authority, or ADIA, has been around for more than three decades. You would be hard pressed to find anyone who knew this group manages nearly a trillion dollars.

$100 oil is only adding to that pot of funds. Abu Dhabi is now the third largest producer within OPEC at 2.8 million barrels a day, having discovered oil in 1958. That is projected to grow to four million barrels a day in a few years. Right now they are bringing in about $100 billion a year from oil alone. Natural gas is another revenue stream. You can say the emirate is sitting pretty, but not sitting idle.

(Manama) First impressions mean a great deal. Mine go back three years in Bahrain at an Arab Business Council meeting. The voice seemed nearly out of place, a mid-Atlantic accent emerged from a crowd of executives and government officials as the American-educated crown prince of the kingdom swept the room.

A big smile and warm greeting clearly mask the undertaking within the court of the crown prince to complete an economic and political reform process.

The intense heat of August is nearly enough to keep movement to a bare minimum, but we made our best efforts to see, what some in government like to describe as the Ireland of the Middle East, is up to nearly four decades after independence.

In an exclusive interview in his office, it is abundantly clear Crown Prince Sheikh Salman bin Hamad al-Khalifa is determined to protect and even enhance the role for Bahrain as a regional financial and services hub. He has accelerated, for example, a process to train workers to stave off intense competition from Dubai, Qatar, Abu Dhabi and neighboring Saudi Arabia.

“If we don't capitalize on diversifying away from oil, the real estate and brand new buildings, stunning architecturally, are not going to solve anything unless there are good people inside of them.”

His Highness is using his chairmanship of the Economic Development Board to consolidate the reform process. After three days of protests last December from the majority Shia population, he sent a letter to his father King Hamad Bin Isa Al-Khalifa, signaling that there was too much resistance to change.

“Change is a constant, change is here, change is never easy but I think it must be tackled with the right ambition. It must be tackled with the right energy as well to achieve success,” said the crown prince, “His (the king’s) reform agenda was not clearly understood by some elements and by him speaking directly to people not just in the government, but also to others in the community, I think it helped to set the record straight.”

One could easily read into that effort a high-stakes move to consolidate authority and renew a mandate to push through privitizations and labor reforms – both sensitive issues to those in government and the private sector who have resisted the change he talked about and who benefited from market protection.

Some of those same elements of society have also not fully embraced the need to spread the wealth during this time of $100 oil. The crown prince sees it quite differently, “Making sure that poverty or relative poverty, this is a very important term, is addressed here in the kingdom and distribution of wealth is managed in a more actionable manner is something that I am very focused on.”
It is a delicate balancing act, something the kingdom of Bahrain is accustomed to. Bahrain remains home to the U.S. military’s Fifth Fleet. Once a new port facility is built, the fleet will be able to spread its wings and have the existing facility to itself. The relationship with Washington goes back decades and partially explains the kingdom’s loyalty to the U.S. dollar, despite its 35 percent correction in the last few years.

“Being linked and pegged to the dollar, of which I am a strong proponent, removes any uncertainty in our revenue collection. Secondly, it facilitates regional trade because five of the six member states are pegged to the dollar,” and the crown prince finished on the diplomatic point, “Thirdly, it is something that we have taken a long view to, since 1980, so you don't quit when the going gets tough and benefit with the good times.”

Those five members of the Gulf Cooperation Council are aiming to launch their own dollar-pegged single currency in the next few years. It is a sign that members of the oil-rich group want to control their own destiny. We are witnessing that as well in the Middle East peace process with both Saudi Arabia and Qatar actively involved in talks to push that process forward.

Meanwhile, Bahrain continues to straddle relations with Washington and Tehran. This effort has been made more challenging by some of the bellicose comments coming from Iran. When asked what he thinks Iran’s intentions are when it said it can block the Straits of Hormuz, a major shipping line, the crown prince steered towards greater collective dialogue, “Only Iran knows what Iran intends with those kinds of comments. But what we certainly call for is an increased dialogue, understanding and tolerance. I hope that cooler heads will prevail and that peace and dialogue are the victors.”
That is certainly something that everyone can sign onto.

From CNN Correspondent Alphonso Van Marsh.

