So far, Arab states have pledged they will pick up the slack to keep the momentum going and urged the private sector not to run away — even if it means posting small budget deficits this year for the first time since the oil boom began in 2002. But as economists cut back 2009 economic growth forecasts to almost zero for Saudi Arabia and the United Arab Emirates, the region will be wary about how much it draws down its immense reserves.
The slump in global asset values makes it a bad time to sell foreign investments and repatriate reserves, analysts said. “They will rightly be cautious in their spending choices because revenues are not under their control,” said Simon Williams, regional economist at HSBC. “I think they will spend more and there will be a willingness to run deficits … but I expect the region to be careful and ensure that its priority projects that have the first claim on public funding.” In the six years to 2008 Saudi Arabia amassed surpluses from oil export revenues of $ 378 billion, according to HSBC estimates.
Despite this cushion the kingdom, projecting its first deficit in seven years of $ 17.3 billion in 2009, may spend less than last year. Its spending targets are higher this year than last, but Saudi Arabia overspent last year by 24 percent. So if the kingdom sticks to its budget this year it will spend less than in 2008.
“They will very carefully assess the projects that go through,” said Paul Gamble, head of research at Riyadh-based Jadwa Investment. “The ones that will take precedence are very much the key physical infrastructure projects — power, water, roads — that address shortcomings that are already there,” Gamble said. Early indications are that the Saudi government does not want to overspend, with the cabinet instructing public departments not to exceed the amounts allocated to them in 2009’s budget.
Signs of growing caution are prevailing across the Arab world, which lost some $ 2.5 trillion in the last four months as oil revenues fell, stock markets slumped and development projects were delayed, Kuwait’s foreign minister said last week.
The Council on Foreign Relations, a US think tank, estimated this month that the value of Gulf sovereign wealth funds and central bank assets fell by $ 82 billion in 2008. The price collapse has cut potential oil export revenues of Arab producers by three quarters, while supply cuts for those in OPEC have eaten further into income. Kuwait has said it will reduce public spending in all areas except for government employee wages and capital spending for projects, while non-OPEC producer Oman has pledged to trim public spending if oil prices slip below $ 45 a barrel.
Factbox
Gulf oil producers spent billions of their windfall earnings over the past six years on 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 the collapsing oil price.
The following gives oil revenues as a percentage of government revenues, and oil and gas production as a percentage of GDP.
Oil, gas revenue
as % Oil as %
of state revenues of GDP
2007 2007
Bahrain 80.1 24.9
Kuwait 97.3 52.1
Qatar N/A 55
Oman 75.8 45.8
Saudi Arabia 87.5* 50.3
UAE 77.1 35.9**
All data from government sources.
* Saudi figure for oil only, not including gas revenues.
** UAE figure for crude only, not including gas.
