Abu Dhabi, KSA, Kuwait have room to manoeuvre

Abu Dhabi, Saudi Arabia and Kuwait have the greatest amount of fiscal space which could help each state to sustain 10 per cent deficit without resorting to debt finance for at least 25 years, an analyst at Standard and Poor's said yesterday.

Farouk Soussa, credit analyst at S&P's, said: "We believe that GCC governments have exceptional fiscal space to implement their counter-cyclical expansionary policies, despite experiencing significant losses on their foreign asset holdings over the past 18 months.

"In our view, Saudi Arabia, Abu Dhabi, and Kuwait have the greatest amount of fiscal space to pursue such policies, and we forecast that each could sustain a 10 per cent deficit without resorting to debt finance for at least 25 years. Bahrain and Oman are in the least comfortable positions, as their oil resources are more limited than other GCC states and they have therefore benefited relatively less from the windfall in high oil prices in terms of accumulation of assets."

The global credit crunch has meant that a large amount of private investment in the GCC has been delayed due to lack of funding, putting greater onus on SWFs to help in financing or to take a more active role in implementing investment programmes, particularly in infrastructure, in order to inject stimulus in the economy.

At the same time, sovereign wealth funds (SWFs) across the region – particularly in Qatar, Abu Dhabi, and Kuwait – have seen negative returns on their sizeable foreign asset holdings over the past 18 months.

S&P's said assets owned by the GCC governments are a valuable buffer as credit crunch has hit the liabilities side of the regional countries' balance sheets.

The fall in global asset valuations, including in domestic Gulf capital and real estate markets, has had a significant and detrimental effect on the value of their assets, resulting in lower net asset positions and higher contingent liabilities for GCC sovereigns, it said.

Furthermore, a combination of low oil prices and a decline in oil production is likely to have a significant impact on government revenues across the region.

However, according to a new Standard & Poor's report published yesterday, titled "GCC Government Assets: Still Affording Protection Against The Global Downturn", GCC countries are well placed to shield their economies from the global financial turbulence.

The report said the GCC governments have exceptional capacity to pursue counter-cyclical expansionary fiscal policy.

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