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Thu 7 Feb 2008 09:00 AM

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Another robust year for the Middle East

The Middle East appears poised for strong gains over the next 12 months, predicts Arjun Mittal.

Assuming that you're reading Arabian Business in the Middle East, and that you call the region home (either permanently or temporarily), count yourself among the fortunate. This year, like the one that just passed, should be a very good one.

While the global economic outlook for 2008 is replete with uncertainty, the Middle East appears poised for strong gains over the next 12 months.

If there is a dark cloud on the horizon, it is excess liquidity, which contributes to already high levels of inflation.

We forecast regional GDP growth to average a very healthy 6% for the year, broadly in line with a similar pace of growth in 2007. By comparison, we expect the global economy to grow at a slower rate, of between 4-4.5%.

With the US economy at risk of tipping into recession, Japanese growth weak and Europe decelerating, worldwide demand for oil is likely to slow. We believe this will lead oil prices to settle in the US$60-US$70/barrel range for the full year, down significantly from recent highs but in the broad bracket of the 2007 average per barrel price of US$74 and staying significantly higher than the $55/barrel average of the past five years.

Led by high oil prices, the Middle East is not just in the midst of a period of sustained growth but also in the middle of an investment boom. In 2008, buoyant prices will support such ongoing public and private-sector investment, with a particular focus on large-scale infrastructure projects. At the same time, regional investment in oil production and refining should increase over the course of the year.

It is not only the oil-producing countries of the region that we expect will experience growth, however. Supported by high levels of remittances and increased inward investment trends, the Middle East as a whole should have a strong year. Indeed, the Middle East is today experiencing a virtuous circle: high oil prices provide increased revenues, which are being reinvested in the long-term growth of the region. This investment is being accompanied by reforms that encourage increased foreign direct investment, further increasing regional liquidity levels. If there is a dark cloud on the horizon, in fact, it is precisely such excess liquidity, which contributes to already high levels of inflation. Soaring residential and commercial property prices, rapid wage growth and ever-higher food prices are also driving inflation upwards. The real estate supply-demand imbalance is stabilising, however, as thousands of new units will soon hit the market.

We expect the dollar to recover against the euro and the yen in 2008. This year should also be another good one for region's equity markets, with the possibility, in our view, of double-digit returns. While unlikely to match 2007 levels, robust macroeconomic growth should support corporate profitability, while allowing local currencies to strengthen. This means that interest rates will not have to rise significantly to curb overheating pressures.

Currently, valuations are stretched but price-earnings ratios probably still provide scope for the markets to continue to move higher. As well, relative to other emerging market regions, the Middle East is under-owned by developed market investors. There is clearly a great opportunity for increased foreign institutional share ownership in the year to come. Foreign investors are increasingly aware of the facts on the ground in the Middle East: Iraq may be mired in war, Iran at loggerheads with the West and the peace process seemingly perpetually stalled, but the global investment community recognises that this is hardly the whole picture.

The Middle East's economic renaissance is ongoing. You probably already know that, though. That's why you're here - sharing in the prosperity, in the right place, at the right time.

Arjun Mittal is a senior director, Global Wealth Management, NRI & India, at American Express Bank.