Business | Oil & Gas
Crude prices plunge
Tumbling oil prices are forcing many of the Gulf states to record budget deficits and limit a critical source of foreign investment for poorer Arab countries.
- Bloomberg
- Published: 23:51 January 15, 2009
- Image Credit: Reuters
- The Kingdom Tower in central Riyadh. EFG-Hermes is forecasting that the Saudi economy will shrink by 0.9 per cent this year.
London: Tumbling oil prices are forcing many of the Gulf states to record budget deficits and limit a critical source of foreign investment for poorer Arab countries.
Crude is now selling at below the budget break-even point for seven of the Arab world's 10 top oil producers and Saudi Arabia, the world's biggest exporter, is forecasting its first deficit in at least seven years.
Poorer Arab states are facing a fall in foreign investment with Egypt expecting inflows to almost halve this year, according to EFG-Hermes Holding SAE, the largest Arab investment bank by market value.
"We have to find ways to limit the impact which could hurt the Arab economy and make sure econ-omic growth in Arab countries continues at appropriate levels," Kuwait finance minister Mustafa Jassem Al Shimali said, referring to the global crisis. "We are not immune to its negative effects."
Heads of state, including Saudi King Abdullah and Egyptian President Hosni Mubarak, will attend the main sessions of the Arab Economic Summit on January 19-20.
Oil prices have fallen almost 75 per cent from their July high, as the global economy sank into recession, straining budgets of crude exporters. Most will probably tap into their oil savings to maintain spending and avoid recession.
Saudi Arabia said it will post a 65 billion Saudi riyal ($17 billion, Dh62.39 billion) deficit this year; Oman said it will record a budget shortfall of 810 million Omani riyals ($2.1 billion, Dh769.5 million); while Dubai forecasts a shortfall of Dh4.2 billion ($1.1 billion).
"If governments cut back on spending they might make the economic slowdown worse," said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi PJSC, the UAE's second-biggest bank by assets. "Policy must be counter-cyclical."
EFG-Hermes is forecasting that the Saudi economy will shrink by 0.9 per cent this year while Kuwait will contract by 1.2 per cent. Growth will remain positive in Qatar, Bahrain and Oman and the UAE economy will stagnate.
Saudi Arabia posted a record budget surplus of 590 billion riyals ($157 billion) last year as oil rose to a record $147.27 a barrel in July. That was about the same size as Egypt's gross domestic product.
"Rising oil prices were the catalyst for exceptionally strong growth over the past six years and falling prices will bring a slowdown in 2009," Simon Williams, a Dubai-based economist for HSBC Holdings Plc, said by e-mail.
"The Gulf can manage the deceleration, but the slowdown is going to be felt across the region and in all sectors of the economy."
In Arab countries that have depended on their rich Gulf neighbours for investment, the impact may be felt the hardest.
Foreign direct investment in Egypt is projected to fall to $7 billion this year from $13.2 billion in 2008, EFG-Hermes said in a November 13 report.
About 20 per cent of the investment came from the Gulf. The Dh8.6 billion in remittances that were sent home by Egyptians working abroad last year are expected to shrink by 10 per cent in the fiscal year starting in June, EFG-Hermes said.
Half of that money comes from the Gulf. The bank expects Jordan's economic growth to slow to 4.7 per cent this year from an estimated 5.7 per cent in 2008, in part because of lower remittances and foreign investment from the Gulf.
To help boost regional trade, Gulf Arab leaders on December 30 approved an agreement to create a Gulf central bank and single currency.
The accord must now be endorsed by the national governments of Saudi Arabia, Kuwait, Bahrain, the UAE and Qatar. Oman has pulled out of the proposal.
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