Gulf Arab states are pursuing a strategy of presuming low oil prices and controlling spiralling expenditure to maintain the surplus in their budgets and rebuild their foreign currency reserves after a sharp drop during the 1990s.
This strategy was adopted almost six years ago and is a reversal of their previous practice of forecasting high crude prices and letting spending go out of control to continue reeling under painful fiscal deficits and piling debt.
The strategy has gained momentum in two years following a sharp rise in their fiscal surplus due to a surge in their petrodollar income and growth in non-oil revenues .
$121 BILLION SURPLUS
In 2006, the actual surplus in the combined budgets of the six-nation Gulf Co-operation Council (GCC) climbed to its highest level of around $121.3 billion (Dh437bn) and the surplus is expected to have remained very high in 2007.
The situation over the past few years was in sharp contrast to most of the years during 1990s, when they reeled under heavy deficits due to low crude prices. Their combined shortfall peaked at more than $37bn in 1991 and started improving in the following years before worsening in 1998, when it stood at around $23.5bn, half of which was suffered by Saudi Arabia.
“During 1990s, most Gulf states used to forecast relatively high oil prices in their annual budgets and this was the main reason for the persistent deficit,” said Jassim Al Saadoun, a well-known Kuwaiti economist. “But they have now changed that behaviour… most of them are projecting very low oil price, while at the same time keeping expenditure at modest levels… in Kuwait for example, expenditure was expected to be lower in this fiscal year.”
The UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman, which control more than 40 per cent of the world’s recoverable oil deposits, forecast oil prices between $35 and $45 a barrel in their 2006-2008 budgets. But actual prices ended up much higher in the past two years, averaging around $62 in 2006 and climbing to a record $68 in 2007. Prices are projected even higher in 2008 after surging above $100 just after the start of the year.
As a result, actual revenues jumped by at least 80 per cent over their forecast level during those two years, creating a massive surplus in most member states despite an increase in actual spending.
Saudi Arabia, the world’s oil powerhouse, reported a record surplus of nearly $77bn in 2006 before it eased to about $47.6bn in 2007.
The Kingdom assumed a much lower surplus of only around $10.6bn in its 2008 budget as it forecast prices for its crude at around $45, nearly half its present level. But economists expect the actual surplus to shoot up by the end of the fiscal year because of expectations oil prices will remain high.
“Normally Saudi Arabia’s projections about oil prices are on the low side. This means actual revenues will certainly be much higher through the year,” said Malik Yunus, senior economist at the Saudi National Commercial Bank.
“Although we expect actual spending to be higher, growth in revenues will be much higher… this means the actual surplus will be much higher and our initial forecasts point to a surplus of between SR150-200bn.”
According to another report by a Saudi investment centre, the government overshot projected spending by only around 13 per cent in 2007 in order to maintain a large surplus and at the same time check soaring inflation.
“Restraining the growth in government spending is important to tackling inflation. Given the run up in costs associated with capital spending, spending growth of 13.5 per cent underscores the government’s seriousness in controlling inflation,” Jadwa Investment said in a study about the Saudi budget.
“The 2008 budget once again appears to be based on a conservative oil revenue assumption. We think oil production of 9.1 million barrels per day at a price for Saudi oil of $45 is consistent with the oil revenue projection in the budget. As we expect Saudi oil to average $72 in 2008, we forecast a budget surplus of SR187bn, though spending is likely to exceed its target.”
In Kuwait, the budget surplus hit a record KD6.9bn in fiscal year 2005-2006 and remained above $20bn during 2006-2007. In the current 2007-2008 fiscal year, which ends on March 31, the actual surplus is expected to be close to the record 2005-2006 balance.
According to the government-controlled National Bank of Kuwait (NBK), Kuwait’s oil earnings soared to its highest level in 2007 and could hit a record during the present fiscal year, noting that Kuwait’s forecast oil price of $36 was nearly half the expected actual price of $74 during this period.
