30 November 2009
Gulf oil producers have sufficient financial resources abroad to deal with debt financing and push ahead with fiscal measures to counter further effects of the global economic distress, according to two special studies.
Although the combined debt of the six Gulf Cooperation Council (GCC) countries has climbed close to $400 billion (Dh1.46 trillion), it remains below half their foreign assets, which have gained ground following the global market improvement, they said.
The external position of the GCC is considerably stronger than central bank foreign assets imply, the Saudi American Bank (Samba) said in its monthly economic bulletin.
It said all GCC members except Saudi Arabia manage the bulk of their reserves through sovereign wealth funds which hold combined assets conservatively estimated at about $750bn, with the Abu Dhabi Investment Authority and Kuwait Investment Authority holding $250-400bn each. "Having incurred substantial losses last year when asset prices plummeted worldwide, GCC foreign holding will have recovered ground this year as global equity markets have rallied, further bolstering the already comfortable external position... the GCC's large holdings of foreign assets ensure that it retains a net creditor position despite the recent surge in private external debt in the region, particularly in the UAE," said Samba.
It estimated that total GCC debt has risen to $396bn at the end of 2008, equivalent to about 38 per cent of the gross domestic product, and considerably less than combined foreign asset holding of regional central banks and sovereign wealth funds, estimated to be in excess of $1trn.
"Such assets will help GCC states deal with debt refinancing and rollover risks stemming from the global financial crisis."
Samba expected average oil prices this year to be nearly 40 per cent below the 2008 level despite the recent surge. It said lower prices would ally with a sharp cut in the GCC's crude output to depress the group's current account surplus. From 25.2 per cent of GDP in 2008, the surplus will fall to 0.8 per cent of GDP this year, before recovering to five per cent in 2010 as oil earnings pick up.
But the report said the bulk of this fall reflects Saudi's projected shift into a current account deficit of more than $21bn and nearly six per cent of GDP Oman is also projected to move into deficit, but all the other GCC countries are expected to maintain reduced, but still healthy surpluses.
The bank said it believed the relative resilience of GCC current account balances, excluding Saudi Arabia, is reflected in the only modest drawdown in official reserves reported for the first half of the year, despite plunging oil revenues, large capital outflows, and increased state spending.
In the case of Qatar, reserves have actually risen by more than $5bn as new LNG exports have come on stream, it said.
In contrast the widening current account deficit in Saudi Arabia has been reflected in a $55bn drawdown of central bank official foreign assets.
At more than $385bn, Saudi Arabia has ample reserves, Samba said adding that the kingdom has "appropriately" decided to dip into these savings in order to fund strong counter cyclical fiscal policies.
Another study by a Western financial institution estimated the GCC's net foreign assets of at about $1trn, equivalent to 110 per cent of its GDP.
"These assets continue to provide substantial funds to sustain government robust spending levels," said the Washington-based Institute of International Finance. "Having benefitted from the large current account and fiscal surpluses, foreign assets of the region increased from $0.5trn at end-2002 to $1.6trn at end-July 2008 before declining to $1.3trn at end-2008 due to the drop in global asset values... a significant portion of the SWFs of Kuwait, Qatar and Abu Dhabi were invested in global financial markets."
Samba said the improvement in oil prices would support the GCC's fiscal balances despite a sharp rise in actual expenditure as part of stimulant measures announced by most members to offset the impact of the crisis. "It is clear that the strengthening of oil prices will again result in substantially higher revenues than budgeted. This will help support fiscal balances in 2009 despite a large increase in public spending in excess of that already budgeted. Higher oil revenues will also limit the need to tap into reserves," it said.
"As a result, the GCC aggregate fiscal balance this year is projected to shift into a deficit of 1.5 per cent of GDP from a surplus of 28.5 per cent in 2008. While stronger oil prices will further boost fiscal accounts in 2010, this will be offset by sustained counter cyclical fiscal policies, particularly in Saudi Arabia, Qatar and the UAE. The aggregate GCC fiscal balance is thus expected to move only marginally into positive territory at a projected 0.8 per cent of GDP."
According to the report, the UAE, Qatar and Kuwait are expected to post small but rising surpluses, while the evident surge in government capital expenditure is likely to keep Saudi Arabia's fiscal balances in deficit.
