Gulf states are expected again this year to bask in a gigantic budget surplus that will extend a five-year financial euphoria reminiscent of their first oil boom 30 years ago when they kicked off one of the largest construction drives in history.
The surge in the combined surplus despite an expected increase in actual expenditure means the six Gulf Cooperation Council (GCC) countries will push ahead with a campaign to slash debt, replenish their overseas assets, and construct projects that are needed for their economic diversification.
In their 2008 budgets, the six members forecast a combined surplus of $39 billion (Dh143bn) but it was based on an average oil price of only $40-45 a barrel.
With oil prices boiling over $115 last week and predicted to average a record $80 this year, the surplus is projected to increase many folds although most of them are expected to be tempted by high revenues to overshoot spending again.
“The actual forecast surplus in the budgets of the GCC countries assumed that surpluses will multiply this year because of the surge in oil prices… although Bahrain and Oman projected a deficit of around $1.1bn each, this deficit will turn into a large surplus at the end of the year,” the state-controlled Emirates Industrial Bank (EIB) said in a study on GCC budgets this week.
“The surplus will be achieved despite a sharp increase in projected expenditure and an expected growth in actual expenditure… this is because oil prices have sharply increased and GCC states have overcome all the negative repercussions of the low-price period as they began to record large surpluses in 2003.”
In 2007, the GCC states of the UAE, Saudi Arabia, Bahrain, Qatar, Oman and Kuwait projected a combined budget surplus of around $33bn but the actual balance shot up to nearly $110bn, half of which was recorded in Saudi Arabia, the world’s largest crude exporter. The balance was slightly lower than the 2007 surplus of around $121bn.
The figures included only the federal budget of the UAE, which forecast equal revenues and expenditure in 2006, 2007 and this year. They did not include the Emirates’ consolidated financial account (CFA), which better reflects the country’s financial position as it involves the federal budget and the local spending of each emirate.
The UAE has so far published consolidated financial account figures for 2006, when it recorded its highest surplus of around $19.7bn because of a surge in revenues. Bankers expect the surplus to have remained high in 2007. “Our estimates are that the GCC surpluses this year will be almost equivalent to last year’s surplus, which was one of the highest in current prices,” Saeed Al Shaikh, chief economist at the Saudi National Commercial Bank, said.
Analysts said the surge in the GCC surpluses was because the growth in their actual revenues far outpaced that in their expenditure, which increased by between five and 15 per cent for some members. While they were projected at around $187bn in 2007, actual revenues rocketed by at least 90 per cent to nearly $360bn, including around $320bn in oil export earnings.
The surge in oil prices was underscored in Saudi Arabia, which had reeled from painful fiscal surpluses for many years before 2003. In 2006, the Kingdom recorded its highest ever budget surplus of $74.6 billion, which was expected to have eased to nearly $48bn in 2007. The surplus is projected to further slip to around $45bn but it remains far higher than the assumed surplus of nearly $5bn, according to Jadwa Investment company in Riyadh.
The cumulative budget surplus in the GCC countries over the past five years, exceeding $300bn, has allowed them to slash public debt, sharply boost their overseas reserves, and embark on a massive development drive with the participation of the fast growing private sector.
The present boom is in sharp contrast with the situation during the 1990s, when most of them suffered from record fiscal deficits, slow growth and high debt. The combined GCC budget shortfall peaked at nearly $35bn in 1991 after some of them were forced to sharply boost spending to finance a US-led multinational campaign to eject Iraq forces from Kuwait. “Gulf states are passing through a new fiscal era because of the massive fiscal surpluses, which have helped them overcome all the negative consequences of low oil prices during the 1990s,” EIB said.
“Some of them have managed to slash their public debt from 115 to only 19 per cent [Saudi Arabia] while high public spending has largely stimulated their economies… while the first oil boom era enabled them to complete most of their infrastructure projects, the current boom will allow them to carry out strategic development projects that will contribute to diversification of sources of income… this in turn ushers in a new stage in the GCC economies.”