Gulf oil producers are expected to start restructuring their annual budgets to adapt to new fiscal changes brought about by the economic crisis and the collapse of crude prices, according to a semi-official UAE study.
The UAE has already announced a restructured budget mechanism based on three-year zero fiscal balance, while other members of the six-nation Gulf Co-operation Council (GCC) appear to be planning to rationalise expenditure and upgrade budget performance, the government-controlled Emirates Industrial Bank (EIB) said in its latest monthly economic bulletin.
Citing official data, the study said strong oil prices boosted the combined GCC budget surplus to a record high of around $189 billion (Dh693bn) in 2008 but it could turn into a deficit this year because of the sharp fall in oil prices.
"The global financial distress and the sharp decline in crude prices are opening the doors for a revision of the financial systems in the GCC countries and for a restructuring of their budgets," the study said.
"The progress made by most GCC members in diversifying their economies will of course positively impact those budgets and allow the GCC to avoid large deficits from which they have suffered during the 1990s… there is no doubt that the revision of financial systems and diversification programmes will help the GCC achieve relative stability in the budget and economy."
Preliminary GCC actual budget estimates showed the 28-year-old Gulf alliance is projected to have recorded its highest fiscal surplus last year after its oil income jumped to a record high of $53bn in current prices.
As most member states forecast an average oil price of around $40-$45 through 2008, their actual revenues could have nearly doubled the projected earnings after crude prices averaged nearly $95 a barrel in 2008.
"Oil prices averaged over $95 a barrel last year despite the decline in the last quarter. This means prices were nearly double the conservative level forecast by the GCC governments," said George Abed, an advisor to the Director General of the US-based International Institute of Finance. "Although the Gulf countries normally exceed forecast spending, the growth in their income last year has largely surpassed that in their actual expenditure. Our expectations are that their budgets recorded a very high surplus."
EIB estimates showed the surplus peaked at $189bn but the study did not say how it calculated the actual surplus of such members as Kuwait and Qatar, where the fiscal year ends on March 31.
The report about the UAE budget included only federal spending rather than the consolidated finance account, which comprises the federal budget and spending by each emirate. The surplus in the consolidated account is projected to have exceeded Dh100bn last year.
Saudi Arabia, the world's dominant oil power, accounted for nearly 83 per cent of the GCC budget surplus as it was put at SR690bn (Dh585bn), the Kingdom's highest ever fiscal surplus.
EIB said the surge in the GCC's actual surplus last year from the forecast surplus of only $39bn was a result of a sharp rise in the oil export revenues. But it expected the situation to be reversed this year after crude prices lost more than $100 a barrel because of a steep fall in global demand.
"The massive surplus recorded in the GCC budgets last year could turn into a deficit this year… preliminary figures show there is a projected deficit of around $24 billion in 2009… but this shortfall could end up lower or higher at the end of the year depending on the average oil prices and the actual spending by members countries, most of which have traditionally overshot forecast expenditure over the past years," EIB said.
"All GCC members have based their budget for this year on an oil price of $45-$55 and we believe this will allow them to avert large deficits because there are expectations prices will be near that level through 2009 before they begin to rise again by the end of the year or early next year, when the global economic conditions begin to improve… another positive factor is that actual spending by the GCC this year is expected to stabilise near 2008 levels." According to EIB, the huge fiscal surplus achieved in 2008 will allow member states to finance any budget shortfall this year. It has also enabled them to deal with the fallout of the financial turmoil.
"This massive surplus has provided the GCC countries with sufficient liquidity to contain the negative effects of the global crisis… as a result, the GCC economies are considered the least affected by the crisis…the financial and economic systems are now operating normally despite a slight drop in profitability. Only the real estate sector has been negatively affected as it is suffering from the credit tightness caused by the crisis."
GCC states have enjoyed high internal and external financial surpluses over the past six years because of a sharp rise in oil prices. This boom was in a sharp contrast with the situation during 1990s, when they reeled under heavy deficits because of low oil prices and high expenditure, mainly in defence.
In 2007, when oil prices averaged around $70, GCC members projected a combined budget surplus of around $33bn but the actual balance shot up to nearly $11bn, half of which was recorded in Saudi Arabia. The balance was slightly lower than the 2006 surplus of around $121bn.
The surge in crude prices last year boosted the GCC's combined revenues to nearly $530bn but the income is expected to plunge by nearly 50 per cent this year due to lower prices and output by members, according to EIB.
Figures by the Energy Information Administration of the US Department of energy showed Saudi Arabia's revenues peaked at $288bn in 2008 compared with $194bn through 2007.
The earnings of $89bn also largely exceeded its 2007 income of $63bn, while those of Kuwait and Qatar soared to $81bn and $38bn from around $55bn and $26bn respectively.
Besides budget surpluses, strong oil prices also boosted the GCC's external balance, or current account surplus, to a record $342bn last year compared with around $211bn in 2007.
The balance is projected to tumble to around $155bn in 2009 mainly due to the slump in oil prices.
"Gulf states have passed through a fiscal era because of the financial surpluses, which have helped them overcome all the consequences of low oil prices during the 1990s," EIB said.