Gulf oil producers have sufficient financial resources abroad to deal with debt financing and push ahead with fiscal measures to counter further effects of the global economic distress, according to two special studies.
Although the combined debt of the six Gulf Cooperation Council (GCC) countries has climbed close to $400 billion (Dh1.46 trillion), it remains below half their foreign assets, which have gained ground following the global market improvement, they said.
The external position of the GCC is considerably stronger than central bank foreign assets imply, the Saudi American Bank (Samba) said in its monthly economic bulletin.
It said all GCC members except Saudi Arabia manage the bulk of their reserves through sovereign wealth funds which hold combined assets conservatively estimated at about $750bn, with the Abu Dhabi Investment Authority and Kuwait Investment Authority holding $250-400bn each. "Having incurred substantial losses last year when asset prices plummeted worldwide, GCC foreign holding will have recovered ground this year as global equity markets have rallied, further bolstering the already comfortable external position... the GCC's large holdings of foreign assets ensure that it retains a net creditor position despite the recent surge in private external debt in the region, particularly in the UAE," said Samba.
It estimated that total GCC debt has risen to $396bn at the end of 2008, equivalent to about 38 per cent of the gross domestic product, and considerably less than combined foreign asset holding of regional central banks and sovereign wealth funds, estimated to be in excess of $1trn.
"Such assets will help GCC states deal with debt refinancing and rollover risks stemming from the global financial crisis."
Samba expected average oil prices this year to be nearly 40 per cent below the 2008 level despite the recent surge. It said lower prices would ally with a sharp cut in the GCC's crude output to depress the group's current account surplus. From 25.2 per cent of GDP in 2008, the surplus will fall to 0.8 per cent of GDP this year, before recovering to five per cent in 2010 as oil earnings pick up.
But the report said the bulk of this fall reflects Saudi's projected shift into a current account deficit of more than $21bn and nearly six per cent of GDP Oman is also projected to move into deficit, but all the other GCC countries are expected to maintain reduced, but still healthy surpluses.
The bank said it believed the relative resilience of GCC current account balances, excluding Saudi Arabia, is reflected in the only modest drawdown in official reserves reported for the first half of the year, despite plunging oil revenues, large capital outflows, and increased state spending.
In the case of Qatar, reserves have actually risen by more than $5bn as new LNG exports have come on stream, it said.
In contrast the widening current account deficit in Saudi Arabia has been reflected in a $55bn drawdown of central bank official foreign assets.
At more than $385bn, Saudi Arabia has ample reserves, Samba said adding that the kingdom has "appropriately" decided to dip into these savings in order to fund strong counter cyclical fiscal policies.
Another study by a Western financial institution estimated the GCC's net foreign assets of at about $1trn, equivalent to 110 per cent of its GDP.
"These assets continue to provide substantial funds to sustain government robust spending levels," said the Washington-based Institute of International Finance. "Having benefitted from the large current account and fiscal surpluses, foreign assets of the region increased from $0.5trn at end-2002 to $1.6trn at end-July 2008 before declining to $1.3trn at end-2008 due to the drop in global asset values... a significant portion of the SWFs of Kuwait, Qatar and Abu Dhabi were invested in global financial markets."
Samba said the improvement in oil prices would support the GCC's fiscal balances despite a sharp rise in actual expenditure as part of stimulant measures announced by most members to offset the impact of the crisis. "It is clear that the strengthening of oil prices will again result in substantially higher revenues than budgeted. This will help support fiscal balances in 2009 despite a large increase in public spending in excess of that already budgeted. Higher oil revenues will also limit the need to tap into reserves," it said.
"As a result, the GCC aggregate fiscal balance this year is projected to shift into a deficit of 1.5 per cent of GDP from a surplus of 28.5 per cent in 2008. While stronger oil prices will further boost fiscal accounts in 2010, this will be offset by sustained counter cyclical fiscal policies, particularly in Saudi Arabia, Qatar and the UAE. The aggregate GCC fiscal balance is thus expected to move only marginally into positive territory at a projected 0.8 per cent of GDP."
According to the report, the UAE, Qatar and Kuwait are expected to post small but rising surpluses, while the evident surge in government capital expenditure is likely to keep Saudi Arabia's fiscal balances in deficit.
By Nadim Kawach
© Emirates Business 24/7 2009