This week, MarketPlace Middle East airs my report on the privatization -- and revitalization -- of iconic Egyptian department store, Omar Effendi.

Way back in the day, Omar Effendi was THE PLACE to shop. The latest fashions, VIP service, gorgeous architecture -- sort of like a Macy’s or Saks of Egypt. Mind you, we are talking the early-- and mid-- 1900's.

Sadly, by the time I first walked though an Omar Effendi store in the 1990s, the government-run chain was infamous for the tackiest fashions, bad service, and rundown, dusty showrooms with wires hanging out of the ceiling.

The worst part of the Omar Offendi experience then: the time it takes to get out of there. Find a set of sheets to purchase, for example. Pull the king size whites off the shelf and an employee takes it from you. He slowly walks out of store showroom, with a promise to get another set from the ‘stock room’ in ‘just a minute.’ Meanwhile, you are instructed go to the counter to get an invoice. Then take the invoice to another counter to pay. Once you pay, you take the invoice back to the first counter to get it stamped. Then take the stamped invoice to a new counter to pick up the sheets. And hope that after all this time, the employee who ran off with your display sample sheets has returned from the stockroom with the color and size you requested. What? No king size left? Only queen sheets in purple? Maalesh (no worries)!? God willing you’ll have king size tomorrow? What’s that all about?

That’s the horror of a state-run businesses: everybody has got a job -- but nobody’s really working.

Little more than a year after Omar Effendi was privatized and the chain became a beneficiary of a multi-million dollar investment scheme in 2007, I went back to the same department store branch. And, oh how things have changed. Things look, well, fresh. The electronics department had banks of televisions that actually worked. Men’s clothing on clean shelves and metal hangers – available in more sizes than old-school kabiir (big) and gamousa (cow). Employees acted like they actually cared.

So I tried to buy a pair of socks. But when the Omar Effendi employee tried to take them out of my hands -- and pointed me to a counter, my eyes started to roll. Apparently, some things are slower to change. This time, however, a simple, kindly-worded protest nipped the counter-game in the bud. Pay at one counter. Get change. Socks in bag. Walk out of store. In less than ten minutes.

This ain’t your father’s Omar Effendi. Watch our profile on OF’s turnaround in the making by clicking on my story link here, or if you’ve had a similar Omar Effendi experience, tell us about it

In the spirit of the Beijing Olympics and the boxing finals, it is worth exploring whether the credit crisis afflicting primarily the G-8 countries is half way through the bout, or whether we are getting to the final round.

As sports buffs know, Olympic boxing is controlled with thick headgear and the bout is limited to four rounds of action. The damage to the athletes is limited and the action intense in a rush to score points.

I wonder if we can say the same right now for the global economy. Is further damage limited and how much more intense will it get before this fight is over?

One of the leading economists this week put a cold towel on expectations of a quick recovery and in fact, signalled that times will get worse before they get better. This was further complicated by a recovery in oil prices from their recent low of $111 a barrel.

First, let’s review the comments from Kenneth Rogoff, the former chief economist of the International Monetary Fund. At a conference while on a tour in Singapore, Rogoff said: “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.” That would put us at round two of the four round fight.

Having made his comments in Asia, the trading world had a full day to digest those comments and read between the lines on the seriousness of his thoughts.

Rogoff did not stop there. He said it wouldn’t be a minor banking player that would collapse, but a major institution, “a whopper” the economist noted.

I have heard Rogoff speak at past conferences, primarily in his official role at the IMF. Not personally, in the heat of the credit crisis contest and far from home, he spoke more freely and spoke his mind. Sometimes comments like these are brushed off to use a boxing analogy, but in a jittery market unsure of the path going forward, these landed a near knock out blow.

Rogoff rounded off his thoughts questioning the wisdom of providing too much liquidity by lowering interest rates to avert recession. The result? We are witnessing the highest inflation since 1991. This is another reason he feels the worst is yet to come.

The forecast for higher inflation was not helped by energy prices. After tumbling to a recent low of $111 a barrel (still up 68 percent this past year) leading analysts are predicting that we will move higher after this summer lull, where we saw a 20 percent correction.

