Gulf better placed despite $350bn loss
Categories: Government
The UAE and other Gulf oil producers suffered from a combined asset loss of nearly $350 billion (Dh1.2 trillion) as a result of the global financial distress but their financial position remains strong enough to respond to faltering revenues and other repercussions, a major Saudi bank said yesterday.
After nearly seven years of an economic and fiscal boom, the six Gulf Co-operation Council (GCC) countries now face a difficult period as oil prices tumble, their crude output dives by more than two million barrels per day and global credits become scarce, the Saudi American Bank (Samba) said in a study.
Given their heavy reliance on oil exports, the decline will likely turn years of fiscal surpluses into deficits in some members, while their economies will either plunge into a recession or sharply slow down this year, it said.
But the seven-year boom is not a bygone era as its positive impact will stretch into 2009 and beyond. It was this boom that allowed the six members to rebuild their once vast overseas investment empire after it was eroded by many years of low oil prices and high defence spending during the 1990s.
"Going into the current global crisis the financial position of the GCC is strong, having benefited from years of huge fiscal surpluses. Rising oil prices during 2002-2008 have been mirrored in rising fiscal and current account surpluses, and a large accumulation of foreign assets. Official foreign reserves of GCC members rose more than seven fold through 2008 to reach $517bn, the greater part of which ($440bn)," Samba said.
It said that in addition to these reserves, substantial official assets have also been built up over the last few years by Sovereign Wealth Funds (SWFS) and other government institutions
Large assets
Drawing from various sources, the overall level of GCC foreign assets (including official reserves), is thought to have been around $1.28trn at end-2007, with the majority accounted for by Sama, and the large SWFs of Abu Dhabi (Adia), Kuwait (KIA), and Qatar (QIA), according to the study.
"Little official data on the composition of SWF assets is available, but it is clear that their value will have fallen steeply during 2008 in line with the global collapse in asset values. Rough estimates suggest that the overall drop in total GCC foreign assets could be $350bn, with Adia, KIA and QIA suffering the heaviest declines of around 40 per cent, while Sama's lower exposure to equities is thought to have limited losses to 12 per cent."
The study said that despite such losses, large new additions to official foreign assets, reflecting record oil revenues during 2008, suggest that total GCC foreign assets still ended the year at around $1.2trn.
Strong cover
"This will provide substantial funds to help offset lower capital flows, cover external debt repayments, and support public spending levels in the face of lower oil prices. This particularly applies to the Saudi Arabia, Kuwait, the UAE, and Qatar, while Bahrain and Oman have less room for manoeuvre and face a potentially sharper fiscal adjustment," it said.
"While the outlook is challenging, the GCC is better positioned to weather the storm than many other economies. GCC governments are willing and capable of smoothing the downturn by drawing down their huge savings of the last five years. Already we have seen concerted efforts to support the financial sector, and more can be expected," it said.
"Injections into the banking system will be particularly important to moderate the funding shortfall resulting from the reduction in foreign finance. In addition, further use may be made of SWFs to prop up collapsing asset prices at home. GCC authorities are also expected to maintain support on the fiscal front. However, the extent of the fiscal stimulus is harder to gauge as governments will be wary of seeing their budget and current account deficits balloon, and thus the pace of spending may lag as authorities' watch to see what happens to oil prices."
Low oil prices
The study said the collapse in oil prices would ally with sharp output cuts in Gulf oil heavyweights to turn their massive current account surplus in 2008 to a small deficit of around $2bn this year.
Given the credit tightness, GCC could be forced to withdraw from their foreign assets to finance the deficits and any fresh government liquidity injections into their banking systems.
"The combination of lower oil prices and likely counter-cyclical increases in fiscal spending is expected to push some GCC budgets into deficits. In Saudi Arabia, Oman and Bahrain, projected oil prices are now below the estimated 2009 budget break even prices (that is the oil price which will lead to a zero government deficit), implying that they will move into deficit. In contrast, Kuwait, Qatar and the UAE are expected to sustain small surpluses as they have lower break even prices," it said.
