The state’s general revenues increased by 30.8 per cent by the end of February this year, registering RO 1.85 billion as compared to RO 1.42 billion during the corresponding period last year, according to statistics released by the department concerned (at the Ministry of National Economy).

The state revenues received strong backing from a major hike in oil prices in recent months, with net oil revenues standing 43.4 per cent higher at RO 1.54 billion as against RO 1.07 billion in the corresponding period in 2011. The gas revenues soared 23.6 per cent to RO 205 million during the same period this year.

While the statistics registered the great increase in oil and gas revenues, there was no mention of figures on customs tariffs or income tariffs. The statistics also indicate that capital revenues declined by 27.3 per cent to RO 1.6 million, while revenues from other sources decreased by almost 30 per cent to RO 112 million.

The January-February budget balance indicates a surplus of RO 756 million, compared to a deficit of RO 85 million in the same period. General spending increased by 7.7 per cent during the stated period to RO 1.09 billion, while total current expenditures rose by 16 per cent to RO 792.5 million. Investment expenditures declined by 17.5 per cent, while subsidy stood at RO 58 million, registering an increase of 44.5 per cent during the same period in 2011.

Meanwhile, despite adverse global developments, the Omani economy continued to sustain the growth momentum in 2011, mainly driven by high crude oil prices in the international markets and monetary and fiscal policies. Gross Domestic Product (GDP) at current prices increased by 22.7 per cent to RO 27,945.4 million in 2011 from RO 22,773 million in 2010. While nominal GDP emanating from the petroleum sector posted a growth of 36.3 per cent, the non-petroleum sector GDP rose by 11.4 per cent in 2011. The average rate of inflation stood modestly higher at 4 per cent compared to 3.3 per cent a year ago.

The increase in oil revenues will fuel another year of twin surpluses, with the fiscal and current account balances expected to register 14.3 percent and 31.3 percent to GDP, respectively, says a new report from the National Commercial Bank ( NCB ) unveiled yesterday.

The Kingdom’s real GDP growth is expected to rise by 3.9 percent, largely driven by the vibrant nonoil sector and partially due to the increase in oil production, the report said. With Saudi crude oil prices expected to average around $ 105/bbl this year, it said the fiscal account will be in surplus at 14.3 percent of GDP, a substantial SR 317.4 billion.

The current account surplus is expected to grow further as hydrocarbon exports offset the increase in imports. The report said growth in nonoil sectors, particularly construction, manufacturing and wholesale and retail trade, will also remain robust this year, mainly due to strong private and public investment and consumption spending.

Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports. Headline figures for Saudi Arabia will remain buoyant in 2013, based on crude oil price and production maintaining elevated levels.

Meanwhile, inflationary pressures are likely to continue in the Kingdom in the second quarter, the central bank said in a report published on its website.

“The available data points to an expectation of continued inflationary pressure… during the second quarter of 2012,” said a quarterly inflation report issued by the Saudi Arabian Monetary Agency .

It singled out rent and food as two main areas of expected price pressure during the current quarter.

Annual inflation slowed to 5.3 percent in April from 5.4 percent in March, according to figures released by the Central Department of Statistics. Prices rose on the month by 0.2 percent, the department said. In another sign of inflationary pressure, bank lending to the private sector rose 4.7 percent in the first quarter, its largest quarterly jump for more than two years.

It said the growth projections for 2012 and 2013 at 3.5 percent and 4.1 percent, Y/Y respectively, reflect how the global economy has weakened compared to 5.3 percent for 2010.

“Yet, this cloudy outlook might be marginally revised upwards given the recent upbeat figures from the US and the success in restructuring Greek debt, but downside risks remain such as rising energy costs, geopolitical risks in the Middle East, and the lack of real growth drivers in peripheral Europe,” said the NCB report.

Saudi crude oil prices are expected to average around $ 105/bbl in 2012. The fiscal account will be in surplus at 14.3 percent of GDP, a substantial SR317.4 billion.

The current account surplus is expected to rise at around 31.3 percent of GDP, as hydrocarbon exports offset the increase in imports, according to the NCB researchers.

The monetary situation remains in a virtuous cycle with the buoyant broader economic activities, supported by the Saudi Monetary Agency ’s ( SAMA ) policies that enhanced the operating environment for banks, said the report.

It said the favorable economic backdrop has obviously helped SAMA in the previous two years, with no recourse to unconventional monetary tools.

