Heavy public spending puts GCC on track

Gulf economies suffered from one of their worst setbacks in the wake of the 2008 global fiscal distress, but heavy public spending backed by massive overseas assets are gradually putting them back on track.

Except for Qatar, which has emerged almost unscathed by the crisis due to its soaring gas exports, the economies of the other five members of the Gulf Co-operation Council (GCC) sharply slowed down during 2009 while their fiscal achievements were eroded. But the six nations, which control more than 40 per cent of the world's recoverable crude deposits, are expected to bask again in a relative economic euphoria this year and the recovery could stretch into the next few years, according to the World Bank and other institutions.

The sharp recovery this year will be driven by higher oil prices and record high government expenditure as part of the region's ongoing fiscal stimulus measures spurred by the global crisis.

In case oil prices remain at their current level through the year, the GCC's real GDP could rebound by more than four per cent this year and growth could be close to five per cent in 2011.

In its latest regional report published last month, the World Bank said the GCC countries, accounting for more than half the combined Arab economy, would lead regional recovery this year despite slackening domestic bank credit, seen by many analysts as a key obstacle to full recovery in regional countries during 2009.

Remarkable recovery

"Growth in the GCC countries is projected at 4.4 per cent in 2010 – a remarkable comeback, given close to zero growth in 2009... the six countries were hit hard by the global crisis, so a return to growth of 4.4 per cent in 2010 and 4.9 per cent in 2011 represents a remarkable comeback. The expected rise in oil revenue will also enable governments in GCC countries to continue implementing supportive policies," the World Bank said in its report.

The view was supported by a key Western financial centre, which forecast relatively high growth this year and expected the GCC countries to press ahead with fiscal expansionary policies, aided by what it described as a massive increase in the foreign assets, which they had built up during the 2002-2008 oil boom.

The Washington-based Institute of International Finance (IIF) said heavy public spending would offset the post-crisis slowdown in banking lending and private sector investment.

Asset growth

In its latest biannual report, the IIF said strong crude prices during the last oil boom nearly tripled the GCC's combined foreign assets to around $1.47 trillion (Dh5.3trn) at the end of 2008 compared with 2002.

Slightly more than half of these assets are in the form of sovereign wealth funds (SWFs), and are largely invested in diversified portfolios of public equities, fixed-income securities, real estate and minority shares in big-name global companies, the IIF said. "Given the large current account fiscal surpluses, we expect the net foreign assets of the GCC countries to rise from an expected $1bn at the end of 2009 to $1.3bn by the end of 2011, equivalent to nearly 122 per cent of the region's GDP," it said.

"With relatively little external debt, the large net foreign assets of the region will continue to provide substantial funds to sustain robust government spending levels in the next few years."

The IIF expected the GCC's overall current account surplus to widen over the next two years after a sharp decline in 2009 due to lower oil prices.

It said the rise would be mainly a result of a surge in the region's revenue from oil and gas from around $323bn in 2009 to nearly $419bn in 2010 and $457bn in 2011.

The increase will boost the current account surplus from about $48bn in 2009 to $129bn in 2010 and $165bn, equivalent to nearly 15 per cent of the group's GDP in 2011, the report showed.

The budget fiscal surplus will also increase from around three per cent of GDP in 2009 to 10 per cent of GDP in 2010-2011, despite a continued rise in government spending, it added.

Fiscal expansion

"Expansionary fiscal policies will be maintained over the forecast period. However, investment flows to the region may slow, the cost of funding will be higher and banks are likely to adopt a more cautious and discriminating approach to lending going forward," the IIF said.

"The GCC is emerging from the global recession and is recovering at a solid pace. Underpinning the robust recovery in the GCC are several factors. First, firmer oil prices since mid-2009 and a mild recovery in external demand are boosting production and exports. Oil output is expected to rise by around three per cent in Kuwait, Saudi Arabia and the UAE. Qatar's hydrocarbon real growth could reach 22 per cent due to the sharp increase in gas production."

The report said a second factor is that government fiscal policy will remain expansionary and will offset the weak but gradually strengthening private sector demand.

"Third, the normalisation of global trade and capital flows will provide added lift to growth prospects especially through the more globalised sectors of petrochemicals [Saudi Arabia], airline and port activity [the UAE] and services more generally," it said.

"However, vulnerable financial sectors, and weak property sectors may hold back the recovery in some economies of the region. While the private sector will recover modestly, it will grow at a much slower pace compared to recent years. Historical experience shows that private investment tends to recover slowly from downturns, especially those that involve financial stress. The Greek debt crisis and its broader ramifications could further delay the recovery."

The IIF gave no figures on the fiscal surplus in 2009 but according to the Emirates Industrial Bank, it was estimated at $19.6bn.

