Jan 06 2013

Rising Gulf spending

Rising Gulf spending
Saudi Arabia's public expenditure is set to hit USD275-billion by 2014, and Abu Dhabi is also expected to boost spending, as the region's two largest economies step on the gas.
The region's three largest economies - Saudi Arabia, UAE and Egypt - are expected to experience largely varying fortunes in 2013.

Saudi Arabia, which recently unveiled an expansionary budget for 2013 with public spending of USD219-billion is stepping on the gas to meet rising infrastructure needs.

"Budgeted capital spending is 28% higher than in 2012, though the government has struggled to achieve its capital spending targets in recent years," said Fitch ratings agency in a note. "Education and healthcare remain the focus of spending, accounting for 37% of the total. Defence and security tends to be the largest single item, constituting around one-third, but is not disclosed in the budget."

If recent history is anything to go by, actual spending will above budgeted level, says Jadwa Investment.

The government's actual spend has been an average 24% higher than budgeted in the past ten years.

Still the extent of overspending is likely to be smaller than the previous two years.

"This is due to the fact that the temporary spending commitments contained in a series of Royal Decrees in 2011 are not likely to affect the 2013 budget," notes Jadwa senior economist Fahad Alturki. "We thus expect that the excess spending in 2013 will be relatively close to the budget projection leading to a total expenditure of SR871 billion."

HSBC expects the good times in Saudi Arabia to continue as triple-digit oil prices will continue to ensure surpluses, although growth will moderate from 5.3% in 2012 to 4.3% in 2013 and 3.7% in 2014.

"The surpluses should persist despite further growth in public spending, which we expect to exceed USD275bn in 2014 - roughly double the 2008 total and three times the level recorded in 2005," said HSBC economist Simon Williams, in a report.

"This highly expansionary fiscal stance will be the core driver of growth in the non-oil sector, boosted by the expansion in domestic credit and the acceleration in household formation associated with the kingdom's overwhelmingly youthful population."

However, the public outlays means the Kingdom's budget breakeven oil price to over USD95 per barrel in 2014, according to HSBC, which could hurt the government if crude prices fall for a sustained period of time.

Meanwhile, Fitch projects that the Kingdom's breakeven oil price will rise to USD74 b in 2013 (assuming oil production of 9.7 million bpd) up from USD68 per barrel in 2012 and just over USD40 per barrel in 2008.

While the economic prospects look rosy, the political aspects are cause for concern.

"Political risks will continue to weigh, as regional tensions persist and uncertainties over succession within the kingdom come into focus," said Mr. Williams. "More broadly, policymakers are aware that they must look to accelerate and deepen the build-out of the non-oil economy and reduce dependence on oil if Saudi Arabia's long-term prosperity is to be assured."

Meanwhile, it is also important to remember that the economy remains heavily dependent on government spending.

"This spending will be affordable, but the economic growth such vast spending will generate will not be spectacular," says Jadwa's Mr. Turki in a report.

The UAE is also expected to enjoy good economic prospects in 2013, but is unlikely to experience the runaway growth of Saudi Arabia.

HSBC expects UAE's GDP to edge up 3.9% in 2013, from 3.7% last year, as non-oil sectors drive growth.

"Strikingly, non-oil exports have held up well despite soft global demand - a reflection in part of the competitiveness of the UAE's service sector as well as its exposure to the still fast-growing oil rich states of the Gulf."

Dubai is set to reap the rewards of its status as a regional and tourism hub in 2013.

"Although it has yet to complete the rescheduling of its debt stock, its repayment obligations over the coming 18 months are low. A pick-up in asset prices - both at home and overseas - will also ease some of its balance sheet strains."

The UAE's tourism sector is estimated to have grown 4.5% in 2012 compared to 2011.

Dubai saw its tourists arrivals soar by 10% and hotel revenues by 19% in the first half of 2012, has recently announced new tourism initiatives to host 80 million new visitors to the city.

The UAE banking sector is also working through its problems, even though it continues to face pressures on asset quality metrics, says BankAudi in a report.

"Although UAE banks witness some lingering non-performing loan pressures, they maintain significant buffers to withstand a further deterioration in asset quality," notes the Lebanese bank.

"IMF stress tests indicate that the domestic banking system could absorb a significant increase in NPLs, although adding that for some banks with high loan concentration in real estate, Tier 1 capital would fall below the regulatory minimum of 8% in a severe stress scenario."

Abu Dhabi, which has been the laggard over the past few years due to prudent economic policies, is also expected to loosen the purse strings.

"After slowing its capital spend over the past three years, we expect to see some acceleration in outlays on core projects over 2013-14, supported by a financial sector that is more robust than in Dubai. Outside of key infrastructure and oil sector projects, however, the rate of increase is likely to remain moderate."

© alifarabia.com 2013

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