A sustainable level of credit, elevated excess reserves and a range-bound inflation will justify a wait and see strategy by SAMA in the medium-term.

Accordingly, SAMA is expected to maintain the repo and reverse repo rates at 2 percent and 0.25 percent, respectively.

“Nonetheless, we are concerned over the uncertain and uneven global economic outlook. While the global economy is no longer on the edge of the abyss especially after Greece’s historical debt restructuring, yet structural imbalances across peripheral Europe will continue to pose immense sovereign credit risks that can trigger another global meltdown. Additionally, the Iranian standoff remains a key concern. Although a possible full scale war between Iran and the US/Israel is highly unlikely, the inflammatory rhetoric will continue to disrupt oil markets,” the report added.

It said: “Our macroeconomic projections are based on an average crude oil price (Arab Light) of $ 105/bbl and an average daily crude oil production level of 9.4 MMBD (out of which 82 percent is exported) in 2012. The increase in oil revenues will fuel another year of twin surpluses, with the fiscal and current account balances expected to register 14.3 percent and 31.3 percent to GDP, respectively. Real GDP growth is expected to rise by 3.9 percent, largely driven by the vibrant non-oil sector and partially due to the increase in oil production. Growth in nonoil sectors, particularly construction, manufacturing and wholesale and retail trade, will also remain robust this year, mainly due to strong private and public investment and consumption spending. Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports. Headline figures for Saudi Arabia will remain buoyant in 2013, based on crude oil price and production maintaining elevated levels. It should be noted, however, that risks to our crude oil prices and production forecasts remain on the high-side, particularly if geopolitical tensions associated with the Iranian standoff escalate further going forward.”

The report pointed out that risks to sustainable global economic growth increased since the third quarter of last year, with growth forecasts for 2012 and 2013 revised downwards.

The growth projections for 2012 and 2013 at 3.5 percent and 4.1 percent, tear-on-year respectively, reflect how the global economy has weakened compared to 5.3 percent for 2010, according to the IMF. In fact, the extent of the revisions by the IMF since the beginning of the year in its World Economic Outlook (WEO) reports, albeit a minor upward revision in April, was substantial, slashing 0.5 percent from the world’s real GDP in 2012 and 2013, respectively.

The advanced economies continue to weigh heavily on the global economy, with their economies teetering on the edge of a new recession and elevated sovereign credit risks.

Surprisingly, however, emerging-markets’ growth which had offset the impact of Europe’s debt crisis since 2008 will exhibit moderation on the back of weakening external demand, with the IMF forecasting 2012 global trade growth of 4.0 percent, well below 12.9 percent and 5.8 percent registered in 2010 and 2011, respectively.

In 2011, the developing economies grew by an estimated 6.2 percent and are expected to register 5.7 percent Y/Y and 6.0 percent Y/Y for 2012 and 2013, respectively.

Meanwhile, advanced economies have considerably lagged behind, posting an estimated 1.6 percent growth for 2011 and an expected 1.4 percent and 2.0 percent for this year and next.

The cloudy outlook might be marginally revised upwards for the global economy given the recent upbeat figures from the US and the success in restructuring Greek debt.

However, downside risks such as rising energy costs, geopolitical risks in the Middle East, and the lack of real growth drivers in peripheral Europe will remain key themes in 2012.

The report said commodities had registered the first annual drop in three years on concerns the sovereign-debt crisis in Europe and a moderating Chinese economy may undermine global growth.

After peaking in April 2011 to a three year high, commodities nosedived and declined by more than the 20 percent threshold of a bear market, thus, S&P Goldman Sachs Commodity Index of 24 commodities and Reuters/Jefferies CRB Index of 19 commodities lost around 1.2 percent and 8.3 percent in 2011.

The reversal in fortunes for major commodity indices in a relatively short period of time reflected the escalating fears emanating from Greece’s debt crisis and China’s economic slowdown, which were seen as the main downside drivers on demand for raw materials.

Accordingly, industrial metals were the worst performers, plunging by 22 percent last year, as measured by the London Metal Exchange, with platinum and palladium falling by 21 percent and 18 percent, respectively. Interestingly, copper that is viewed as an indicator of the status of business activity given its use in the automobile and construction sectors fell by around 21 percent, the first decline since 2008.

Additionally, agriculture commodities fell by around 14.9 percent after a record increase of 44.5 percent in 2010 as slowing global economic growth, higher inventories, and normal weather conditions depressed prices.

