Spending by GCC governments has outpaced revenue growth for the first time in five years, a US-based research house has found.
The Institute of International Finance (IIF) said on the back of record incomes from the hydrocarbon sector, governments had orchestrated a 13 per cent pick-up in expenditure in 2007, which eclipsed a four per cent gain in revenue.
This in turn eased the GCC’s fiscal surplus to 19 per cent of GDP last year, from 23 per cent of GDP in 2006.
“GCC governments continue to pursue high growth strategies in a bid to provide employment for their young and fast-growing populations. Government spending has gathered pace over the past year or so, and in 2007 outstripped revenue growth for the first time since the current oil boom began in 2002,” the IIF’s Economic Report said.
It also found expenditure had stabilised as a percentage of GDP at 29 per cent, while revenue eased to a still-formidable 48 per cent of GDP. “In aggregate terms, hydrocarbons revenue accounted for around 84 per cent of total government revenue, and was not less than 74 per cent in any country. Non-hydrocarbons revenue climbed by around six per cent to $69 billion (Dh253bn) owing to an increase in investment income. Revenue from customs tariffs, fees and charges also posted gains,” said the report.
The study said the six states’ aggregate current account surplus was up to an all-time high of $215bn in 2007 (27 per cent of GDP), adding this would bolster the region’s vast stock of net foreign assets, which is now estimated at around $1.8trn.
The current account surplus is expected to widen slightly to around 28 per cent of GDP in 2008, with a further increase in oil prices expected to offset the impact of burgeoning import demand. Notwithstanding the anticipated easing of oil prices in 2009, the GCC’s external position will remain extremely comfortable, the IIF predicted.
“With oil prices high GCC governments are likely to step up the pace of capital spending. The danger of overcapacity remains real, but rising construction costs and other supply-side constraints might place a natural check on some of the more fanciful real estate projects, that are in the planning stages.
The report added: “For the most part, GCC governments have continued to pursue policies aimed at encouraging rapid economic growth. They are supported in this by highly elevated oil prices, which have allowed substantial fiscal surpluses to be recorded even as spending picked up. However, in some countries the rapid growth strategy has contributed to significant inflationary pressures, which have been exacerbated by fixed peg exchange rate systems.
“Structural problems, such as rigid labour markets, extensive fiscal subsidies, and corporate governance shortcomings are being gradually addressed, but remain deep-rooted,” it added.
A recent research note from UBS stated enormous current account surpluses had allowed energy-exporting GCC states significant fiscal reserves in sovereign wealth funds.
Although, the bank’s report, the Global Emerging Markets Strategy, warned GCC government’s were running the risk of pinning future budget surpluses solely on high oil prices.
“In the GCC, hydrocarbon revenues make up 70 to 95 per cent of central government budget revenues. From a budget perspective, ‘breakeven’ oil prices – oil prices where budgets would just be balanced – are well below current market prices.
“The result is huge windfall gains. However, given strong public investment, high population growth and associated social spending, budget ‘breakeven’ oil prices are expected to rise over time. In other words, GCC countries will need higher oil prices in the future to keep their budgets in surplus,” said the report.
The private sector was also credited with the current economic boom in the GCC, with investment in tourism, infrastructure, manufacturing, financial services and telecommunications remaining buoyant.
Both UBS and the IIF agreed private sector input would foster stronger and more sustainable future economic conditions in the GCC. The IIF said private money in the economies had received a helping hand from sizeable inflows of foreign credit and FDI.
“In 2009, the pace of government spending might cool somewhat in line with the softening of oil prices that is envisaged in the IIF’s World Economic Framework, but there should be enough private sector momentum to sustain nominal growth of around 8 to 10 percent,” IIF predicted.
UBS said: “Compared with previous energy bonanzas, which were dominated by public sector activity, the current oil boom is being led by the private sector – a positive development that should also bode well for the sustainability of the expansion.” The bank said this had led to an impressive growth in per capita income in the region, particularly in the energy-exporting countries. In Libya and Qatar, per capita GDP more than doubled in 2003-07; in many other countries it increased by 50 per cent or more.
And in the GCC countries, the divergence in per capita income is a close reflection of hydrocarbon production per head, with Qatar, the UAE and Kuwait in a leading position. Strong per capita GDP growth has taken place despite a fairly high population growth rate in the region, often a result of strong immigration, the UBS report said. UBS added that out of the Middle East oil countries, the process of sectoral diversification was most advanced in the GCC.
Non-oil activity now accounts for 50 per cent of GDP. Within the GCC, the UAE, Bahrain, and Oman are leaders, thanks to large-scale diversification programmes, that have particularly targeted the development of financial services and tourism.
The IIF said with oil breaching $90 in late 2007, governments are likely to maintain capital spending to expand the absorptive capacity of their economies.
The Spending Spree
In Abu Dhabi there is some $140 billion (Dh514bn) worth of “megaprojects” mainly in the planning stage, most of which will require substantial public sector funding.
The cost of Saudi Arabia’s “economic cities”, which are to be built across the Kingdom, is expected to be borne by the private sector, but in many cases basic infrastructure and services will be provided by the government.
Qatar is in the midst of an $83bn five-year hydrocarbons investment programme, which will be partly funded by state-owned Qatar Petroleum. The pace of spending in Doha has cooled somewhat following the completion of the December 2006 Asian Games, but upgrades to transport, health and education infrastructure are continuing.
Elsewhere, Kuwait has ambitious plans to develop a raft of real estate projects, though execution has been – and is likely to remain – slow.
With oil prices breaching $90 per barrel in late 2007, governments are likely to maintain their focus on spending as they attempt to expand the absorptive capacity of their respective economies, according to the IIF.
The research house’s recent study warned the danger of overcapacity remains real, but rising construction costs and other supply-side bottlenecks might place a natural check on some of the more fanciful real estate projects that are in the planning stages.
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