Economically, things may not be looking all that cheerful in the GCC states right now. With GDP growth rates slowing, budget deficits heading upwards and oil prices, which started to decline with the Asian financial crisis still declining. Most Gulf Governments are cutting back or reassessing their capital spending.

What has happened in the global economy that has lead to a situation where one of the richest regions in the world that has two of the most sought after natural resources on the planet, oil and liquefied natural gas is facing, along the America and Europe, the worst financial crisis since the 1930s?

To find answers we need to look at how, what started out as a fairly routine run on one countries currency and its subsequent devaluation, led to an economic melt -down among neighbouring countries that then spread around the globe. It was in July 1997 that the Government of Thailand decided to devalue its currency the baht which led to a twenty per cent drop in its value against the dollar. while this was noteworthy , most economists saw it only as a signal that some of Asia's fast growing economies were in for a bit of turbulence but none imagined it would mark the beginning of the worst global financial crisis since the depression.

Within days of Thailand's decision to devalue the baht, other Asian 'Tiger' economies found their currencies being squeezed; the Malaysian ringgit, the Indonesian rupiah, and the Phillipines peso all came under heavy pressure from global speculators. what had seemed like an event of limited significance quickly took on a more troubling complexion.

One year on this 'event of limited significance' is set to crash the international financial system. No emerging market has remained unscathed by the events in Asia, it has engulfed the entire developing world. A few newcomers to the free market - Russia in particular - appear to be on the verge of ruin.

If Japan, the world's second largest economy is infected with the virus that sapped the economic health of its neighbours how long can other economies such as the United States, Europe and the Middle East remain stable? With many of their export markets collapsing, the United States and Europe will almost certainly slide into recession Ð or worse. While the Governments of the Middle East will see the price of their natural resources slide which will lead, as is happening, to a major slowdown in Capital expenditure.

No one is sure of the exact causes of this disaster but a few factors are cited again and again in discussions of what has gone wrong and while these do not give a definitive analysis, they do offer a partial explanation.

As pressure on the baht mounted, investors and speculators started to pay attention to the underlying weaknesses in the Thai economy that out-weighed its obvious strengths.

The accumulation of enormous debts by Thai companies, the glutted property market, the continuing construction boom, coupled with lax regulations that generated problems in the banking sector and a ballooning currant account deficit all led to the currency downfall. As soon as the bahts devaluation was announced speculators and investors woke up to fact that similar conditions prevailed in nearly all Asia's high growth economies. and soon speculators started attacking other Asian currencies particularly those of Indonesia and Malaysia. But within a couple of months even the South Korean economy was in difficulty.

A second factor that has contributed to the economic meltdown in South-East Asia is that to varying degrees, each of Asia's tiger economies, have adopted the Japanese development model, the regions first economic powerhouse. One key aspect of it is the Kerietsu network, which is a set of interlocking, mutually profitable relationships between members of Japan's political, industrial and financial sectors. this crony capitalism has lead to business systems rife with nepotism and corruption. Vigilant regulation is impossible within such a tightly spun web where all parties owe favours to each other.

This form of crony capitalism seems particularly suited to another cause of the ills that are dogging South East Asia - the high debt model of development followed by most of Asian most dynamic economies. This strategy of borrowing to finance expansion can produce soaring growth rates but what it also does, is mortgage a countries future and invites a day of reckoning.

Banks were the the source of most of the profligate borrowing undertaken by corporations throughout Asia. As prominent figure in chaebols, bankers were willing to lend their partners almost any amount. They were able to do this as they were had plenty of cash due to Asia's exceptionally high rate of domestic savings. Government officials, also part of the chaebols, looked they other way as loan repayments fell behind schedule and the banks continued to lend money to the defaulting companies.

Previous banking crises have led Western governments to create stringent regulations that provide safeguards against corrupt or reckless practices. but cowboy capitalists in America found the loose regulatory structure in Asian markets much to their liking.

These quick money artists both in the US and Europe were eager to put money into economies offering much higher returns than in their home markets. Asian companies already owing billions to their partner banks took on still more debt as there foreigners rushed -in to invest and reap hyper-profits from what seemed the Asian Miracle. But these investors were not part of the Chaebols and had no wish or incentive to play along and hope for the best when conditions began to deteriorate. As foreign capital started to flee, Asian economies began to collapse.