On the contrary, gold and West Texas Intermediate Oil limited commodity losses, rising by around 10 percent and 8.2 percent, respectively, supported by the global economic uncertainties and the geopolitical tensions that erupted in the Middle East.

On the investment front, risk aversion was apparent from the reduced net inflows to commodity-related exchange-traded products that totaled $ 10 billion, a meager figure compared to around $ 60 billion in 2010.

Looking forward into 2012, commodities might recover part of the losses incurred last year, especially that the developing economies in general and monetary policy makers in specific have reversed course of late as risks to growth take precedence over inflationary pressures.

The report added: “The Saudi economy had an exceptional performance in 2011, yet we project real GDP to moderate to 3.9 percent in 2012.

The Kingdom’s nominal GDP crossed the 20 percent threshold for the first time since 2008, expanding 28 percent to SR 2.16 trillion, thus, boosting per capita income to an estimated SR76,000, the highest on record. Meanwhile, real GDP grew by 6.8 percent compared to 4.6 percent in 2010. This sharp expansion in nominal and real terms was driven by the surge in oil prices, higher crude production, robust domestic demand, and prudent macroeconomic policies. The nonoil private sector, in particular, was stimulated by the series of royal decrees announced in Q1 2011, amounting to around SR 400 billion in supplementary spending, with an estimated SR 110 billion to have been spent in 2011. Going forward, we project real GDP growth of 3.9 percent for 2012 due mainly to base effects, including the slower pace of increase in Saudi oil production, and the fading-out of one time transfers estimated at around SR 94 billion, representing around 4.3 percent of 2011’s GDP. A tightly balanced global oil markets still remains our baseline scenario for the near term, which will ensure that oil prices remain high.”

The report said that contribution of the oil sector to the Kingdom’s economic growth will remain positive, albeit modest compared to last year.

Even though the European sovereign debt crisis intensified in the second half of 2011, the geopolitical unrest that impacted the Middle East and continues to do so, supported the upside trajectory of crude.

As a result, the Arabian light oil prices averaged $108/bbl in 2011, a 39 percent increase over 2010 average levels.

Furthermore, the war conflict in Libya that escalated in February 2011 enabled the Kingdom as a swing producer to increase its daily production to offset the shortage in supply, with Saudi oil output rising by 13.3 percent in 2011 to average 9.25 MMBD.

In 2012, Saudi Arabia continues to benefit from this ensuing positive oil price dynamics that propelled the benchmark Arabian light to a three year high of $ 127.5/bbl in March and to an average of around $ 118.5/bbl year to date.

On the production side, the Kingdom maintains elevated levels of production that have not been witnessed since 1980s due to various supply disruptions pertaining to non-OPEC members and Iran’s crude exports.

As mentioned earlier, the non-Iranian troubles, from the pipeline dispute between Sudan and South Sudan to outages in the North Sea, have knocked an estimated 700,000 b/d off global supply while the EU and US sanctions are expected to reduce Iranian exports by an additional 0.5-1 MMBD.

In spearheading the first new output agreement since 2008 for OPEC countries back in December that increased the quota from 24.84 to 30 MMBD of production; the Kingdom had shown adamancy to keep a leash on oil prices by maintaining current levels of production.

“Thus, we expect Saudi oil production to average 9.4 MMBD in 2012, yet marginally higher by 1.6 percent than the output of 2011,” said the report.

“Additionally, with our forecast of $ 105/bbl for the average Arabian light spot prices, we project revenues to register SR1,006 billion, the second highest on record,” it added.

The forecast growth is far higher than projections by most institutions

Dubai’s gross domestic economic product is projected to pick up and grow by around 4-5 per cent in 2012, fuelled by strong performance of trade and other non-hydrocarbon sectors, an official was reported on Saturday as saying.

The forecast growth is far higher than projections by most other institutions, including the Washington-based Institute for International Finance (IIF), which expects the emirate’s real GDP to swell by about 2.5 per cent this year.

“Our projections show Dubai’s real GDP will grow by 4-5 per cent this year compared with around three per cent in 2011,” said Ali Tawfiq Al Sadeq, chief economist at Dubai’s Economic Council.

“Growth this year will be supported by expansion in overall economic activities and strong performance of key sectors…this was shown in the first quarter of 2012,” he told the semi official Arabic language daily Alittihad.

