GCC's 2010 fiscal position strong on oil prices

Strong crude prices will bolster the fiscal position in Gulf oil producers in 2010, but some of them could still record a manageable budget deficit because of counter-crisis high public spending, according to analysts.

While the combined budgets of the six-nation Gulf Co-operation Council (GCC) would likely record a surplus, as was the case in the previous nine years, some of them could suffer a relatively small shortfall despite an upsurge in their hydrocarbon earnings, they said. The experts believe four GCC members – the UAE, Kuwait, Qatar and Oman – would record surpluses while the budgets of Saudi Arabia, the largest Arab economy, and Bahrain would remain in a deficit.

"I would say that the region should sustain high oil revenues and most witness a fiscal and current account surplus, given that oil averages in the $70 range, and with oil in the $80 range [this] should provide strong confidence about the region's revenue prospects," John Sfakianakis, Chief Economist at Banque Saudi Fransi (BSF), told Emirates Business.

Another analyst based in Saudi Arabia agreed that the GCC as a whole would enjoy a strong fiscal position but expected gaps in individual budgets.

"GCC fiscal balances will mostly be in surplus as revenues exceed spending… we are somewhat against consensus, though, in thinking that Saudi Arabia will post a marginal fiscal deficit of 0.3 per cent of the GDP, despite revenues being above budget," said Andrew Gilmour, senior economist at the Saudi American Bank Group (Samba). "This is because we expect Saudi Aramco to withhold a larger share of export earnings for its own investment purposes."

In a new study sent to Emirates Business, Samba, one of the largest banks in the Middle East, said the recent surge in oil prices above $80 a barrel would strengthen the GCC's finances in 2010 and allow most members to record budget and current account surpluses. This will also boost their overseas assets, already filled up by seven years of oil boom.

But it noted that fiscal surpluses could still be far below those recorded during the 2005-2008 boom years due to a massive increase in public spending.

"In the case of Saudi Arabia, its exceptionally large planned budgetary spending is expected to result in a second year of fiscal deficits in 2010 [2.8 per cent of the GDP]. Although the kingdom accounts for nearly half of GCC fiscal spending in any one year, the region as a whole is still projected to post a fiscal surplus of near five per cent of the GDP in 2010," Samba said.

According to the report, the GCC countries, sitting atop 45 per cent of the world's oil, have plans in 2010 to maintain the expansionary fiscal policy of recent years that has provided the main driver of growth in the region.

Spending to surge

"We expect government spending will rise by around 14 per cent this year to a record $354 billion [Dh1.3 trillion], bolstered by stronger oil prices. A large proportion of this spending has been earmarked for infrastructure investments to support growth. As is customary, spending levels are expected to exceed the amounts presented in official budgets," Samba said. "However, given that most governments have based their budget revenues on oil price assumptions well below our $75 a barrel projection for 2010, we should still see solid improvements in fiscal balances. Along with Saudi Arabia, Bahrain is likely to post small deficits this year, but the rest of the GCC should see fiscal surpluses."

In a recent study, the Emirates Industrial Bank (EIB) expected that the improvement in oil prices to a projected average of over $70 a barrel this year from $60 in 2009 would widen the GCC's fiscal surplus to nearly $50bn in 2010 after plunging last year to one of its lowest levels in a decade.

The six GCC nations, which pump more than 15 per cent of the world's crude supply, assumed a modest deficit in their 2010 budgets, but it could turn into a massive surplus by the end of the year as crude prices are projected to average far higher than the budgeted level, the government-run EIB said.

From a record $189bn in 2008, the GCC's consolidated fiscal surplus dipped to only $19.6bn in 2009, but the balance is expected to rebound sharply this year, the Dubai-based bank said.

"Although the six-member countries forecast a deficit of $2.9bn in their budgets for this year, the actual balance is expected to turn into a surplus of nearly $50bn…. This is because most of the budgets were based on an oil price of $50 a barrel while prices are expected to average $70," EIB said.

"The 2010 budgets were the highest in the GCC, as they were nearly 3.5 to 20 per cent higher than the previous year's budgets… naturally, the record expenditure will stimulate the economies of member countries… the surplus will be achieved despite an expected rise in actual spending."

EIB estimated that the combined spending in the 29-year-old Gulf economic, defence and political alliance increased by around 14.4 per cent to $269.3bn in 2010 from a budgeted $235.4bn in 2009, while forecast revenues swelled by about 4.4 per cent to nearly $266.3bn from $255bn.

The GCC nations basked in their largest fiscal surplus during the second oil boom of the previous decade, with their cumulative balance standing at a staggering $564bn during 2005-2008, including nearly $272bn in 2008 alone. Saudi Arabia accounted for almost 60 per cent of the 2005-2008 surplus.

In the UAE, the second largest Arab economy, the government has again announced a balanced federal budget, but the country has not published figures on the consolidated fiscal account (CFA), which includes the federal budget and spending by each emirate.