I spoke to Francisco Blanch the head of Commodities Research at Merrill Lynch, who thinks we can peak out near term at $124 a barrel. The important thing in his view is the demand we are still seeing from emerging markets – including the wide belt of growth from the Middle East. Blanch said, “On the supply side we still have serious constraints particularly for oil, while on the demand side we have of course, we still have strong emerging market growth and that is all that matters in the commodity markets, what happens to emerging markets.” His research shows that regional oil consumption represents 20-30 percent of the new demand.

As it turns out, Blanch is being conservative versus his counterparts at Goldman Sachs. They were the first to call for $100 oil and are now forecasting prices of $149 a barrel near term. That is despite what Rogoff has to say about where the U.S. economy is at this juncture and how much that is influencing a slowdown in Europe and Japan, for example.

Oil and other commodity prices were under the influence of a stronger dollar, with traders lulled into the belief that the fight against the credit crisis was nearly over. They were looking at a pretty sluggish forecast for Britain, Germany and France and saying they too will struggle.

That may be true, but the U.S. economy is still the largest (albeit for another decade or so) and this is where an old boxing adage comes in useful: The bigger they are, the harder they fall.

A dozen wooden dhows one by one were sailing in the late afternoon sun in Manama harbor in the shadow of the twin towers that make up the Bahrain Financial Harbor. The scene captured one of the many stark contrasts you can find in the Gulf where tradition sits (or sails) right next to gleaming modernity.

We were in Bahrain this week working on an upcoming special for Marketplace Middle East. The temperatures were searing hot, ranging from 39 to 44 C as we covered nearly the entire island nation of just over one million Bahraini and expatriate residents.

My last visit to Bahrain was at the end of 2005 when many of the buildings were skeletons of what they are today. The World Trade Center with its three wind turbines providing a portion of its energy is the other anchor property within the burgeoning skyline.

While going from point to point for interviews and video shoots, there was a lot of give and take about where the region is going and this week’s stock market sell off triggered by a less than bullish property report from U.S. investment bank Morgan Stanley.

In a nutshell the report talks about a potential 10 percent correction in Dubai property prices by 2010. At this juncture and due to demand in other markets which are playing an intense game of catch up, they don’t see this spreading to other Gulf and North African markets – although a contagion is not ruled out.

In terms of context, a 10 percent fall is not severe and analysts I spoke with say it could be much greater. The retail market is up another 25 percent already this year and was up 79 percent since the start of 2007. The numbers are far more staggering over the past decade.

The real point is that there is now discussion about a top for the market. As business people and viewers of our program know, there is always a soft-toned discussion about what will happen next, how frothy prices are and whether neighboring countries are blindly following down the same path, not really knowing where that path may lead them.

I had that report on my mind and the subsequent market sell-off as I toured a housing development on the outskirts Bahrain. Nearly a thousand villas are going up ranging from $1 million to $2 million, pretty modest by Gulf standards, but nonetheless quite an ambitious planned community.

It also struck me on this visit, (and it is not the first time) that it is always difficult to gauge classic supply and demand in a market where desert sands are vast and new housing stock can be added when growth warrants. In London, for example, if one wants a prime property in West London, there is no extra land to build on. You either buy what is available or you don’t. As we have found out over the past year, London property is not a one way bet only pointing upwards.

There is also some context missing. If a 10 percent correction is all that is on the cards, then the downside risks are pretty low. I think U.S. homeowners would have been pretty happy to walk away with that sort of decline at the start of the credit crisis.

Supply and demand in the Dubai model and for that matter in other Gulf States are complicated by governments holding so much of the property stock themselves. Like a water tap, they can either hold back property development to prop up prices or they can let this cycle play out and let some of the excesses work their way out of the market.

Countries later in the cycle, such as Bahrain, are trying to gauge if this is the beginning of a real sell-off. If so, they need to do some of their own housekeeping on the project approval front. Most on the sands of Manama seem quite content where they are and instead want remain focused on keeping inflation at bay and getting workers trained up for the next wave of growth.

One said this report injected a “small hint of concern” but in a sector which has only known very prosperous times, a sneeze can feel like the beginning of a full blown cold.

These are the dog days of August, when historically traders from Wall Street to Sheikh Zayed Road escape for cooler climates, collect their heads and square positions for the autumn.