Al Sadeq said his high forecasts for Dubai’s GDP were based on the several factors, including the strength of the emirate’s trade sector and other non-oil economies, expanding business opportunities, Dubai’s openness, an improvement in global economies and revised projections by the IMF and the World Bank for higher regional and global growth rates.

He said trade and other five key sectors, including tourism and industry, account for nearly 96 per cent of Dubai’s GDP, the second largest after Abu Dhabi. “These six sectors are expected to drive GDP growth this year and I believe that investors will find great opportunities in the emirate in 2012.”

Surplus is expected high at the end of the 2011-2012 fiscal year

A surge in oil prices and Qatar’s LNG exports allowed the Gulf country to record a massive budget surplus in the first nine months of its 2011-2012 fiscal year, according to official data.

Qatar had projected spending at around QR139.9 billion (Dh141 billion) and revenue at QR162.47 billion (Dh163.5 billion) for its previous fiscal year which ended on March 31, creating a surplus of QR22.53 billion.

But the actual balance widened to around QR26.7 billion in the first nine months of that year and could have expanded further by the end of the year.

The surplus came after actual revenue reached around QR150.9 billion and is projected to have largely exceeded the budgeted level because of higher oil prices and LNG sales, the Abu Dhabi-based Arab Monetyary Fund (AMF) said in a report, citing Qatari government data.

It put spending at around QR124.2 billion, which is also expected to have surpassed the forecast expenditure by the end of the fiscal year.

Qatar has assumed a conservative oil price of $55 a barrel for its 2011-2012 budget but average rude prices have remained above $100.

The country, which controls the world’s third largest gas resources after Russia and Iran, has also boosted LNG export capacity to 77 million tonnes per year following the completion of mega projects at its mammoth offshore North Field, home to nearly 25 trillion cubic metres of non-associated gas.

Qatar, an OPEC member, became the richest nation on earth in 2011 in terms of GDP per capita because of enormous oil and gas wealth and relatively small population of around 1.9 million.

The Gulf Cooperation Council (GCC) member economies are expected to post an average growth rate of 5.3 percent in 2012 while the pace of the global economic recovery remains hesitant and uncertain against the backdrop of mixed indicators, Gulf Investment Corporation (GIC) said in its monthly economic report titled “Global Economic Recovery Remains Hesitant” released Sunday.

It said firm oil prices and continued fiscal expansionary policies have supported robust growth in the GCC during 2012. According to the EIU, real GDP growth in 2012 is expected to reach 5.5 percent for Kuwait, 5.0 percent for Oman, 7.0 percent in Qatar and 5.5 percent for Saudi Arabia.

Continuing political tensions in Bahrain is likely to constrain growth to 3.5 percent. The IMF has recently revised the growth forecast of the UAE to 3.5 percent in 2012. More than 25 percent of the GCC imports originate from the EU and historically the GCC has recorded large deficits with Europe.

However, the weakening of the euro is expected to soften the trade deficit and also reduce imported inflation.

Overall, inflation is expected to remain contained in the GCC region, with Bahrain and Qatar forecast to record 2012 rates of 3.3 percent and 2.1 percent respectively.

While UAE is expected to record around 2.4 percent, it is expected to be marginally higher in Kuwait and Saudi Arabia, at 4.3 percent and at 5.0 percent, due to the faster and more widespread wage and salary increases which has triggered substantial increase in food prices and rents.

Firm oil prices and improved economic performance have boosted fiscal and trade surpluses, and led to an improvement in accumulated reserves.

Consequently, the region’s SWF are expected to grow to nearly $2 trillion by the close of 2012, for an estimated $1.6 trillion at present.

Dealing with the GCC equity markets, the report said despite some positive surprises for the 1Q earnings season, these markets witnessed a trend-reversal during the month of April, leading to a net decline of -2.08 percent in the S&P GCC index during the month, as renewed fears of the European credit crisis pressured global equities.

The 1Q earnings season saw Saudi Banks report positive earnings surprises amidst improved traction in loan growth, a spurt in fee income, and lower provisions, according to the report.

Banks in Abu Dhabi witnessed positive momentum, as two of the largest banks reported robust growth in earnings.

While earnings amongst Dubai banks were mixed, the general trend in the UAE appears to be that of positive asset growth and moderating provisions.

Though the results for the petrochemicals sector was mixed, those for two of the largest players, one each in Saudi and Qatar, beat estimates by a reasonable margin.

