Oil windfalls open window of opportunity for GCC states


The GCC countries, which are traditionally oil economies, have on the whole become more prosperous than ever as a result of the recent boom in oil prices. Oil prices broke the $ 80 per barrel barrier last week in New York and were hovering in that range.



According to the recent GCC Credit Survey of Standard & Poor’s, the world’s foremost provider of financial market intelligence, including independent credit ratings, more than 40 percent of proven oil reserves lie within the six GCC states, which collectively contribute about 22 percent of the world’s crude oil production. Most of this is concentrated in three countries — Saudi Arabia, Kuwait and the United Arab Emirates.



GCC countries are largely dependent on oil production for continued economic prosperity. High oil prices clearly have a positive effect on the economic and fiscal outturns of the GCC states. The current oil boom has strengthened all the key macroeconomic indicators in all six countries. Real GDP growth has been strong and is expected to average 6.2 percent in 2006. This partly reflects continued increases in oil production capacity in most GCC countries as they strive to expand output to meet global demand.



External positions have also benefited from the recent oil boom. Current account surpluses have been extremely strong, particularly in the larger oil producing countries. These foreign exchange receipts have mainly been channeled toward boosting foreign reserves, either in direct central bank holdings or in the various foreign investment funds. As a result, the net creditor position of the GCC states vis-à-vis the rest of the world has been growing rapidly over the past three years, to reach extremely sizable proportions.



The S&P report, which was received here yesterday, said on average, the oil sector accounts for 44 percent of GCC states’ GDP and 81 percent of total exports. This dependence varies from state to state. In Qatar, crude oil production is a relatively small element of the economy. However, this masks the country’s continued dependence on the wider hydrocarbons industry: Qatar possesses 14 percent of the world’s proven natural gas deposits, and heavy investments have yielded large increases in liquefied natural gas (LNG) production and exportation in recent years.



Bahrain has only limited oil resources in its onshore Awali field where production averages 35,000 barrels per day but this is enhanced by a production-sharing agreement with Saudi Arabia.



Oman’s oil production has been diminishing as its oil reserves become more difficult and expensive to extract. Despite an extensive enhanced oil recovery program, Omani crude oil supplies have continued to fall.



Fiscal outturns have been given a significant boost by the oil revenue windfalls. Increases in total expenditure by GCC states have been limited relative to revenue growth, and have mainly focused on capital expenditures. Indeed, a major distinction between the current oil boom and previous booms in the 1970s and 1980s has been the comparatively prudent management of windfalls during the most recent surge. This reflects improved fiscal policies and economic management, as well as lower expenditure pressures, as infrastructure and social needs have diminished over time. As a result, GCC states have achieved extremely robust budget surpluses, particularly for the large oil-producing countries.



On monetary impact of the oil boom on GCC states, the S&P report said extensive foreign exchange receipts had not translated into large pressures on the GCC currencies to appreciate as the majority of the receipts were held in offshore funds, rather than converted into domestic currency. Instead, this policy has strengthened confidence in the currency pegs as reserves accumulate.



According to the Saudi Arabian Monetary Agency’s Monthly Bulletin for May 2007, Saudi Arabia’s total reserves minus gold were at $ 24.71 billion at the end of April compared to $ 27.52 billion in 2006.



The S&P report added that inflation has been picking up in the GCC states. Moreover, growing liquidity may not be translating entirely into increased consumer demand, but may be finding its way into investments on the vibrant stock markets and into the real estate markets.



Despite the current bullish economic environment, a number of challenges lie ahead for GCC states. An over reliance on trade in a single commodity for economic activity and, in particular, for government revenues, is a potential source of vulnerability for the GCC states, as volatility in commodity markets can hit economic prospects.


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