"Given that GCC spending traditionally overshoots announced budgets, the break even oil price is just a rough indicator, and understates the likelihood of fiscal deficits emerging.
"Budget balances will be heavily dependent on how far GCC governments are prepared to sustain and/or raise spending to help support their economies. The evidence to date suggests that GCC spending levels will appropriately be sustained or raised, consistent with call for a robust fiscal response to the crisis."
It noted that in this this context, GCC governments seem content to run much lower surpluses or finance deficits from savings.
"In particular, this includes the dominant Saudi Arabian economy, which is projected to run a deficit of around 15 per cent of GDP, while preserving spending levels. This will be the main driver behind a dramatic shift from an overall GCC fiscal surplus of nearly 29 per cent of GDP in 2008, to a projected deficit of close to five per cent in 2009" it said.
Difficult time
Despite government interventions, the study expected 2009 to be difficult for the GCC because of lower oil prices and output, and slow credit growth.
"It is clear that credit growth in the region will slow sharply; probably falling to low single digits in most countries, compared with the rates of between 20 per cent and 50 per cent over the last two years. Banks are already adopting stricter lending criteria, and will be looking to maintain liquidity ratios within prudent limits, and are likely to focus on preserving asset quality in the difficult global and local environments," it said.
Slow growth
Its figures showed real growth in the 28-year-old Gulf economic, political and defence alliance would plunge from 6.5 per cent in 2008 to 0.5 per cent in 2009.
Much of this will reflect the decline in dominant hydrocarbon sectors.
Economies will shrink
Economies in half of the six countries that make up the Gulf Co-operation Council will shrink this year, said Merrill Lynch. Kuwait's oil dependent economy will contract by as much as 1.8 per cent, it said in a report yesterday.
The Saudi economy will shrink 0.2 per cent and the UAE by 0.6 per cent. Gulf Arab states are feeling the brunt of the global economic crisis after oil prices tumbled more than $100 a barrel, leading them to cut production.
After nearly seven years of an economic and fiscal boom, the six Gulf Co-operation Council (GCC) countries now face a difficult period as oil prices tumble, their crude output dives by more than two million barrels per day and global credits become scarce, the Saudi American Bank (Samba) said in a study.
Given their heavy reliance on oil exports, the decline will likely turn years of fiscal surpluses into deficits in some members, while their economies will either plunge into a recession or sharply slow down this year, it said.
But the seven-year boom is not a bygone era as its positive impact will stretch into 2009 and beyond. It was this boom that allowed the six members to rebuild their once vast overseas investment empire after it was eroded by many years of low oil prices and high defence spending during the 1990s.
"Going into the current global crisis the financial position of the GCC is strong, having benefited from years of huge fiscal surpluses. Rising oil prices during 2002-2008 have been mirrored in rising fiscal and current account surpluses, and a large accumulation of foreign assets. Official foreign reserves of GCC members rose more than seven fold through 2008 to reach $517bn, the greater part of which ($440bn)," Samba said.
It said that in addition to these reserves, substantial official assets have also been built up over the last few years by Sovereign Wealth Funds (SWFS) and other government institutions
Large assets
Drawing from various sources, the overall level of GCC foreign assets (including official reserves), is thought to have been around $1.28trn at end-2007, with the majority accounted for by Sama, and the large SWFs of Abu Dhabi (Adia), Kuwait (KIA), and Qatar (QIA), according to the study.
"Little official data on the composition of SWF assets is available, but it is clear that their value will have fallen steeply during 2008 in line with the global collapse in asset values. Rough estimates suggest that the overall drop in total GCC foreign assets could be $350bn, with Adia, KIA and QIA suffering the heaviest declines of around 40 per cent, while Sama's lower exposure to equities is thought to have limited losses to 12 per cent."