In the UAE, real estate majors beat analyst estimates, as property prices sustained positive growth for three consecutive months, project deliveries appeared to accelerate and some companies recorded growth in Lease and Rental income.

The Saudi Tadawul index emerged the least-performing index during the month, declining by a net -3.53 percent, as the Insurance and Investment sectors, that had led most of the rally during the previous month, recorded sharp losses.

The losses were triggered partly by indications of reform in the capital markets that could target speculative activity.

The heavyweight petrochemicals and banking sectors also edged down sharply. Saudi banks could also benefit from major projects in infrastructure projects, apart from a potential increase in lending to the SME and retail segments, the report forecast.

Growth in business activity in Saudi Arabia’s nonoil private sector rose to a nine-month high in April, boosted by strong output and new orders, a survey showed.

April Purchasing Managers’ Index (PMI) data was reflective of strong demand conditions in the Saudi Arabian nonoil private sector economy, said the report issued by the Saudi British Bank ( SABB ) and HSBC.

SABB has published the results of the headline SABB HSBC Saudi Arabia PMI for April 2012.

The PMI reflects the economic performance of Saudi Arabian nonoil producing private sector companies through the monitoring of a number of variables, including output, orders, prices, stocks and employment.

The monthly report said growth of both output and new business accelerated from March readings, taking the latter above its series trend.

Firms also demonstrated their confidence in current and future business conditions by taking on new staff, increasing purchasing activity and accumulating stocks.

Rising from March’s reading of 58.7, the headline PMI posted 60.4 in April.

Registering above the series trend, it was the highest reading for nine months, and signaled another marked improvement of operating conditions across the KSA non-oil private sector.

New business rose markedly during the latest survey period, and at an accelerated rate, according to the SABB statement.

Respondents commented on improved demand conditions and more business from government contracts.

Data suggested that the domestic market remained a key driver of new order growth, according to the report.

To accommodate gains in new business, Saudi Arabia’s nonoil private sector firms raised output during April.

The rate of growth was sharp and above the trend for 2012 so far.

With new order growth continuing to outstrip the expansion in output, levels of unfinished business continued to build at Saudi Arabia’s nonoil private sector companies.

The accumulation of backlogs was solid, and the seventh in as many months.

In order to keep up with rising business requirements, companies raised both employment and purchases during April.

Job creation was the most marked for nearly a year, while buying activity increased at a joint series-record pace.

As a result of higher acquisitions, input stocks at Saudi Arabian non-oil private sector firms accumulated at a steeper pace. Panelists stated that holdings were increased as expectations of new order growth were positive.

Cost inflation accelerated during April to a new survey record, pushed up by higher purchasing prices for raw materials and fuel, as well as higher staff costs.

To protect profit margins, and in light of strong demand, non-oil private sector firms increased their own tariffs at a solid pace.

Non-oil private sector business activity in the United Arab Emirates surged to a 10-month high in April, as new business orders rose and employers hired more staff, a report from HSBC Holdings PLC (HBC) showed Thursday.

HSBC said its purchasing managers index, or PMI, climbed to 53.5 in April, from 52.3 in March, the biggest monthly increase since October 2011. A reading above the neutral 50 level indicates the economy is expanding.

“Sharper expansions were recorded in output, total new business, buying activity and employment, pointing to an improved business environment,” said HSBC. “Price pressures eased over the month, but remained solid”.

Simon Williams, chief economist for Middle East & North Africa at HSBC, said while it is encouraging that the data picked up so strongly in April there are still some grounds for caution.

“This is only one good month’s data after 6 months in the doldrums, and the quieter summer months could put a dent in the uptrend. The U.A.E. also continues to be held back by both tight monetary conditions and a limited fiscal stimulus,” said Williams.

“However, against a backdrop of stronger macro indicators out of Dubai in particular, the April number is positive,” he added.

According to HSBC’s PMI reading, new work for UAE non-oil private sector companies grew at the quickest pace for three months, reflecting stronger market demand and a more stable economic environment.

HSBC’s latest report also showed that overall input price inflation eased to a three-month low, but still remained above the long-run trend for the series, driven by rising purchase prices.

The PMI index, the first of its kind to be published in the Gulf, was compiled with data provider Markit and based on data compiled from monthly replies to questionnaires sent to purchasing executives in approximately 400 private sector companies.

The short to medium term economic outlook of the GCC countries is positive due to strong external balances and rising oil prices, the International Monetary Fund said yesterday.

