Strong crude prices are expected to widen the combined fiscal surplus of the six Gulf Co-operation Council (GCC) oil producers to nearly $50 billion in 2010 after plunging last year to its lowest levels in a decade, according to a study by the UAE government-controlled Emirates Industrial Bank (EIB).
The GCC countries, which pump more than 17 per cent of the world's oil supply, recorded a modest deficit in their 2010 budgets, but this 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 study said.
From a record $189bn (Dh693bn) in 2008, the GCC's consolidated fiscal surplus dipped to $19.6bn (Dh72bn) in 2009. However, the balance is expected to rebound sharply this year, EIB said.
"Although these six member countries forecast a budgetary deficit of $2.9bn for this year, the actual balance is expected to turn into a surplus of nearly $50bn… this is because most budgets were based on an oil price of $50 a barrel while prices are expected to average $70 a barrel," EIB said.
"The budgets for 2010 were the highest in the GCC being nearly 3.5 per cent 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," it noted.
The EIB study estimates that combined spending in the 29-year-old Arabian Gulf economic, defence and political alliance increased by about 14.4 per cent to $269.3bn (Dh987bn) 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 report gave no breakdown for the actual surplus in 2009, but Kuwait reported last week a surplus of nearly KD8.02bn (Dh102bn) in the first ten months of its 2009-10 fiscal year, which starts on April 1.
Saudi Arabia, the world's top oil exporter and the largest economy inthe Arab World, recorded a lower deficit of around SR45bn (Dh44bn) compared with a budgeted shortfall of SR65 bn.
The kingdom, sitting atop a quarter of the world's extractable oil deposits, recorded its highest budgetary surplus of SR581bn in 2008 after crude prices climbed to a record high average of $95 a barrel.
Towards the end of last year, Riyadh announced another record budget for 2010, forecasting a deficit of SR70bn despite expectations that oil prices would be at least $10 above their 2009 level of around $62 a barrel. Although the kingdom is again expected to overshoot planned spending, its budget could end the year with a tiny surplus after recording its first shortfall last year in nearly a decade.
"We forecast a budgetary surplus of SR15 bn in 2010. This is because we expect oil prices to be higher than that used in the budget and, therefore, that oil revenues will exceed the budgeted total," said Riyadh-based Jadwa Investments, one of the largest financial consulting firms in Saudi Arabia.
"We forecast total oil revenues to the budget at SR538bn and non-oil revenues at SR80bn. Spending will be in excess of the budgeted level. Actual spending has averaged 21 per cent greater than that budgeted over the past 10 years and even though oil prices were below the budget assumption for part of last year, the budget was still overspent by 16 per cent. We project total spending in 2010 at SR603bn," the consulting firm said.
Balanced budget for the UAE
In the UAE, the government again announced a balanced budget for 2010 although it was around 3.4 per cent higher than the previous federal budget. Spending was estimated at Dh43.6bn and analysts ruled out a real deficit on the grounds that any shortfall could be easily shored up by Abu Dhabi.
Unlike in other GCC member states, the UAE's federal budget does not reflect the real fiscal position of the country since it is part of bigger consolidated finance account (CFA), which covers federal spending and the budget of each emirate.
Most emirates do not publish budget figures while CFA details are released only one or two years later, apparently because of the delay in the accounting process in the seven emirates, according to financial analysts.
The UAE, Saudi Arabia and other GCC nations have been locked in massive fiscal stimulus programmes triggered by the global economic crisis. They include the approval of record budgets and support for their financial sectors.
In Qatar, spending for fiscal year 2009-10 was forecast at QR94.5bn (Dh95.3bn), which was slightly lower than its record budget of QR95.9bn in the previous fiscal year 2008-09.
But revenues were slashed to a projected QR88.7bn from QR103.3bn because of a steep fall in crude prices and in the country's production volumes in the first half of 2009. Lower forecast earnings created a deficit of QR5.8bn against an assumed surplus of QR7.4 bn in the previous budget, which was the highest in Qatar's history. The new budget, which kicked off on April 1, is based on an oil price of $40 a barrel, sharply below the $55 a barrel price assumed in the 2008-2009 budget.