The study said that despite such losses, large new additions to official foreign assets, reflecting record oil revenues during 2008, suggest that total GCC foreign assets still ended the year at around $1.2trn.
Strong cover
"This will provide substantial funds to help offset lower capital flows, cover external debt repayments, and support public spending levels in the face of lower oil prices. This particularly applies to the Saudi Arabia, Kuwait, the UAE, and Qatar, while Bahrain and Oman have less room for manoeuvre and face a potentially sharper fiscal adjustment," it said.
"While the outlook is challenging, the GCC is better positioned to weather the storm than many other economies. GCC governments are willing and capable of smoothing the downturn by drawing down their huge savings of the last five years. Already we have seen concerted efforts to support the financial sector, and more can be expected," it said.
"Injections into the banking system will be particularly important to moderate the funding shortfall resulting from the reduction in foreign finance. In addition, further use may be made of SWFs to prop up collapsing asset prices at home. GCC authorities are also expected to maintain support on the fiscal front. However, the extent of the fiscal stimulus is harder to gauge as governments will be wary of seeing their budget and current account deficits balloon, and thus the pace of spending may lag as authorities' watch to see what happens to oil prices."
Low oil prices
The study said the collapse in oil prices would ally with sharp output cuts in Gulf oil heavyweights to turn their massive current account surplus in 2008 to a small deficit of around $2bn this year.
Given the credit tightness, GCC could be forced to withdraw from their foreign assets to finance the deficits and any fresh government liquidity injections into their banking systems.
"The combination of lower oil prices and likely counter-cyclical increases in fiscal spending is expected to push some GCC budgets into deficits. In Saudi Arabia, Oman and Bahrain, projected oil prices are now below the estimated 2009 budget break even prices (that is the oil price which will lead to a zero government deficit), implying that they will move into deficit. In contrast, Kuwait, Qatar and the UAE are expected to sustain small surpluses as they have lower break even prices," it said.
"Given that GCC spending traditionally overshoots announced budgets, the break even oil price is just a rough indicator, and understates the likelihood of fiscal deficits emerging.
"Budget balances will be heavily dependent on how far GCC governments are prepared to sustain and/or raise spending to help support their economies. The evidence to date suggests that GCC spending levels will appropriately be sustained or raised, consistent with call for a robust fiscal response to the crisis."
It noted that in this this context, GCC governments seem content to run much lower surpluses or finance deficits from savings.
"In particular, this includes the dominant Saudi Arabian economy, which is projected to run a deficit of around 15 per cent of GDP, while preserving spending levels. This will be the main driver behind a dramatic shift from an overall GCC fiscal surplus of nearly 29 per cent of GDP in 2008, to a projected deficit of close to five per cent in 2009" it said.
Difficult time
Despite government interventions, the study expected 2009 to be difficult for the GCC because of lower oil prices and output, and slow credit growth.
"It is clear that credit growth in the region will slow sharply; probably falling to low single digits in most countries, compared with the rates of between 20 per cent and 50 per cent over the last two years. Banks are already adopting stricter lending criteria, and will be looking to maintain liquidity ratios within prudent limits, and are likely to focus on preserving asset quality in the difficult global and local environments," it said.
Slow growth
Its figures showed real growth in the 28-year-old Gulf economic, political and defence alliance would plunge from 6.5 per cent in 2008 to 0.5 per cent in 2009.
Much of this will reflect the decline in dominant hydrocarbon sectors.
Economies will shrink
Economies in half of the six countries that make up the Gulf Co-operation Council will shrink this year, said Merrill Lynch. Kuwait's oil dependent economy will contract by as much as 1.8 per cent, it said in a report yesterday.
The Saudi economy will shrink 0.2 per cent and the UAE by 0.6 per cent. Gulf Arab states are feeling the brunt of the global economic crisis after oil prices tumbled more than $100 a barrel, leading them to cut production.
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