News Column

Drilling down into the Gulf's financial core

May 10, 2014

Andrew Shouler Financial Correspondent



Dubai: It's not difficult to imagine that there's a bit of a risk premium in current oil prices, given the escalation of tensions, political provocation and outright conflict in Ukraine right now.

Stock markets in the Gulf have barely noticed, powered even further along by a positive earnings season, to some extent reflected globally, but gold too reflects some safe-haven appeal at this troubled time between Russia and the West.

Of course it's an ill wind that blows nobody any good, and this region benefits through its energy export receipts whenever instability either locally or internationally blows up.

Arguably, that very fact can provide support for equities as well, insofar as the GCC economies garner much of their accumulating wealth, yearly national income growth and impetus for business from those earnings.

So oil remains steady in the vicinity of $100 (Dh367) for WTI and $105-110 for Brent levels that continue to spell healthy returns to government coffers, consequently keeping economic conditions, state finances, banking systems and real estate markets broadly on the up.

Analysts have very little to quibble about, besides wondering how good it can get, and whether that might actually become too good at some point.

Just how healthy the fiscal figures actually are, particularly relative to the commitments undertaken by governments in the Gulf, has been explored in the latest review of the region by the Institute for International Finance (IIF), the Washington-based bankers' body which not only examines policy and performance but divines all the kinds of numbers that make up a detailed review of country finances.

Diversification

The IIF points out that despite the impact made by economic diversification, which has curtailed the hydrocarbon sector's share of GDP from 41 per cent at the turn of the century to 33 per cent today, "GCC countries have not done as well in diversifying their domestic revenue base, as the oil and gas sector's contribution to budget receipts has remained high at 84 per cent on average in the last three years."

Oil dependence, expressed as the proportion of export receipts derived from such products, remains high but has declined, from 97 per cent in 1984 to about 86 per cent now. Falling hydrocarbon export receipts have meant lower fiscal revenues, at 41 per cent of GDP in 2014, from 43 per cent in 2013.

That said, on a national basis no serious financing issue arises to worry about, with current accounts on the balance of payments exceeding 10 per cent of GDP on aggregate, sending net foreign assets to some $2.3 trillion (138 per cent of GDP) by the end of this year.

If the GCC is thus viewed as a single entity (a favourite device of economists although one not rooted in political or practical reality for which see the operating methods of the Eurozone), its consolidated fiscal surplus will still be 8.3 per cent of GDP in 2014, from 10.6 per cent last year.

Those are still hugely favourable outcomes overall, but they do mask the relative positions of the constituent states.

While the GCC average budget breakeven oil price has risen from below $50 in 2008 to $75 in 2013, that overall view masks significant variations in the component elements, ranging from Kuwait's$51.6 on the most recent measure to $119.4 in Bahrain (see chart).

Still, the IIF's report denotes a collective response to declining revenues. "Authorities across the GCC appear to have taken heed, as attested by budget targets. Planned expenditure growth slowed sharply to 4 per cent in 2014, versus the 15 per cent average budgeted during 2010-2013." Only Kuwait, which typically underspends anyway, has not imitated that trend.

State expenditure

As an aside, it's a notable quirk of Gulf governments' distinct sourcing of ongoing funds namely substantially from the rest of the world that their budgets create a net fiscal stimulus to the local economies, whereas surpluses are usually perceived (at least by mainstream economists) as effectively some kind of withdrawal from the flow of income round an economy. Hence the common argument that deficits should be allowed to persist in circumstances of undue unemployment.)

The effect of slowing state expenditure is the same regardless of origin, however, namely the likelihood of slower GDP growth in the non-oil sectors. The IIF observes that one way to compensate for that ramification would be to encourage capital rather than current spending, quoting a study as having revealed that the long-term multiplier (effectively leveraging of stimulus around the system) for the former ranges from 0.6 to 1.1 compared to the latter's 0.3 to 0.7. In other words, the government's outlays are proportionally more productive over time when they are in the form of investment rather than simply consumed.

Overall, though, what's not to like, indeed? If that's the biggest problem there is, it does seem very much like there's no real problem at all. With the one key caveat that the GCC isn't a single country customs union talk notwithstanding no wonder the big picture for the region is viewed as pretty rosy.


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Source: Gulf News (United Arab Emirates)


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