GCC can deal with fresh global crisis

Gulf hydrocarbon exporters are in a position to deal with the global economic weakness and any fresh fall in oil prices given their massive overseas assets and financial surpluses, according to a key Saudi bank.

The Saudi American Bank Group (Samba) estimated the combined assets of regional sovereign wealth funds (SWFs) at nearly $1.1 trillion, more than half of which are controlled by the Abu Dhabi Investment Authority (Adia).

In a study on the impact of global fiscal turbulence on the six-nation Gulf Cooperation Council (GCC), SAMBA said the figures do not include the assets controlled by the Saudi Arabian Monetary Agency (Sama), estimated at around SR1,926 billion ($513bn) at the end of August.

It said most GCC members basked in budget and current account surpluses in 2010 and expected the balance to improve further through 2011.

“GCC states are well placed to deal with the continuing weakness in the global economy. During the oil boom of 2003-2008 governments prudently used the increase in revenues to pay down public debt, build up external assets and begin implementing ambitious infrastructure and development programs aimed at diversifying their economies,” the study said.

“We believe that the region has a bright future…. it has abundant energy resources which are increasingly sought by growing emerging market economies. Its public finances are strong, its labour force is becoming more educated, its banks are sound, and its governments committed to economic development and diversification.”

But Samba stressed that success would depend on a consistent set of policy prescriptions to deal with the challenges ahead.  It said good progress has been made to-date adding that the recent experience of dealing with the global crisis has given GCC leaders “new insights into how to navigate a global economy in transition.”

The report noted that GCC nations, which control over 40 per cent of the world’s proven crude deposits, had run large fiscal and current account surpluses during 2003-2008, and were able to draw on the accrued savings to implement strong counter cyclical fiscal policies to support their economies during the global crash.

It said the resultant increase in public spending combined with the slump in oil prices did push fiscal balances into deficit during 2009-2010 in some states, but all members are expected to post healthy surpluses in 2011, despite additional spending commitments to address social concerns and boost employment. 

The report also said rising oil prices together with an increase in GCC oil production to offset the loss of Libyan crude supplies have helped boost government finances in 2011. “But even as such benefits will wane next year, we still expect GCC fiscal balances to remain sound,” it said.

“Although the buffer of large fiscal surpluses has certainly diminished, leaving GCC states more vulnerable to oil price volatility, public finances are still strong and we expect they will remain so despite large spending commitments on both infrastructure projects and recurrent outlays such as salaries and pensions….oil price volatility is a problem, but with large external assets to draw on, it is a manageable problem,” the report added.

A breakdown showed UAE SWF assets are estimated at around $719.1bn, including nearly $625bn controlled by Adia. It put Kuwait’s assets at around $296bn and those of Qatar and Oman at $85bn and $8.2bn.

As for current accounts, the report said they have been consistently in surplus since 2000, adding that although they have diminished somewhat in recent years reflecting government stimulus measures and fluctuations in oil prices, they remain large and have contributed to a dramatic build up in GCC external assets.

“As a result of sound fiscal balances, government debt levels in the GCC are generally low, giving them ample room to borrow to cover any temporary fiscal shortfalls. With strong international credit ratings, access to capital markets should not be an issue,” Samba said.

“GCC governments can also tap into local and regional liquidity…. even in the debt constrained emirate of Dubai, the government has been able to borrow in capital markets, having more clearly delineated its contingent liabilities on government related entity.”

In its quarterly bulletin issued last month, Samba said it expected the GCC economies to surge by more than seven per cent in 2011, its second highest growth rate in many years since the sharp increase in 2008.

Samba said it had revised up its previous estimates for growth in the GCC on the ground the global economy will not be unduly affected.

“As such, our revisions stem mainly from the impact of higher oil prices and GCC production; recently announced government spending plans; and some country-specific disruptions to economic activity in Bahrain and Oman,” it said.

“Overall GCC real GDP growth is now projected to surge to just over seven per cent this year, led by a 5.7 percent increase in the dominant Saudi economy. Such a strong performance was last achieved in 2008 when the region was booming prior to the global recession and growth stood at 7.3 per cent.”

Follow Emirates 24|7 on Google News.