Analysts, however, believe the UAE has no real fiscal problems, on grounds that any shortfall is covered by returns from its massive overseas assets, mainly those held by the Abu Dhabi Investment Authority (Adia).

In 2009, the UAE boosted public spending to its highest ever level of Dh289bn despite a sharp decline in oil revenue. This expenditure was way above the 2008 spending of Dh254bn, although oil prices in 2008 were nearly 58 per cent higher than in 2009, according to the Abu Dhabi-based Arab Monetary Fund (AMF).

The AMF, a key Arab League institution, cited the UAE government figures as showing revenue in 2009 plunged to around Dh292.6bn from a record high of Dh450.3bn in 2008.

It said the decline was a result of a sharp fall in hydrocarbon export earnings to nearly Dh217.5bn last year from a peak of Dh362.1bn in 2008.

"Despite the sharp fall, the UAE consolidated finance account recorded a surplus of around Dh3.5bn in 2009… this is compared with a record budget surplus of nearly Dh197bn in 2008," the report said.

Other GCC members

Kuwait, one of the first nations to pump oil, is expected to record the largest fiscal surplus in 2010 as it had in 2009, mainly because the country normally assumes the GCC's most conservative oil price of below $40.

Its 2009-2010 budget is reported to have ended with a surplus of around KD6bn (Dh75.9bn) for the 11th year running.

Semi-official data showed the emirate budgeted revenue for fiscal 2010-2011 at around KD9.7bn and spending at KD16.16bn, leaving a deficit of nearly KD6.4bn. But analysts believe the actual balance would turn into a large surplus as oil prices have been assumed at nearly half their current level and the country has shown a great degree of spending restraint.

In Qatar, holder of the world's third largest gas reserves, the government announced its budget for the 2010-2011 fiscal year will be 25 per cent higher than the previous budget, amid a projected 44 per cent rise in revenue.

State spending will increase to QR117.9bn (Dh118.9bn) while revenue is projected to rise to QR127.9bn, generating a surplus of about QR10bn.

In its latest forecasts about Qatar, Samba said it expected the 2010-2011 budget to end the year with a surplus because of high oil prices and a surge in the country's LNG (liquefied natural gas) exports with the completion of new projects. The report expected the actual surplus at around $9.2bn, slightly lower than the surplus of $9.4bn recorded in the 2009-2010 budget.

Opec non-member Oman has joined its GCC partners in approving a record budget to offset the downward pressure of the global crisis. The budget is based on an oil price of $50 a barrel and high crude production as the country is pushing ahead with projects to maximise its output capacity.

Budgetary expenditure for 2010 is estimated at RO7.18bn (Dh68.57bn), nearly nine per cent above the 2009 budget.

Revenues are assumed at RO6.38bn, leaving a deficit of RO800 million, slightly lower than the RO810m shortfall forecast in the 2009 budget.

Saudi budget forecast

Economists have provided contradicting and varied scenarios about the actual balance in Saudi Arabia's budget this year, with some expecting a deficit and others projecting either a tiny or a large surplus.

One scenario by Saudi Arabia's largest bank, National Commercial Bank (NCB), forecast a massive surplus of around SR121 billion (Dh118.5bn) in this year's budget against an assumed deficit of SR70bn.

"We are forecasting oil prices to average $75 a barrel in 2010. The overall fiscal surplus will rise to 7.6 per cent of GDP [or SR121bn] in 2010, based on higher oil revenues… our forecast is based on an average Arab light price of $75. This will result in oil revenue of about SR634bn, nearly 40 per cent higher than actual levels in 2009, which also takes into account a two per cent growth in export volumes," NCB said in a study.

Another scenario involved a tiny surplus of around SR23bn on the basis of a sharp rise in revenue despite a surge in expenditure. The Riyadh-based Jadwa Investments expected actual revenue to soar to SR626bn from a budgeted SR470bn while spending could swell to nearly SR603bn compared with a projected SR549bn.

Figures released this week by the Saudi Arabian Monetary Agency (Sama), the kingdom's central bank, indicated the state budget could be in a surplus in the first quarter of 2010 as Sama's overseas assets swelled to around SR1,610bn at the end of March from SR1,570bn at the end of 2009.

Data by the US Energy Information Administration also showed Riyadh earned nearly SR188bn from crude oil exports, far higher than the average budgeted income of about SR117bn.

Sama's strong showing

In a recent study, BSF expected Sama's overseas assets to surge by nearly 14 per cent at the end of this year, because of an expected rise in oil prices to an average $70 from around $60 in 2009.

The bank said the increase this year would follow a decline by about 12 per cent in those assets because of heavy withdrawal by the government to meet growing spending commitments at home.

"We believe the government will continue to support the expansionary public spending programme this year, but since oil revenues are projected to increase, we expect those assets to rise by 14 per cent to reach nearly SR1.67trn at the end of 2010."

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