It was far below the record surplus of around $272bn achieved in 2008, when a surge in oil prices to a record average of $95 boosted the income of the six members to its highest ever level.

Figures by the Abu Dhabi-based Arab Monetary Fund (AMF), a key Arab League establishment, showed the GCC countries basked in a staggering cumulative budget surplus of more than $564bn during 2005-2008 and nearly half of it was recorded in 2008.

Solid growth

"The GCC countries are returning to solid growth, underpinned by higher oil prices that are supporting production and exports, robust government spending, and some normalisation of global trade and capital flows. Overall, real GDP is projected to expand by 4.4 per cent in 2010 and 4.7 per cent in 2011, as compared with 0.3 per cent growth in 2008," IIF said in its 20-page study.

"Over the medium term, growth would be further enhanced by deeper structural reforms, more urgent in the crisis-affected jurisdictions, including the rehabilitation of banks' balance sheets, restructuring of the nonbanking financial sector, and risk management," the report said.

The IIF said the GCC countries were not spared the fallout from the crisis but they fared better than other emerging regions.

It said over real GDP growth in the GCC decelerated from around seven per cent in 2008 to just 0.3 per cent in 2009.

Hydrocarbon real GDP contracted by about eight per cent in Saudi Arabia, the UAE, and Kuwait in 2009, due to Opec-induced output cuts while the non-oil sector grew by 2.7 per cent last year as compared with about 7.8 per cent in 2008. "Weaker private demand was the main cause of the slowdown in non-hydrocarbon real GDP, offset to some extent by continuing strength of public demand," the report said.

Most regional nations have approved record high budgets over the past two years to mitigate the impact of the crisis and make up for waning bank credit and private sector activity.

UAE budget

Although it released its highest ever federal budget for 2010, the UAE has not revealed spending in its consolidated finance account (CFA), which reflects the country's real fiscal position as it covers the federal budget and expenditure by each emirate.

For 2009, the IIF estimated total CFA spending at a record high of around Dh289 billion, far higher than the previous record budget of Dh253bn in 2008 and the 2007 expenditure of Dh164bn.

According to IIF, the sharp rise in spending coupled with a steep fall in the country's revenues because of lower oil prices slashed the CFA surplus to just Dh3bn in 2009 from a record Dh197bn in 2008.

It estimated revenue in 2009 at Dh292bn compared with as high as Dh450bn in 2008, when oil prices soared to their highest average of $95 and the UAE pumped at near capacity. The surge in oil prices boosted the GCC's combined fiscal surplus to an all-time high of $272bn, of which more than half was recorded by Saudi Arabia. The cumulative surplus stood at $564bn during 2005-2008, allowing the GCC to bolster its asset base.

Saudi Arabia

Before the end of 2009, Saudi Arabia, by far the largest GCC member and the world's dominant oil power, announced another record high budget within its ongoing counter-crisis fiscal stimulus.

Spending was estimated at SR550bn (Dh550bn) and revenue at SR505bn, leaving a deficit of SR45bn. But analysts believe the kingdom will likely again overshoot planned expenditure this year, prompted by better oil prices and the need to stimulate fragile growth because of waning bank credit and private sector activity.

Growth breakdown

A World Bank breakdown showed the UAE economy, the second largest in the Arab World, could grow by around 1.3 per cent this year and 3.1 per cent in 2011 before picking up to 4.8 per cent in 2015.

Saudi Arabia, whose economy sharply slowed down to just 0.1 per cent last year from 4.1 per cent in 2008, could see a rebound by 3.7 per cent this year, four per cent in 2011 and 4.6 per cent in 2015.

Kuwait GDP, which tumbled by 2.7 per cent last y ear, could recover by 3.1 per cent in 2010,4.8 per cent in 2011 and 4.9 per cent in 2015.

The economies of other GCC states are also projected to perform well, while that of Qatar, which holds the world's third-largest gas resources after Russia and Iran, could see its GDP growth doubling to 18.5 per cent in 2010 from nine per cent in 2009. It is forecast to slow down to 14.3 per cent in 2011 and 4.9 per cent in 2015.

In a study, a Saudi investment firm expected the GCC's nominal GDP to climb to nearly $1 trillion (Dh3.67trn) this year and $1.5trn in 2015. NCB Capital said stimulus measures undertaken by the GCC states had not only limited damage to the economy but also laid a solid foundation for a quick rebound to pre-crisis growth levels.

"This GCC's GDP is projected to reach $2trn by 2020. We expect the region's largest economies – Saudi Arabia, the UAE and Kuwait – to post annual nominal growth of 9-10 per cent and real growth of four to five per cent over this period. This would likely increase the region's contribution to the global GDP from some 1.5 per cent currently to around two per cent by 2015."

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