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29 March 2024

Oil price rise to improve GCC budget prospects

The recent oil price increase means more revenue and this will allow them to record surpluses. But all this will depend on whether they will be tempted by the price increase to further boost expenditure. (EB FILE)

Published
By Nadim Kawach

The recent surge in crude prices could allow Gulf crude producers to escape their first fiscal deficit in nearly seven years despite a sharp increase in public spending because of the global economic turmoil, according to analysts.

Oil prices have shot up to nearly double their January level of about $40 a barrel and the rapid improvement has prompted several institutions to revise their forecasts about average prices for 2009.

From around $50-55 a barrel, the International Institute of Finance (IIF), the Riyadh-based Jadwa Investment and other establishments are now projecting an average price of more than $60, at least $10 above the crude price assumed by most Gulf Co-operation Council (GCC) members in their 2009 state budgets.

Theoretically, their budgets are supposed to record a large surplus, taking into consideration their non-oil revenues and projections of lower crude output. But most of them are believed to have overshot their forecast budgets as they strive to ease the effects of the global fiscal crisis on their economies. "I think GCC budgets could still record a surplus this year albeit much lower than the record surplus in 2008," said Ihsan bu Hlaiga, a Saudi economist.

"The recent oil price increase means more revenue and this will allow them to record surpluses. But all this will depend on whether they will be tempted by the price increase to further boost expenditure. This has happened before."

The six members, which rely heavily on oil exports, have amassed nearly $605 billion (Dh2.22 trillion) in fiscal surpluses during 2003-2008 as a result of strong crude prices, which also allowed them to sharply bolster their foreign assets.

As oil prices this year are projected just above half their 2008 average and the six members are pumping far below last year's oil output, their crude export earnings could plunge by nearly $250bn in 2009. But they remain almost equivalent to their 2006 earnings and way above their 2000 income.

Estimates by the Washington-based IIF showed the combined oil export revenues of the six GCC nations, which sit atop about 45 per cent of the global proven crude wealth, could dip to nearly $327bn in 2009 from a record high of $575bn, when crude prices peaked at $95 a barrel.

The surge in earnings allowed GCC countries to record their highest ever budget surplus of nearly $189bn last year though they had forecast a surplus of only $32bn. Saudi Arabia accounted for more than 80 per cent of the surplus following a sharp rise in its oil output and prices.

IIF, which had previously predicted a tiny fiscal surplus in the GCC this year when crude prices were as low as $40 a barrel, said their combined budgets could now record a modest surplus following the improvement in crude prices. But it noted that it will be far lower than the 2008 surplus as a result of higher public spending and lower oil and non-oil revenues.

"The consolidated GCC fiscal surplus will narrow to about seven per cent of the GDP in 2009 from nearly 22 per cent in 2008," the report said.

According to the Saudi American Bank (Samba), the budget position in the GCC countries this year will depend on how far they will go in surpassing forecast expenditure to fulfill their commitment to pledged anti-crisis measures.

"Given that the GCC spending traditionally overshoots announced budgets, the break even oil price is just a rough indicator, and understates the likelihood of fiscal deficits emerging budget balances will be heavily dependent on how far the GCC governments are prepared to sustain and/or raise spending to help support their economies," Samba said in a study.

In the UAE, the second largest Arab economy after Saudi Arabia, strong oil prices coupled with high crude production boosted its fiscal surplus to a record high of Dh127bn in 2008 but the balance could turn into a deficit this year. The surplus swelled to an all-time high despite a sharp increase in public expenditure by the federal government and each of the country's seven emirates, showed the figures by the London-based Economist Intelligence Unit (EIU).

The consolidated finance account (CFA), which covers federal spending and the budgets of each emirate, recorded the surplus for the fourth successive year after several years of a massive deficit because of relatively low oil prices and a steady growth in public spending on infrastructure and other key sectors.

"In 2008, strong growth in oil and non-oil revenue pushed up the consolidated fiscal surplus to an estimated Dh127bn, nearly 13.6 per cent of the GDP, in spite of a highly expansionary budget," EIU said in a report on the UAE economy, sent to Emirates Business.

"In 2009, a decline in oil revenue owing to falling prices and production cuts will push the public finances into a small deficit of around 0.3 per cent of GDP."

 

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