Despite the rising external surpluses, the IMF has warned that the Gulf economies should beware of potential fiscal imbalances creeping in as a result of excessive public spending and the rising budget break even oil prices.

In 2012, GDP growth is projected to average almost 5 per cent and be evenly spread among the GCC and other regional oil exporters in the region, as oil prices are expected to average about $115 (Dh422) per barrel. While Kuwait, Saudi Arabia and Qatar are projected to grow more than 6 per cent, the UAE and Bahrain are projected to grow at 2.3 per cent and 2 per cent respectively.

“Last year GCC countries benefited from high oil prices, and generally shrugged off the impact of the global slowdown induced by the euro area crisis. In the GCC, the average real GDP growth reached 8 per cent. In 2012 too, the outlook appears positive on high oil prices,” said Masoud Ahmad, Director of the IMF’s Middle East and Central Asia Department.

Non-oil GDP growth is expected to rise in all GCC countries. On aggregate, the IMF expects non-oil GDP growth to reach 4.5 per cent in 2012, largely on the back of increased government spending. As a result, non-oil GDP is expected to be around three-quarters of overall GDP growth by 2013.

According to the IMF’s regional economic outlook, intensified social demands and higher oil prices prompted large jumps in government spending in the GCC.

In non-GCC countries, governments increased spending by one-third in dollar terms, giving rise to an average fiscal deficit of 1 per cent of GDP despite average oil prices of more than $100 in 2011.

GCC fiscal expenditure rose by about one-fifth in dollar terms but the twin effects of higher oil prices and export volumes allowed GCC fiscal balances to improve. Aided by higher oil prices, the oil exporters’ combined current account surplus reached $400 billion in 2011, almost double the 2010 level. This increase helped lift their official reserve position above the $1 trillion mark.

Although the IMF estimates oil prices around $115 a barrel, it has warned that the reasons that kept oil prices high in 2011 are waning. The recovery of oil production in Libya is likely to more than offset the decline in production and exports in Iran due to sanctions, while capacity expansion continues in Iraq. With Europe in recession and the prospect of slower growth in many emerging markets, the IMF expects Saudi Arabia’s role as swing producer to shrink this year.

Fiscal vulnerabilities

“Although the short term economic outlook of the GCC is very positive, we can’t ignore the long term fiscal vulnerabilities arising from potentially lower oil prices and the steadily rising budget break-even oil prices which in some countries are very close to the already high oil prices,” said Nasser Saidi, Chief Economist of the Dubai International Financial Centre.

Revenues in Kuwait are double the forecasted figures for 2011-12 in only 11 months, due to rising oil prices and increasing outputs, according to official data.

Kuwait’s income reached record highs of $96.8bn at the close of February, a massive increase over the yearly expectations of $48.4bn, based on data posted by the finance ministry.

The 44.1 percent revenue surge over the past year has resulted from rising oil prices and a marked output increase, moving from 2.3mn barrels per day (or bpd) last year to 3.0mn bpd.

Oil revenues represent 95 percent of government income and hit $91.7bn during the opening 11 months of this year, representing a 45.8 percent increase from last year.

Budgeted oil revenues were calculated using a conservative $60 per barrel price. Actual results saw the average oil price reach $109 per barrel over the last 11 months.

Spending over that period amounted to nearly half of the budgeted amount. Ministry figures reported $38.9 billion in expenditures over the 11-month period, significantly lower than the budgeted amount of $70 billion.

These figures result in a $57.9 billion provisional budgeted surplus, twice the amount of last year’s surplus. Kuwait has posted a surplus for thirteen straight years, accumulating over $200 billion in surplus funds over the last twelve years.

The current figures are record high for Kuwait, both in terms of budget surplus and actual revenue.

The record high income of Kuwait previously sat at $79 billion, earned during the 2010-11 fiscal year. The highest budget surplus for the Gulf state was recorded in 2007-08 at $33.5 billion.

Recent forecasts from the National Bank of Kuwait indicate that actual budgeted figures at the close of this fiscal year will drop to about $43 billion as a result of year-end accounting adjustments.

Kuwaiti law dictates that ten percent of the yearly government income be moved into Kuwait’s sovereign wealth fund. The budget does not include any returns for that fund.

Businesses in Saudi Remain Stable in a Resilient Economy

The National Commercial Bank (or NCB) stated that Saudi businesses will remain stable during the second quarter of this year, as the sector continues to be resilient. NCB launched the 2012 Q2 Business Optimism Index, in association with D&B South Asia Middle East.

