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29 March 2024

Crisis reverses fiscal euphoria in Gulf nations

The six Gulf Cooperation Council (GCC) countries, which control nearly 45 per cent of the world's proven oil deposits. (GETTY IMAGES)

Published
By Nadim Kawach

Gulf oil producers are expected to record budget deficits or tiny positive balances in 2009 as the global financial distress has reversed several years of fiscal euphoria that saw them accumulate more than $600 billion (Dh2.20 trillion) in budget surpluses.

The six Gulf Cooperation Council (GCC) countries, which control nearly 45 per cent of the world's proven oil deposits, could have shunned shortfalls in their 2009 budgets as oil prices are projected to average above their estimates.

But most of them are believed to have heavily overshot assumed spending as part of overall stimulus measures intended to mitigate the impact of the crisis and prevent a sharp downturn in their economies after years of high growth.

The six members, which rely heavily on oil exports, have amassed nearly $605bn 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.

From a record $459bn in 2008, the GCC's combined crude export earnings are projected to tumble to nearly $258bn in 2009, according to the London-based Centre for Global Energy Studies (CGES) and other sources. While deficits had jolted their economies and forced them to resort to borrowing a decade ago, any fiscal gap this year will not have any major problem for them given strong growth in their non-oil sector and the fact that they are using their immense overseas assets to cover the shortfall.

"Some of them might record a tiny surplus this year while others could have a small deficit," said Ihsan bu Hlaiga, a Saudi economist.

"But when you look at the assets they have built up during the boom period and the surpluses achieved over the past seven years, this is not a problem at all."



Large GCC budget surplus

Strong crude prices, which hit a historic high of $147 in mid 2008 before averaging around $95 through the year, allowed GCC countries to record their highest ever budget surplus of nearly $189bn last year though they had forecast a surplus of only around $32bn. Saudi Arabia accounted for more than 80 per cent of the surplus.

Analysts said most of the GCC budgets could record deficits because of weak oil prices, high public spending and lower crude production as the group's four Opec members are cutting output in line with an Opec pact.

Saudi Arabia, the world's dominant oil power, is expected to bear the brunt of the cuts as it pumps just below a third of the group's supplies. The kingdom's oil production is projected to average about 8.2 million barrels per day in 2009 compared with more than nine million bpd in 2008.

"If oil prices average $40 a barrel, then you will see a deficit in the Gulf budgets this year," said Saeed Al Shaikh, Chief Economist at the Saudi National Commercial Bank, the largest Saudi bank. "The main reasons are that most GCC members assumed an oil price near that level or higher but they have budgeted relatively high spending and could still boost actual spending through the year… another reason is lower output which will put further cuts on their crude income."

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 fulfil their commitment to pledged stimuli.

"Given that 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," according to Samba's recent study. In Saudi Arabia, the largest GCC member and the world's top oil exporter, the government is believed to have largely exceeded budgeted spending so far this year despite its approval of a record budget for 2009.


Saudi overspending

Although oil prices are forecast to average above the kingdom's assumed price, overspending is expected to create a small deficit in this year's budget after a fiscal surplus of nearly SR590bn (Dh579bn) in 2008.

"With oil prices now expected to average $54 a barrel and oil production at around eight million bpd, Saudi Arabia will see oil revenues fall by nearly 60 per cent in 2009 – ushering in a period of difficult economic adjustment," said National Commercial Bank, the largest Saudi bank.

"With falling oil revenues, the fiscal balance is expected to swing into a deficit of around four per cent of GDP, as the government resorts to the accumulated reserves in recent years to go ahead with expenditure plans to stimulate domestic demand. We nevertheless estimate that both the fiscal and current account balances will once again realise surpluses in 2010, as oil revenues are expected to recover with our $65 a barrel forecast for average oil prices."

Another Saudi study agreed the kingdom would record a budget deficit this year but it would be lower than the forecast SR65bn.

"We forecast that the government will run a budget deficit this year, though it will be smaller than that projected in the 2009 budget. Both revenues and expenditures are set to be comfortably above the level projected in the budget," the Riyadh-based Jadwa Investments said this week.

It noted that the 2009 budget was based on revenue of SR410bn and expenditure of SR475bn, resulting in a budgeted deficit of SR65bn. "We estimate that oil production of 8.1 million barrels per day at a price for Saudi oil of $44 per barrel is consistent with the oil revenue projection in the budget. With Saudi oil averaging around $54 per barrel to date and production broadly in line with our projection, revenues are likely to have been in excess of the budgeted level as oil accounts for 80-90 per cent of total revenues," it said.

"We are confident that expenditure has also exceeded its target, though we are not certain about the extent of the overspending. But government spending growth is expected to pick up over the remainder of the year, as implementation of projects signed or retendered begins.

