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Business as usual in GCC states despite halving of oil prices
January 18, 2015, 3:57 pm

Weekend evenings continue to see Kuwait’s Gulf Road and other main arteries dense with traffic and denser drivers still attempt to weave their luxury sports cars through this traffic. Food-courts are brimming with families; the glitzy Avenues Mall and other luxury retail outlets continue to be thronged with people.

While oil has slid to half from its high in June 2014 and the oil-rich states of the Gulf are expected to face sharp drop in their incomes, in Kuwait, and elsewhere in other rich Gulf Cooperation Council (GCC) states, there is no sign of any restrain in consumer lifestyles, nor in the government’s spending plans.

A number of development projects may be cut or suspended, especially in Bahrain and Oman, the two financially weaker states among the six-nation GCC bloc, and if oil stays at current levels for several years, the other four GCC economies may be forced into painful spending cuts, but for the moment at least it is business as usual.

Consumers are still spending, companies are investing, and governments are announcing record budgets for 2015. Some economists expect growth in the six-nation Gulf Cooperation Council to accelerate this year.

One reason the governments in the region have not introduced any austerity plans or curtailed their spending on development plans is the enormous buffer they have built-up during years of high oil prices. The financial reserves are enough to keep these governments spending at high levels comfortably for many years to come. 

The government’s continued spending is sustaining consumer and corporate sentiment despite the slump in oil prices. Jarir, a top Saudi retailer, reported a 20 percent year-on-year jump in fourth-quarter sales. December purchasing manager surveys in Saudi Arabia and the UAE showed non-oil business growing at roughly the same pace as in June.

Iyad Malas, chief executive of Majid Al Futtaim-Holding, one of the Gulf's top shopping mall and leisure operators with over 27,000 employees, said the region's business community was uncertain about oil prices but expected solid growth this year. The cost to the Gulf of cheaper oil is huge. Experts estimate that if Brent crude averages $60 a barrel this year, GCC states will run a combined current account deficit of $60 billion. If oil were at $110, as it was in June, they would enjoy a surplus of $300 billion.

But the structure of the Gulf's oil industry minimizes the direct impact of oil price changes on economies. Oil export revenues do not flow straight to the private sector but to governments, which decide how much of them to spend. That means the key factor for economies is not the oil price but state budget policy. Government announcements over the past two weeks indicate state spending may fall marginally in real terms this year but will stay high and near record levels.

The government of Saudi Arabia, by far the largest GCC economy, plans to raise nominal 2015 spending by 0.6 percent from its 2014 plan. Dubai announced a 9 percent spending increase, and even Oman plans a 4.5 percent rise. Top officials of other GCC governments, including Abu Dhabi, Qatar and Kuwait, have said spending on economic development will not be cut. Some governments are using the oil price slide as political cover to raise taxes or cut subsidies, but are stopping well short of austerity. Kuwait cut diesel fuel subsidies but ruled out similar action for petrol; Abu Dhabi raised utility fees.

So growth in the region looks unlikely to fall much if at all this year, and may actually accelerate if other factors are favorable. "We project real GDP growth in the GCC region to accelerate in the range of 5.0 to 5.5 percent in 2015 from an estimated 4.7 percent in 2014," said Joannes Mongardini, head of economics at Qatar National Bank, the country's largest bank. He added, "Unless there is a cut in public investments - which is not expected - in the region, we do not see a major impact on overall business sentiment" from cheaper oil.

GCC governments won't be able to avoid big spending cuts indefinitely if oil prices stay low. With Brent at $50, the current level, all of them would probably run budget deficits. But, analysts believe, their financial reserves are so large that they could cope with such deficits for years. The GCC's foreign exchange reserves and sovereign wealth fund assets are calculated to be worth over 160 percent of gross domestic product.

Investment bank VTB Capital estimates that at an oil price of $60, the assets of the four big GCC states could fund public spending at current levels for two to five years, or cover budget deficits for four to 14 years - all without recourse to debt.

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