This quarterly index indicated positive conditions for the Kingdom’s business sector, in spite of a continuing stalemate in the region’s geopolitical climate and little changes in the European debt crisis.

NCB’s Senior VP and Group Chief Economist Dr. Said Al-Shaikh noted that the healthy conditions in Saudi Arabia’s economy resulted from three factors.

First of all, the Kingdom’s government committed to boost capital expenditures in order to offset the negative impact of a weaker global economy. Dr. Al-Shaikh stated that contracts worth around SR270 billion were handed out to public and private firms by the Saudi government last year, in an effort to encourage domestic growth.

Also, Saudi Arabia has reported massive surpluses, especially significant when compared to the global financial status. These reserves indicate the government’s ability to fund various projects and generate growth. The Kingdom’s foreign assets total SR2.3 trillion to date, according to Al-Shaikh.

The final factor involves the dissipation of that heightened state of fear in reaction to financial worries. Al-Shaikh noted that the predisposition to immediately offset negative impacts has faded, allowing shocks and worries to be absorbed into the economy. Negative conditions have occurred in the past and are sure to happen again, said Dr. Al-Shaikh.

Undaunted by financial problems in other leading economies, Saudi Arabia’s government remained on track for capital expenditures, resulting in stimulated growth. Although geopolitical tensions continued across the region, these conditions resulted in rising oil production and oil prices, with government revenue surging. This was indicated in the hydrocarbon sector’s BOI for the second quarter.

The non-hydrocarbon sector’s BOI for the second quarter was also stable, resulting from positive conditions in the oil sector and a steady commitment by the government to offset uncertainties in the global economy. Only minor alterations were seen from last quarter to the current quarter.

In confirmation, Al-Shaikh noted that 33 percent of survey respondents stated they are not anticipating negative impacts in the second quarter of 2012, compared to 31 percent of respondents making this claim in the opening quarter.

NCB’s BOI report revealed an optimistic hydrocarbon sector in Saudi Arabia, with improved conditions in the second quarter of 2012. Overall the sector recorded a composite score of 43, three points more than the first quarter score, resulting from increased BOI scores across the three parameters. In regards to the parameter covering the level of selling prices, 53 percent of survey respondents anticipate further increases, 37 percent expect prices to continue at the current levels for Q2 and ten percent expect to see prices decline in the period.

The composite index remained steady, according to the BOI, with consumers and businesses reassured by the Kingdom’s committed economic support in spite of weaker global financial conditions. Each of the six parameters indicates a sideways momentum in index value throughout the second quarter, with only marginal decreases and increases.

The volume of sales registered a score of 67, up from 66 in the first quarter, with the new orders score coming in at 65, down from 67 in the opening quarter. The level of selling prices stood at 24 points for the second quarter, declining from 27 in Q1.

Inflation in Saudi Arabia was recorded at 5.4 percent for February. Inflationary pressures are expected to remain stable or decline slightly, resulting from a drop in world food prices and a stable domestic market.

For banks in the Gulf Cooperation Council (GCC) countries, 2011 was a better year than the one before.

Bank profits continued to improve and assets growth was healthy. In the current global context, the region’s economic growth is relatively good, with governments at various stages of implementing ambitious capital spending plans to boost economic growth and funding is plentiful.

However, some regional banks continued to deal with the after-effects of the 2008 global financial crisis, particularly on their asset quality.

Asset growth appeared to lose steam in 2011 and profits, while rising rapidly, remain below levels seen before the 2008 slowdown. To be sure, the GCC is not all running at the same pace. At one extreme are Qatar and Saudi Arabia where banking activity has seen a strong improvement. Meanwhile, Dubai and Kuwait are at the other extreme, where profits continued to suffer and lending growth had yet to recover.

Recovery in the sector still underway

The recovery in the GCC banking sector just finished its second year with profits still seeing strong increases. Still, the 16% growth registered is from a low base and average profitability indicators remain relatively low. Return on equity (ROE) averaged 12.2%, just barely higher than its level in 2010 and a far cry from the 19% seen in 2007.

Region divided

However, the aggregate figures for the region hide a more divided environment. Saudi Arabia, Qatar, Abu Dhabi and Oman have all seen a generally more positive picture. Credit growth was healthy and asset quality issues were largely behind them. In these countries, profitability bounced back and lending grew at a double-digit pace.