So how does all of this affect the economies of the Middle East? Let us start by looking at those sectors that seem the most vulnerable to changes in the world economy.

The Asian crisis could not have come at a worse time for the regions major oil producers, Saudi Arabia, The United Arab Emirates and Kuwait, for being buoyed up by a year of relatively strong oil prices and eager to regain lost market share in East Asia, they successfully pushed through the first rise in Opecs production ceiling in three years. this was announced in Jakarta in November 1997, the Asian capital that was ironically, the most effected by the crisis in the months following the conference. By the time the new capacity was brought on line demand in East Asia had evaporated. Any hope that new markets could be found was soon dashed as El Nino produced one of the warmest winters on record in Europe and the United States. thus depriving Middle East producers of the traditional demand for oil at this time of year in the northern hemisphere. Allied to a renegotiated oil-for-deal which allowed Iraqi to almost double its oil exports; and errant Opec members, particularly Venezuela, who continued to ignore even the raised production ceiling ensured that Opec was still pumping more than one million barrels of oil a day than it should have which let to prices moving even lower.

The net effect has been that GCC Government official have been hastily trying to recalculate project revenues and select which Government projects to shelve. the net effect has been nothing short of frightening. Particularly as the six GCC states had spend the last seven years trying to overcome the combined effect of paying the bill for operation Desert Storm and a prolonged period of weak oil prices, and had at last succeeded in bringing their collective budget deficit down from US$19.8 billion in 1993 to just US$309 million in 1997 and were predicting a surplus by the year 2000. But because of the current crisis the collective deficit is expected to raise to US$11.3 billion dollars by the end of 1998.

Normally an increase of this magnitude in the budget deficit would lead to a great deal of inflationary pressure but because of the extraordinary nature of Gulf economies being sixty per cent reliant on dollar priced oil for revenue means that all the Gulf's economies are pegged to the dollar. so while earnings diminish, domestic spending power will not.

Considering the fall in the value of Asian currencies against the dollar since the crisis started it is obvious that this pegging of Gulf currencies to the dollar at a time when the falling demand for oil in Asian has contributed to a lowering of oil prices means that the lower cost of Asian imports should go a long way to offset the effect of weak demand.

Although the oil sector has been hit hard by the Asian economic crisis, it is the regions growing liquefied natural gas (LNG) sector that has been worse hit as it has to date been solely reliant on East Asia for not only customers but in terms of hundreds of millions of dollars in export credits and commercial loans needed for its development. this relationship will continue, as in Europe there is an adequate supply of cheaper piped and liquefied gas from the North Sea.

But this relationship is being put under strain by the fall in demand for power that has followed the economic downturn in Asia as some of the contracts such as the one between Abu Dhabi Gas Liquefaction Company (Adgas) went on stream with Tokyo Electric Power Company (Tepco) for five million tonnes per year, currently Tepco is seeking to renegotiate the terms of its twenty five year contract with Adgas and may limit its uptake to the minimum of 4.3 million tonnes per year, leaving Adgas with over a million tonnes of spare capacity. things are no better for other Gulf states LNG projects.

Even when they recover from the current recession the prospects for long term contracts are gloomy, as the high cost of transport and the new LNG projects being developed in Brunei, Malaysia and Australia which are nearer to the Asian markets and therefore more competitively priced .

It would be far more practical for Gulf LNG producers to look closer to home possibly on the Indian sub-continent but there is a drawback here as the Indian markets will not reach its full potential unless investors can find ways to reduce the heavy borrowing costs which come with developing market and that financing is readily available for the development of gas receiving and distribution infrastructure

Along with these problems in the regions petroleum and LNG industries, the downturn in demand in key Asian markets could not have come at a more inopportune time for the Gulf's metal industry - the only true manufacturing industry in the region. catching the regions two aluminium smelting plants in Bahrain and the United Arab Emirates in the midst of major expansion programmes. it is estimated that Dubai Aluminium (Dubal) will have to find alternative markets for an estimated seven five thousands tonnes that Asia can no longer afford. this position is aggravated by the imposition of a six per cent tariff on aluminium by the European Union.

the crisis is also making it harder for Aluminium Bahrain (Alba) and Dubal to raise the financing for their already announced expansion programmes. Dubal had considered issuing five to ten year bonds on the US and European stock markets to provide a major part of the US$725 million it will need for its Condor project. But the bond issue could be cancelled if the global financial crisis worsens.

