Flip through the latest issue of Gulf Weekly.
When oil prices shot up, Gulf oil producers amassed huge
surpluses. But with crude
collapsing from a high of $147 to around $36 a barrel and Opec announcing its highest output cut, they almost
certainly face the prospect of running budget deficits next year.
The states have expanded their budgets swiftly since 2002, striving to capitalise on soaring oil to diversify their economies away from gas and oil revenues.
Governments poured billions into developing financial hubs, setting up tourism hot spots, building up industry and petrochemicals and speeding up construction projects.
As a result, the oil price needed to keep budgets balanced has risen substantially across the Gulf. Those with the largest populations to support, like Saudi Arabia, home to 25 million people, are most at risk of deficits.
From posting a surplus exceeding 20 per cent of Gross Domestic Product (GDP) this year, the world's top oil exporter would ring in a deficit of 8 billion riyals ($2.13 billion) next year even if the price of US crude averages $70 a barrel, says Jadwa Investment. The deficit would be several billions more if oil continued to stay below $50 a barrel.
'With oil revenues accounting for around 85 per cent of total revenues, the collapse in prices and lower production will have significant implications for the government budget,' the Riyadh-based investment firm says in a research note.
Steep Opec cuts could reduce Saudi Arabia's oil revenues by 40 per cent next year, Jadwa estimates.
Saudi Arabia has pledged to spend $400 billion on development and investment in the next five years.
Compared with Saudi Arabia the case is different with the UAE, which has also committed itself to keep expanding public spending even as it forecasts an abrupt fall in economic growth.
Abu Dhabi's public finances are very robust and can easily withstand the recent plunge in international oil prices, says Moody's Investors Service. Global oil prices plunged to the lowest in four years to $36 per barrel on Friday despite a steep output cut by Opec as global economic meltdown deepened.
"We estimate that Abu Dhabi's fiscal break even is around $30 per barrel, considerably below today's oil price," says Tristan Cooper, a Moody's vice-president/senior analyst.
"Even if oil prices were to fall below $30 per barrel, the Abu Dhabi government could afford to run sizeable fiscal deficits for many years given its large stock of financial assets," Cooper says. Even under a plausible worst-case scenario, the potential liabilities of the Abu Dhabi government could be amply covered by its assets.
Although financing has become more difficult given a shortage of liquidity among local and international banks, Abu Dhabi is better placed than other emirates and most other countries to ride out the global economic downturn given the strength of its government finances, he says, noting that overall confidence has been hit by the steep fall in the local equity market and a reported softening of real estate prices.
There would not be a shock as such for Bahrain, which usually follows a conservative policy on revenues. Fearing extraordinary developments in the oil market, the kingdom had assumed an average price of $40 per barrel in its 2008 budget.
Bahrain's projected budget deficit for 2008 was set at $947 million, which could now become a reality looking at how oil prices are falling and how expenses are creeping up.
Total spending in 2008 is put at about $5.5 billion or eight per cent higher than budgeted figures for 2007. The planned spending amount comprises about one-third of the country's GDP. This is relatively high by international standards and indicative of substantial governmental involvement in the economy.
A combination of declining oil prices, lower crude demand and production cuts will cost Opec another $151 billion in lost oil export revenue next year, the US Energy Information Administration says.
As a result it revised down its monthly forecast for Opec's oil export revenue during 2009 by 25 per cent to $444 billion, which would be the lowest level since 2004.
While a sustained oil price slump would have a drastic impact on oil producers' spending power, high oil prices have allowed Gulf central banks to enhance their cash cushion against any downturn and to build up huge sovereign wealth funds.
The Gulf made export earnings of $2.2 trillion in the five years to June, according to estimates of Saudi Arabia's Samba Financial Group.
In the short term they would probably accept small surpluses or deficit because the cash cushions they have created with sovereign wealth funds can bear the burden.