Not so for Kuwait, Dubai and Bahrain. Bank performance in these markets was less upbeat. While there were some differences among them and certainly individual bank results varied, the markets generally witnessed poorer credit growth and profits continued to be held back by asset quality issues. Dubai and Kuwait in particular were plagued by heavy provisioning levels which ate into nearly half of pre-provision earnings.

High growth markets benefit banking activity

Banks in markets seeing more robust private sector growth and substantial public sector investment saw a more rosy 2011. Banks in Qatar, Abu Dhabi, Saudi Arabia, and Oman saw average growth in profits top 22% and return on equity increasing to an average of 14%.

In these markets, improved profits were achieved on the back of healthy credit growth. Average lending growth reached 12% in 2011. Banks in Abu Dhabi were the only ones not to see double-digit growth in total credit. In contrast, growth in Qatar approached 20%.

This strong growth in credit was in part supported by strong government capital spending. The average annual value of investment projects executed in these four markets during the last three years topped 18% of GDP. Saudi Arabia and Abu Dhabi saw the highest intensity of new projects with annual averages of 22% and 16%, respectively.

Dubai, Kuwait and Bahrain saw a far slower pace of execution of planned capital spending. The value of executed projects accounted for an average of less than 9% of GDP over the last three years, half of the ratio for the other GCC markets.

Strong consumer lending growth also provided a boost to bank profits in 2011. Growth topped 17% during the year, with most markets seeing double digit growth following a far weaker year in 2010. Bahrain, Saudi Arabia and Qatar all saw growth above 20%. Meanwhile, Kuwait and the UAE lagged the rest of the GCC, though in both cases growth remained healthy and recovering.

Assets quality dragged down laggards

Meanwhile, asset growth issues remained in the forefront for banking sectors in Dubai and Kuwait and to a lesser extent Abu Dhabi. In all three markets, provisions to pre-provision income exceeded the GCC average. While Abu Dhabi’s ongoing heavy provisioning did not stand in the way of strong overall profitability, this was not the case for Dubai and Kuwait.

In the other markets, namely Qatar, Oman and Saudi Arabia, provisioning was substantially lower (between 10% and 15% of pre-provision income). In Qatar, banks avoided high provision expenses throughout the aftermath of the global financial crisis, thanks largely to the government acquiring most of banks’ bad loans in 2009.

For the GCC as a whole, provisioning was highest in 2009 and has since fallen gradually. It stood at 35% then and has fallen to 27% in 2011. The average ratio before the crisis stood at 6.7%, a level that was possible not only because of better asset quality, but also due to healthy revenue growth then.

Capitalization continues to improve

Following the economic slowdown and the appearance of substantial asset quality issues in 2008, banks have sought to boost their capitalization and 2011 saw a continuation of that trend. The average ratio of equity to assets across all GCC countries has been gradually rising over the last few years hitting 14% at the end of 2011. Last year saw average ratios rise in most individual markets. The exception was Oman, which saw its sector wide equity to asset ratio decline to 12%.

Capitalization levels were the highest in Qatar and Saudi Arabia, where average ratios exceeded 15%. Kuwait was the country that has seen the largest improvement in capitalization with the equity to asset ratio rising from 10% to 14% during the last three years. Meanwhile, Bahrain and Oman trailed regionally but with ratios that remain quite healthy just below 12%.

Reliance on foreign funding limited

One of the lessons learned from the financial crisis is that excessive reliance on foreign funding can be detrimental for banks and can have severe consequences for financial stability and the health of domestic banking sectors. Since 2009, foreign bank liabilities at GCC banks have fallen substantially. Whereas these stood at 17% of assets in 2007, the average now stands at 11%.

While some countries have reduced their ratios by more than half since 2007, including Saudi Arabia, UAE and Kuwait, there remain some banking sectors that continue to rely heavily on foreign funding. Bahrain is particularly exposed in this regard, though a large part of the foreign funding there is from regional banks. Qatar remains highly reliant, and has even seen its ratio rise in 2011 above its level before the crisis.

2012 is likely to be another recovery year We expect to see the recovery in bank performance continue in 2012 with the overall trends intact. Project spending will continue to be the key driver for banking activity for all markets.

Consumer lending will also contribute to an improved performance, fueled by salary increases and employment. Meanwhile, asset quality issues will remain a problem for many banks in Kuwait and Dubai though provisioning levels will decline gradually.