Higher planned spending
Oman, a non-Organisation of Petroleum Exporting Countries (Opec) member, also announced record spending of RO7,180 million (Dh68.49bn) for 2010, which was nearly nine per cent higher than that budgeted for in 2009. Revenues were assumed at RO6,380m, leaving a budgetary deficit of RO800m, which was slightly lower than the projected 2009 shortfall of RO810m.
Figures released by the Omani Ministry of National Economy showed the 2009 shortfall was slashed to around RO107m in the first 11 months of the year as compared with a record surplus of RO1.98bn in 2008.
Bahrain, which does not export crude given its limited hydrocarbon resources, also approved higher spending of BD2.19bn (Dh21.33bn) for 2010 compared with BD2.08bn in 2009. Revenues were forecast at BD1.46bn in 2010 and BD1.39bn in 2009. The deficit was expected at BD728.8m and BD684m respectively.
The EIB report said it expected the improvement in crude oil prices to tempt GCC governments to exceed planned expenditure during this year, adding the increase would positively impact their economies and offset the repercussions of the global economic crisis.
"Given the expectations that oil prices will remain relatively high in the coming months, public spending in the GCC will increase and this will have a positive effect on the economy… it will also allow member states to extend more support to the financial and banking institutions, which in turn will encourage them to ease curbs on lending and contribute to accelerating growth rates," it said.
Positive signals to markets
"Furthermore, the announcement of deficit-free budgets with a small deficit and the assumption of relatively low oil prices in the GCC budgets, will send positive signals to markets and investors that member countries have almost overcome the repercussions of the global crisis and are ahead of a new stage of growth," the study said. Strong crude prices allied with high crude output sharply boosted the GCC's fiscal surpluses during the last oil boom and allowed them to bolster their foreign assets despite losses caused by the global financial crisis.
Official figures showed the cumulative fiscal surplus in the six member states totalled an approximate $546.8bn during 2005-2008. Nearly half the surplus was recorded in 2008, when the GCC's oil export earnings hit a record high of nearly $460bn.
Saudi Arabia registered the largest surplus of around $335bn during the 2005-2008 period followed by the UAE, which recorded a positive balance of nearly $129bn during the same time.
Caution over excesses
Speaking at an economic conference in Abu Dhabi last month, a Riyadh-based US analyst echoed calls from the International Monetary Fund on GCC countries to control expenditure on the grounds that excess spending could lead to massive deficits when oil prices decline.
Brad Bourland, Chief Economist at Jadwa Investments, said high public spending was needed in the GCC as part of an overall stimulus package to counter the global economic crisis.
But he warned that oil prices were not expected to match the steady rise in expenditure in the region and that this could result in a painful fiscal situation.
Bourland noted that GCC governments needed to keep spending at reasonable levels since public expenditure was vital for the generation of jobs and stimulation of economic growth as the public sector still accounts for a bulk of the group's economy.
"There are concerns about the steady increase in government spending in the GCC… oil prices are not expected to rise from their $70 a barrel level on a steady basis by $5 to $6 a barrel, which is much needed for governments in this part of the world to balance their budgets," Bourland said.
"As you know, governments in the GCC increase spending to ensure employment for their citizens and support growth… so I think this high spending will continue for a while because government expenditure is the main driver of growth in the countries of this region.
"I believe they should now be watchful because such excessive spending cannot be supported by a similar increase in oil prices in the next four years. They should also be careful about any unexpected developments when the next crisis hits," he added.
Bourland, one of the best known economists in the region, noted that in 2003, Saudi Arabia recorded its relatively largest budget surplus after several years of persistent shortfalls following a surge in crude prices during that year.
"In 2003, oil prices started to rise and reached $28 a barrel and the Saudi government, for example, ran a large budgetary surplus… Last year oil prices averaged $62 a barrel and the Saudi government ran a deficit of SR45bn," he said.
"As you see, $62 a barrel was not enough to balance the budget in 2009 but $28 a barrel was enough to achieve a surplus in 2003. Things have changed and the GCC governments should be aware of the fact that oil prices will not stay high," he cautioned.
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