Oil prices a boost for Gulf stimulus efforts

Dubai:  Gulf Arab states are likely to keep their large spending packages in place next year, even as major economies withdraw stimulus, as higher oil prices give the world's top oil exporting region enough room to support a nascent economic recovery.

But with oil prices more than doubling from last December's lows of around $32 a barrel, most Gulf governments expect to book budget and current account surpluses this year and are more upbeat about 2010.

"Governments around the globe have been running expansionary policies over the past year, but in much of the world high deficits and a rising debt stock means they are running out of room. In most of the Gulf, that's just not the case," said Simon Williams, chief economist at HSBC Bank in Dubai.

"The Gulf's fiscal stimulus may have arrived later than in other parts of the world, but is likely to last longer because public fin-ances here are so much stronger than in the developed or in emerging markets."

A debate on unwinding large piles of fiscal and monetary stimulus is flying high on policymakers agenda globally.

China decided last week to rein in some incentives, while the world's central banks plan to withdraw trillions of dollars of support next year as economies recover.

"The fiscal stimuli will continue to be in place in line with efforts to keep the economy growing given what the region has gone through in 2009," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh.

Spending is seen staying particularly high in Saudi Arabia, the world's top oil exporter, which has embarked on a $400-billion (Dh1.4-trillion) five-year spree, and in Qatar with a multi-billion dollar expansion of its natural gas facilities.

Comfortable run

With oil prices seen staying at around $75 a barrel next year, most Gulf states will run comfortable surpluses despite high expenditures as they are expected to base their budgets on a conservative price of $50 a barrel on average. "In 2010, we expect the fiscal position to improve with higher oil income," said Monica Malek, senior economist at EFG-Hermes in Dubai. "As a result we expect to see a build-up in the net foreign asset positions of the GCC countries. We only expect to see Bahrain realising a deficit in 2010."

The average price of benchmark US crude to date this year is $61.54 a barrel, comfortably above the $45 a barrel used in Gulf budgets for 2009.

Out of the six-nation Gulf Cooperation Council (GCC), only non-Opec members Oman and Bahrain have not been able to raise spending to the same degree as others due to their limited hydrocarbon resources.

Saudi Arabia is seen showing a budget surplus of 7 per cent of gross domestic product next year, after a mere 0.8-per cent in 2009. The UAE is expected to book a surplus of 5.0 per cent. That is well below projected 2010 surpluses in Kuwait and Qatar of 16.9 per cent and 8.3 per cent of GDP respectively, a Reuters poll showed last month.

Diversification windfall

Gulf Arab states have spent much of their oil windfall earnings over the past six years diversifying their economies away from oil export revenues. But low tax regimes mean that oil revenues continue to provide the bulk of government income, and budgets remain vulnerable to volatile oil prices.

The following break-up gives oil revenues as a percentage of government revenues, and oil and gas production as a percentage of GDP.

2008: Saudi Arabia 89.3 and 59.9; UAE 77.1* and 46.5; Kuwait 93.8 and 55.8; Qatar 59.0 and 47.2; Oman 78.6 and 47.8; Bahrain 85.2 and 63.0

(Sources: governments, Banque Saudi Fransi-Credit Agricole Group)

* UAE revenue data for 2007, last available.