That practice has not held up for the past few years. The credit crisis which took hold in the U.S. this time last year proved to be the latest example of how we live in a 24/7 world, even this month.

Colleagues and friends have called in sharing tales of the various Middle East players spotted on the streets of London, as they mix business and pleasure to escape the heat.

The actions -- or inactions -- by both the U.S. Federal Reserve and the Bank of England this week are not signs that central bankers are caught up in the summer lull; in fact it is quite the opposite. The volatile mix of slow growth and inflationary pressures -- better known as stagflation -- makes it difficult for them to move either way. So the response is to stand pat for now and send signals that they are being vigilant and are fully aware that the worst may not be over.

The vote within the Federal Reserve was close to unanimous, 10-1, with one lone member of the committee urging to raise rates to head off the strong inflation. In their statement that followed, the open market committee stated that the inflation outlook remains “highly uncertain.”

Central bankers see that the housing market is not close to bouncing back and that unemployment, at 5.7 percent, is at a four year high. Americans are not feeling all that perky about the future and neither are their brethren across the Atlantic.

A consumer confidence survey put out by the Nationwide Building Society of Britain this week posted the largest drop in four years and the lowest level since the survey started. The culprits are the same as in the U.S.: weak house prices, layoffs to come and rising costs. Inflation in the country is running at 3.8 percent, nearly double the government’s target.

Interest rates may be at reasonable levels in the U.K., but banks are being stubborn about their lending. As a result, home repossessions have jumped 40 percent since 2007. The International Monetary Fund this week is now predicting growth of 1.4 percent this year and just over one percent next year, with inflation maybe peaking at five percent.

With this backdrop and despite the boost in consumer spending by our Middle East visitors this summer, I am not getting too excited by the fall 20 percent fall in crude prices or the subsequent rally in the U.S. dollar. One cannot get a good read of market sentiment during thin trading, when most senior business leaders are not at the helm or moving at the same frenetic pace.

Outside of the G-8 countries and closer to our region of focus, the Middle East, the energy market correction and the rise of the dollar are taking the heat off of policymakers to answer to calls to put more crude on the market or to reconsider the historic peg to the U.S. currency.

As my family and I embark on a summer sojourn to a Greek island, it seems only fitting to write about what could either be an ambitious political effort with great architecture or a hollow shell with 43 countries and little substance.

The cradle of civilization without even a Plato-inspired debate lies at the heart of the Mediterranean. Until Nicolas Sarkozy re-ignited this effort, few could honestly say they looked at this region as a potentially powerful trade zone. It has been fraught with divisions, immigration problems; border disputes and remains home to the long-standing Israeli-Palestinian conflict.

In traditional French style, Sarkozy invited leaders to Paris to showcase his intent to create substance within the Union of the Mediterranean. For those who have covered or have taken an interest in European Union politics, you know that Franco-German axis dominates decision-making in Brussels. The crumbling of the Berlin Wall tilted that axis east. Minus Malta and Cyprus, the recent expansion of the E.U. has largely been an eastbound effort. So this new Union creates a new paradigm and some tensions in Europe.

German Chancellor Angela Merkel was not going to sit idle and let President Sarkozy design a non-E.U. driven structure, which would have seen only those countries bordering the Mediterranean as part of this effort. The strong-willed East German thought that would set the wrong precedent and allow France to relive the grandeur colonial times with little benefit to the 27 nation bloc.

This would explain where we are today with 43 countries cobbled together. What is now being called Club Med is not a new initiative; it goes back to the so-called Barcelona process of 1995. With so much instability and what many feared would be an endless call by North African countries for cash and E.U. structural funds, the effort stalled.

A lot has changed since then. For one, there is economic stability and pretty decent growth-- 4.4 percent since the turn of the century. While no one can contend the non-E.U. countries represent a cradle for democracy, they do represent a handful of countries that have embarked on real economic reforms – Egypt, Jordan, Morocco, and Turkey immediately spring to mind.

Those reforms caught the eye of some very wealthy Gulf neighbors who can clearly claim first mover status. Large development companies are building new cities, ports, factories and oil and gas facilities throughout Club Med.