“The prospects for the government’s finances remain extremely impressive… we see oil revenues reaching KD17.4-18.2bn this year, compared to KD14.5bn in 2006-2007,” NBK said in a report on Kuwait’s budget.
“Meanwhile, budget expenditures are likely to under-shoot the government’s forecast KD11.3bn by five to 10 per cent, leaving an overall surplus of KD 7.7-9.1bn before the allocation of 10 per cent of revenues to the Reserve Fund for Future Generations… given that the government had reported spending of just 38 per cent of its budgeted expenditures for the year in the first eight months of 2007-2008, our forecast for the surplus may yet prove too conservative.”
The UAE has not yet issued figures on its 2007 consolidated fiscal accounts, which comprise the federal budget and spending by each of the seven emirates.
But its 2006 consolidated budget, which reflects the country’s real fiscal situation, recorded its highest surplus of around $19.7bn after its revenues leaped by nearly 39 per cent to $54.5bn, while there was a lower growth of about 23 per cent in its expenditures to $34.8bn.
“There is no doubt the UAE’s fiscal situation has been strong and will remain strong because of high oil prices and production,” an Abu Dhabi bank manager said. “The country has also shown pragmatism in its expenditure and management of wealth as this is underscored in its overseas assets.”
In Qatar, expenditure has sharply increased over the past few years, prompting calls from the International Monetary Fund (IMF) on the government to tighten its belt. While high spending was one of the main factors for soaring inflation rates, it has not affected the country’s positive budget balance because of soaring income from its mammoth LNG industry.
In its 2005-2006 budget, Qatar reported a surplus of $3.8bn, which swelled to nearly $5bn in 2006-2007. The surplus was projected at about $1.8bn in 2007-2008 but the IMF expects the balance to jump to QR28bn by the end of the fiscal year on March 31 due to higher oil prices and a surge in the country’s LNG exports to 30 million tonnes.
Buoyed by the surge in crude prices, Oman assumed a price of $45 for its crude in its 2008 budget, higher than the $40-price predicted in 2007. As oil prices were nearly $25 above its 2007 estimates, the country’s forecast budget deficit turned into a surplus of $1.7bn.
“This year, the assumed deficit of around $1bn is expected to become a surplus as oil prices are projected to remain high and Oman is not largely overshooting its forecast expenditure,” said an Omani banker.
Unlike its fellow GCC members, unstable oil prices have not largely affected Bahrain’s budget, given its relatively low crude output.
But the recent surge in oil prices has allied with high income from its aluminum exports and tax revenue to create surpluses in its budget.
The surplus stood at $1.4bn in 2006 and the budgets in the following years are expected to remain in surplus although the tiny island nation has forecast a combined deficit for 2007-2008 at around $904 million.
GCC states have used the swelling fiscal surplus to slash their public debt and replenish their foreign exchange reserves, which shot up to their highest level of nearly $317bn at the end of 2007, according to the IMF. They stood at around $276bn at the end of 2006, nearly $195bn at the end of 2005 and as low as $70bn in 1998, when oil prices collapsed below $10 a barrel.
Saudi recorded the biggest increase and accounted for 80 per cent of the GCC’s total gross financial reserves at the end of 2007, when its assets jumped to $255bn from $45bn at the end of 2002.
The UAE was second, with its financial reserves soaring to $32.5bn from $12.7bn. Kuwait’s reserves hit $16.9bn from $7.1bn and those of Qatar to $6.5bn from only $1.3bn.
The reserves of Oman and Bahrain swelled to $4.4bn and $2.0bn from $2.6bn and $1.2bn.
The six members pumped around 15.5 million barrels per day of oil in 2007, fetching them a record $315bn. Their revenues were estimated at $300bn in 2006 and as low as $58bn in 1998. In 2008, the earnings will soar to a new record of $357bn, according to projections by the London-based Centre for Global Energy Studies (CGES), which is owned by former Saudi oil Minister Sheikh Ahmed Zaki Al Yamani.