"We also anticipate a rise in revenues due to higher oil prices. For the whole of 2009 we expect a budget deficit of SR7bn. This can comfortably be financed by the drawing down of foreign assets or deposits at domestic banks," said Jadwa.


Balance turns into deficit

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."

Unlike Saudi Arabia and other Gulf nations, the UAE has not resorted to domestic borrowing to shore up its budget shortfalls in the past year. Instead, it has used its investment returns to bridge the gap, which hit an all time high of around Dh29.39bn in 2003 after a sharp rise in spending.

In a recent study, the National Bank of Kuwait (NBK) said a massive surplus in the UAE CFA in 2008 could totally disappear in 2009 as a result of the plunge in oil prices and its output.

But it added the disappearance of the surplus or even a deficit would no be problem to the country given its enormous assets abroad.

"Further strong government spending growth in the UAE this year is likely to result in a sharp turnaround in the budgetary position," the study said.

Assuming an average oil price of $50 a barrel this year, NBK expected the CFA surplus to fall from 15 per cent of GDP in 2008 to effectively zero in 2009.

"Although a major reversal, this trend provides little meaningful threat to the medium-term integrity of the government's overall financial position. A small deficit would pale beside the near $100 billion of budget surpluses accumulated by the UAE Government over the past four years," it said. The bulk of the UAE's overseas investments are based in the US and other Western countries and controlled by the Abu Dhabi Investment Authority (Adia) one of the largest sovereign wealth funds in the world.

Recent estimates by the US Council on Foreign Relations showed Adia's assets plunged by around $183bn as a result of the global financial crisis in 2008. But there was a net inflow of nearly $59bn because of the sharp increase in the UAE's oil export revenues, which hit an all time high of $92b.

At the end of 2008, Adia was believed to be in control of around $328bn compared with nearly $453bn at the end of 2007, CFR said.


The low assumption

Kuwait is expected to record the highest budget surplus in the region as it has assumed a price for its oil at as low as $35 a barrel. According to NBK, the price has so far averaged nearly 77 per cent above that level.

"Halfway in to the financial year, the prospects for the Kuwaiti Government's budget balance this year are looking increasingly secure," NBK said.

"Although we have no official revenue numbers to go by as yet, the price of Kuwait crude has averaged $62.3 so far, well above the budget assumption of $35 made at a time when pessimism over the world economy was at its peak. "Given that price estimate and if, as expected, public expenditures come in at 5-10 per cent below budget, we estimate that the government will end-up with a budget surplus of between KD1.1bn (Dh14bn) and KD6.2bn, before allocations of 10 per cent of revenues to the Reserve Fund for Future Generations (RFFG)."

This compares with the government's projection of a KD4bn deficit for the year and an actual surplus of KD2.7bn in the 2008-2009 fiscal year.


The LNG advantage

Qatar is also expected to record a relatively high surplus given an expected sharp growth in its liquefied natural gas exports this year.

The Gulf emirate, the world's largest LNG exporter, forecast expenditure at QR94.5bn (Dh95.5bn) in 2009-2010, slightly lower than its record budget of QR95.9bn in the previous fiscal year 2008-2009.

But revenues were slashed to a projected QR88.7bn from QR103.3bn because of a steep fall in crude prices.

Lower forecast earnings created a deficit of QR5.8bn against an assumed surplus of QR7.4bn in the previous budget, which was the highest in Qatar's history.

The new budget, which started on April 1, is based on an oil price of $40 a barrel, sharply below the $55 price assumed in the 2008-2009 budget. Government estimates showed actual revenues in 2008-2009 increased by nearly 10 per cent to about QR130bn, while expenditure grew by 15.5 per cent to QR97.8bn. Oil prices averaged $82.8 during the fiscal year 2008/2009 compared to $79.5 in 2007/2008.

"This year's budget is expected to see another surplus because oil prices are projected higher and LNG exports will sharply growth," Qatar National Bank said.


Oman and Bahrain

Like its fellow GCC members, Oman approved a record budget for 2009 to offset the effects of the crisis but its budget remained in positive balance in the first seven months of 2009 despite a sharp fall in earnings.

Official figures showed lower oil prices depressed the country's total revenue by about 24.7 per cent to RO3.74bn (Dh35.6bn) from RO4.969bn.

The decline slashed its budget surplus to just RO200,000 in the first seven months of this year compared with RO1.387bn in same period of 2008.

Bahrain, the smallest GCC economy and the only member which does not export crude, recorded a surplus in 2008 but the balance is expected by the International Monetary Fund to turn into a deficit this year.

The IMF put the 2008-2009 surplus at around 4.9 per cent of the country's GDP and projected a deficit of 8.7 per cent in the 2009-2010 fiscal year.

It attributed its forecasts to an expected decline in Bahrain's revenue to nearly 24 per cent of the GDP in the current fiscal year from 33.7 per cent in the previous fiscal year. Spending was also forecast to rise to 31.6 from 25.7 per cent.

 

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