x Abu Dhabi, UAESunday 21 January 2018

Gulf states counting even more on oil price

Big increases in GCC public spending this year are pushing up break-even oil prices for some states and raising concerns about the sustainability of government largesse.

Big increases in public spending are pushing up break-even oil prices for some Gulf states. Istockphoto
Big increases in public spending are pushing up break-even oil prices for some Gulf states. Istockphoto

Big increases in GCC public spending this year are pushing up break-even oil prices for some states and raising concerns about the sustainability of government largesse.

In recent days, Oman and Saudi Arabia have unveiled spending plans for this year that rely on higher oil prices than last year in order to balance their budgets.

Oman's finance minister, Darwish Al Balushi, was quoted by Reuters as telling a news conference last week that the country required oil prices of US$104 per barrel this year to break even on a spending plan of 12.9 billion rials (Dh123.21bn). He did not give last year's break-even price but Deutsche Bank analysts estimate it was $91.60 per barrel.

Saudi Arabia's record 820bn riyal spending target for this year requires a break-even price of $71 per barrel, up from $69 last year, estimates Jadwa Investment, a Saudi investment bank.

Economists expect a similar trend for other GCC budgets this year.

These break-even levels are still below current prices of $111 per barrel for North Sea Brent crude. Still, some observers are worried whether governments will be able to sustain high expenditure levels in the longer term.

"In the last four years we have seen a significant increase in break-even oil prices across the GCC," said Raza Agha, the chief economist for the Middle East and Africa at VTB Capital. "It's a reflection of higher current expenditure in wages and salaries."

Increases in spending in 2011 and last year were supported by rises in oil output to make up for cuts to Libyan output in 2011 and more recently for the dip in Iran's exports as a result of international sanctions.

But this year, oil output is expected to moderate. Saudi Arabia's oil revenue is expected to dip to 829 billion riyals (Dh811.92bn) this year, down from 1.24 trillion riyals last year, according to the country's budget statement.

Oil prices are also forecast to soften slightly this year from last year.

The rise in break-even prices is not an immediate concern for most regional governments.

Many are traditionally conservative in their budget forecasting, underestimating revenues for the year.

Most also have hefty foreign reserves to fall back on, while governments are also capable of issuing bonds to raise cash. Oman and Bahrain, considered the most vulnerable to oil price weakness, were promised US$20bn (Dh73.46bn) in aid from the rest of the GCC in 2011.

Despite efforts to diversify their economies into non-hydrocarbon sectors, most of the income of GCC states still flows from oil. Without oil revenues, GCC governments would be running double-digit deficits, said Mr Agha.

The exception is the emirate of Dubai, which depends on oil for only a fraction of its revenue and draws income from its transport, trade and tourism sectors. Last week it unveiled an expansionary budget, with a spending target of Dh34.1bn.

"When income is primarily from oil proceeds, governments need to be aware of the vulnerability of budget revenues to changes in oil prices, and how sustainable expenditure is in this context," said Khatija Haque, senior economist at Emirates NBD.

In its latest report in November, the IMF questioned the sustainability of GCC spending, warning that spending was at levels "inconsistent with intergenerational equity".

Dubai has pledged to create 1,600 jobs for Emiratis this year, while Oman has targeted a further 20,000 posts in the government sector under its latest budget.

"Generally, spending on public-sector wages and salaries is less productive than spending on infrastructure that would support higher economic growth over the medium and longer term," said Ms Haque.

Still, many governments have also boosted spending on infrastructure.

"If you look at capital spending in Saudi Arabia, it has risen from 70.9bn riyals in 2006 to 258bn riyals, that's a huge jump in capital spending to improve infrastructure will sustain a solid non-oil private sector growth," said Fahad Alturki, senior economist for Jadwa Investment.

tarnold@thenational.ae