As for other metals companies the crisis in Asia is providing new opportunities as evidenced by the joint venture between Dubai Cable (Ducab) and the United Kingdoms BICC Group who has recently won its first contracts in Hong Kong. Ducab sees an opening for low-voltage cables in the region particularly and is aiming to double its sales and turnover in the next three years. Zamil Steel the worlds sixth largest producer of pre-engineered buildings is commissioning a new factory in Hanoi and plans to be producing 4,000 tonnes per month within four years.

It is evident that the major sectors of the Gulf region economy, petrochemicals and metal are being affected to a lesser or grater degree by the global contagion stemming from the crisis in Asia which will slow down development in the region as the flow of finance from the Far East that has played an important part in funding new projects dries up as Banks in Japan and Korea which are saddled with billions of dollars in bad debt struggle to stay afloat. Since the crisis began most Japanese banks have restricted their lending and many have completely pulled their funds out of the region. these banks had been keen to lend money in the Gulf, and prior to the onset of the economic crisis as much as a third of any loan syndication was taken up by between them. These banks had been keen despite very competitive loan prices as interest rates in Japan over the last few years have been as low as one per cent .

Because of the current situation the last two major loan syndications out of Saudi Arabia the Yanpet and Kemuya petrochemicals projects have both died in syndication. Just three Japanese banks were attracted to the syndications; a direct result Japanese banks pulling out of the market.

There is however a hope that project finance could reverse as Gulf Banks follow their clients into the Asian market. Gulf bankers are watching closely to see if some of the current proposed acquisitions by some of the GCC's leading petrochemical companies who are seeking oil facilities in East and South East Asia are successful.

Although the current situation looks poor, the prevailing view among bankers is that there is a bright future ahead for the Gulf's petrochemical producers will assume an even more prominent role in the Asian market once the economies there recover.

And they are encouraged by signs that some of the large GCC corporations my be interested in acquiring ailing manufacturers of consumer goods at what are now low prices. It seems that the more astute of the business houses are approaching banks investment arms who are looking to buy manufacturers in Korea and Indonesia. they realise that now is the chance to make purchases that would ease the risks of currency fluctuation, ease stock levels and free themselves from the limitations of distributorship agreements that stop them from going into the potentially lucrative re-export markets in Africa and central Asia.

It is apparent that the GCC states will make it through the current global crisis despite a short lived drop in growth and a drop in oil revenues they will be assisted by their huge liquid assets and enormous oil and gas reserves. But the extent of the Asian crisis is as yet not fully realised, clearly the whole of the region is being affected particularly exports of crude oil. and while South Korea has become a major borrower again but despite the difficulties it is unlikely that the GCC states will go the same way as its oil reserves and liquidity.

One lesson that can be learned by the Gulf states from the current crisis is that it is dangerous to rely on the price of their only asset, oil, to fuel capital expenditure. Before the present world economic crisis, many governments in the Region recognised this weakness. This is particularly true of the United Arab Emirates, whose impressive advances in the diversification of their economy are to be admired.

It is evident that some GCC countries are looking to privatisation, in some form, as a means to gain liquidity by bringing back to the region some of the money invested elsewhere in order to cover their deficits. It is also an opportunity to gain efficiency and gain knowledge of the private sector to enable them to compete more effectively in the global economy. But there are dangers, if governments privatise to gain liquidity, for budgetary and economic reasons, then spend it immediately. The effect will be that a short distance down the road these governments may find themselves with no permanent financing as they have sold off many of their revenue generating assets.

Most of the region's countries are, because of their inherent stability attractive to foreign investors what should be done is market that asset emphasising to foreign capital that the Gulf region is a secure place to invest. if successful and the region attracts long-term investment that brings with it technology and growth of markets this would enable the GCC states to solve one of its most pressing problems; employment. They need to create real sustainable jobs for their citizens. over the next ten to fifteen years as over fifty per cent of the population in most GCC states in under the age of eighteen. An inflow of foreign invest to set up technologically intensive industries will enable regional governments to give their young citizens through education, the skills to enter the national work force.