As the Chief Executive of one Gulf real estate company aptly noted, “we are not a charity; we are out to make money, but if we help stabilize our region at the same time, so much the better.”

This is not the International Monetary Fund or World Bank at work, but the private sector smelling value.

European Trade Commissioner Peter Mandelson acknowledges the frustration many North African leaders have felt after a decade of limited leadership from Brussels, but sees the merits of this effort after the wave of investment.

“I think that it will bring greater political stability on the back of greater prosperity to the countries of the Southern Mediterranean and North Africa and that’s certainly in the interests of Europe,” Mandelson said.

The not-so-foreign direct investment from the Gulf (since they are in the same neighborhood) is the deciding factor for President Sarkozy. The economic risks are low, but the political upside is high and he could even carve out a role for France (and the E.U. for that matter) in the Middle East peace process.

The challenge for all leaders is to make sure wealth can be distributed more evenly. This bloc trails only China in FDI at nearly $60 billion a year. But it is the region’s two most populous countries, Turkey and Egypt and the most tech savvy, Israel, which are dominating that total. Investors either want a large consumer market to sell into or the ability to export skills and technology they don’t have.

That certainly is changing. DP World has, for example, a $3.5 billion port under construction in Tangiers and Renault Nissan has an automobile plant designed within the same facility. FDI is up six fold since the start of the century, with again Gulf players leading the modern day caravan across the Med.

"The Arab world today is in a dramatically different situation and a significantly more promising economic situation than it was in the mid 1990s,” says Florence Eid, President of Arabia Monitor. “On the back of six years of the oil windfall now, we are seeing dramatically different methods of investment."

The investment will provide a foundation for growth and hopefully long term job creation. It is the most pressing issue. Unemployment stands at about 12 percent in the non-E.U. Med countries; most experts contend it is double that amongst the youth.

If successful it will help stem the tide of immigrants who literally wash up on the shores of Spain, France, Malta and

Greece

seeking job opportunities.

President Sarkozy, with his Parisian hospitality, was out to make a statement that the Union of the Mediterranean can be grand, can lower barriers to trade, create jobs and assist in addressing one of Europe’s most pressing issues.

The Club Med launch party was relatively easy to pull off; the real work, however, just begins.

“We have strong concerns about the sharp rise in oil prices, which poses risks to the global economy.”

This quote came from the G8 communiqué on the world economy from Japan, designed to reflect the consensus opinion amongst the developed economies that record oil prices will provide the tipping point into recession in their countries.

Many pundits got excited by the $5 drop per barrel earlier in the week -- the largest single day fall since March. These analysts believed the drop pointed to a bottoming out for the U.S. dollar and falling demand for crude as a result of a global slowdown.

Personally, I think it is too early draw those conclusions on both fronts. The housing market remains dangerously weak in the United States and that caution is clearly starting to take hold in Britain as well. U.S. Federal Reserve Board Chairman Ben Bernanke sent a strong signal of his concerns by noting that emergency cash facilities will be made available well into 2009 if necessary. He would not do so if he did not deem it necessary.

The dollar weakness that we have witnessed for the better part of three years is likely to remain until:

Political change often brings with it an ability to break with positions from the past. This could apply to both the dollar and oil prices.

Daily demand is holding up at around 87 million barrels a day, but according to OPEC and Saudi officials there is no demand beyond the current production now in place. Traders are basically making a big bet (and a lot of money in the short term) that demand from the developing world will outstrip the production earmarked to come on stream in the next few years.

“Oil producing countries should ensure transparent and stable investment environments conducive to increase the production capacity needed to meet rising global demand.”

Transparent was a word used at great length this week in Japan and last week at the World Petroleum Congress in Madrid. There is a polite but serious “tug of war” taking place between the international oil companies (IOCs) and the national oil companies (NOCs) – think Saudi Aramco, Abu Dhabi National Oil Company (Adnoc), Libya’s National Oil Company or Kuwait Petroleum Corporation. There are similar oil groups in Russia, Central and Southeast Asia.

