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Gulf states tread into thorny year with big fiscal muscle

By Nadim Kawach

Gulf crude producers are cautiously treading into 2009 in anticipation of stumbling across mine fields in the oil sector but appear confidently, well-cushioned by an enormous fiscal muscle built in five years of an oil boom.

Although varied scenarios for oil prices over the past few weeks have only contributed to more uncertainty through 2009, the GCC countries appear capable of offsetting any fiscal deficit through incomes from their swelling overseas investments of more than $1.4 trillion (Dh5.1trn).

During the oil boom of 2004-2008, the GCC netted a $1.64trn in crude export earnings and more than a third of them were earned in 2008.

The high income during those five years because of a surge in crude prices surpassed all their oil export earnings in nearly 13 years after 1990.

Although the surge in revenues have tempted most members to overshoot budgeted spending, their combined fiscal surplus exceeded $500bn between 2004 and 2008 and around $355bn was recorded by Saudi Arabia alone.

"This surplus has enabled GCC states to sharply consolidate their foreign assets and this will of course give them a strong cover in 2009 and beyond," said Yunus Malik, senior economist at the Saudi National Commercial Bank.

From an average $12-28 a barrel between 1991 and 2003, the price of Opec's basket of crudes shot above $36 in 2004 and $50 in 2005.

The price continued its rapid climb to average around $61 in 2006 and $69 in 2007. It was expected to average above $95 in 2008.

With their crude output peaking in the past five years, the GCC countries netted around $1.64trn in crude exports in five years, including a record $518bn during 2008 alone. More than half the cumulative income was earned by Saudi Arabia, the world's largest crude exporter and global crude powerhouse.

Besides fiscal surpluses, the surge in crude exports sharply boosted the GCC's combined current account surplus, which totalled more than $900bn during 2004-2008. It was projected at a record $342bn in 2008, according to the Washington-based Institute of International Finance (IIF).

The surpluses have allowed the GCC to largely replenish their foreign assets, which had sharply eroded during the 1990s. From less than $200bn in 1999, the assets jumped to around $700bn at the end of 2004 and continued their steady climb to reach a record $1.467trn in June 2008.

Their official reserves also jumped from around $194bn to $540bn in the same period, showed the figures by the IIF, a World Bank affiliate.

"The Gulf and other Arab states control massive financial resources. For example, Dubai has a deficit of $10bn but possesses reserves of around $90bn. So where is the problem?" said Lebanese Finance Minister Jihad Azour.

"Actually, the GCC countries have become a self-sustained economic and financial power and I do not think they will face any serious problems that will force them to take emergency measures," he said in Gulf press comments.

Experts believe the GCC's combined oil income could tumble by more than half in 2009 as oil prices are expected to fall to half their 2008 level and the Gulf group's crude output could be lower by nearly one million barrels per day in line with an Opec collective agreement to trim oil supplies to prop up sagging prices.

Despite the uncertainty in the oil market in 2009, Saudi Arabia last month approved its biggest ever budget, apparently encouraged by its massive overseas assets of more than SAR1.7trn and its record fiscal surplus of nearly SAR590bn in 2008. Other Gulf states have also reported large budget surpluses and economists believe the combined GCC surplus in 2008 could be the highest recorded by the group since it was created 28 years ago.

"GCC states enter 2009 armed with a strong fiscal muscle and I think they need it because that year is surrounded with uncertainty and challenges," said Fouad Zeidan, an economist at an Abu Dhabi-based bank.

Illustrating such challenges, IIF said it expected the GCC's collective GDP to plunge by nearly $62bn in nominal terms in 2009 after gaining a staggering $277bn in 2008 and $90bn in 2007.

The decline in 2009 will be caused by a sharp drop in the oil sector, which it expected to dive to around $479bn from $613bn. In contrast, the non-oil sector is projected to surge to $557bn from $485bn but the combined current account surplus could tumble to $155bn from $342bn.

IIF said it based its forecast on an average oil price of $75 in 2009, adding the situation could be much worse in case of a $50 price a barrel.

"In this case, the current account surplus could dive to only $five billion and the fiscal surplus could be as low as two per cent of the GDP compared with 13 per cent in case of an oil price of $75 a barrel," it said.