With crude at this level, national oil companies don’t want to pump too much oil and want to hold onto the highest percentage of a field that they can. Many of these NOCs, according to non-government oil company officials I have spoken with, have been less than eager to speed into production or give too much away. This is not reported in the headlines of daily papers and telecasts, but it is the reality on the ground.

That equation is part of a greater co-dependency between the G8 and the Middle East. The region is partnering across the board on major projects, but new terms get defined each month. For example, ConocoPhillips signed a long sought after deal with Adnoc this week to develop an onshore natural gas field southwest of Abu Dhabi. The U.S. energy giant will own 40 percent of the holding; its Gulf partner 60 percent. The Shah Field will likely cost $10 billion to develop.

On the macro-economic level, G-8 countries are more dependent than ever on Middle East producers. Robert Parker, Deputy Chairman of Credit Suisse Asset Management in London agrees: “The answer to that is a clear yes and the reason why I say yes is that when the oil market was trading at $80 to $100, the impact on the global economy was minimal. With the oil price trading above $140 a barrel, I would argue that is having a very negative effect on the Western economies on the oil consumers.”

In today’s scenario, the G8 is calling for great cooperation and dialogue. We saw a hint of this in Japan with the input by leaders of the G-5 (China, India, Brazil, Mexico and South Africa) on the final day. There was not a lot of agreement on how to best address a reduction in greenhouse gases, but plenty of finger-pointing going on.

This effort was however a good start. A G-13 (despite the unlucky number) is much more welcoming than the current structure, which candidly seems dated. It should be a group of equals addressing concerns eye-to-eye. While the world seems to be in an expansive mode, we might want to think a bit differently.

It should not be a gathering of just energy consuming nations, but bring in the producers (either GCC or another structure) to take us from dialogue to action. Let’s not have one-off energy summits like the recent meeting in Jeddah, but make the process more inclusive, more productive and yes more transparent.

Walking through the sprawling Feria de Madrid convention center in the outskirts of the Spanish capital one clearly gets the sense there is plenty of money around. $140 oil can buy a lot of exhibition stand space at the World Petroleum Congress.

On one side, there is Exxon Mobil’s towering display wrapped in semi-transparent modern mesh designed to match its global marketing campaign. In the other hall, front and center the twin stands of Saudi Aramco and Qatar Petroleum are the size of oil platforms. I was told the latter took up 1,200 sq. meters, supported by a full range of recycled goods.

This tri-annual event brings together energy ministers and oil chief executives to rub shoulders and conduct business. This year they all had a lot to say during scores of interviews and press conferences about the price of oil, except when it will peak.

The straight talking Chief Executive of French giant Total, Christophe de Margerie told me: “I was always right to say the price would definitely climb, but unfortunately to a level I did not expect and don’t like”.

He and others don’t like it because they fear the severe spike up will lead to a dramatic fall from where we are today. The International Energy Agency is calling the record price run up a “third oil shock”. A partner at Ernst and Young (E&Y) labels this a “super spike scenario”.

Both groups say the implications of this never ending rally will be far reaching. Don Painter of E&Y believes this particular scenario is interesting because it will “drive changes in behaviour; consumer and consuming nation behavior”.

Having left suburbia for dinner in central Madrid I got a sense of what Painter was talking about.

Spain

’s Prime Minister José Luis Rodríguez Zapatero faced intense criticism this week before parliament for not calling the economic retreat and energy price spike a crisis.

I guess he did not tune in to see the fuel protests on the streets of the capital. After a tremendous 12 year economic run and property boom, Spain now has the highest unemployment rate amongst the developed countries at nearly 10 percent. Jobless claims rose for the first time since the recession in 1993. $140 oil is starting to bite.

To date, the downturn has been confined to the industrialized world. Asia as a whole continues to grow at six percent and, along with the Middle East continues to buffer the impact of the Western slowdown. If oil does not start to back off, don’t expect India, China and Southeast Asia to withstand the pressure.

This backdrop leads me nicely into the blame game. There were calls by G8 leaders for OPEC to provide more crude to the market. Saudi Arabia, which has most of the world’s spare capacity these days, has responded. This month it will add half a million barrels a day of production and says there are another two and a half million barrels available if demand warrants.

This is the headline: The Kingdom’s oil minister Ali Al Naimi says demand is not there.