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GCC Government Spending Set to Remain Strong: Study

Middle East : 29 April 2012

Source: The Saudi Gazette

The GCC governments are continuing to support economic activity in important ways at a time when efforts are underway to drive the massive infrastructure pipeline in a bid to foster more inclusive growth through the greater prioritization of areas such as housing, the National Commercial Bank (NCB) in its latest “GCC Financial Market Quarterly”.

The higher-than-expected oil prices and a tendency to increase production are allaying near-term concerns about overspending and fiscal sustainability, although notably the UAE authorities have taken steps towards fiscal consolidation. The IMF expects overall public sector spending in the UAE to drop by some $5.6 billion this year as the key government authorities seek to rebalance their books after a period of aggressive spending.

“Although private equity deals are still small in number, the market is seeing more activity with some expectations of a rebound going forward. The main source of concern is the relative retreat of European lenders from the syndicated loan market. They have served as a key source of capital for some regional economies and the ability of regional and non-European banks to fill the vacuum is in considerable doubt,” the report said.

The opening months of 2012 saw an impressive revival, albeit still somewhat uneven, of activity virtually across the breadth of the GCC financial markets. Reduced regional and global risk aversion helped bridge some of the persistent gap that has existed between market behavior and the economic fundamentals. Nonetheless, while the underlying outlook remains positive, the multitude of structural weaknesses globally still continues to pose a risk of significant discontinuities.

Kuwait serves as an example of the broader regional tendency to continued fiscal permissiveness. The government is planning to increase spending by 13.4 percent to KWD22 billion ($79 billion) in its FY2012-13 budget. The government’s conservative revenue estimate is KWD14 billion ($50.3 billion) based on a price assumption of $65 per barrel. Qatar has postponed its FY2012-13 budget to late May due to accounting changes.

The performance of the regional stock exchanges has reflected the improving mood with substantial gains over last year’s lackluster performance. Progress was particularly strong in Saudi Arabia and Dubai. Nonetheless, IPO activity has remained subdued and the pipeline vulnerable to changing market conditions.

The GCC bond and sukuk markets have led the positive progress with particularly welcome developments in the sukuk space. Saudi Arabia saw its first sovereign-backed issue while there are signs of private companies tapping the market. Overall, the remarkable rebound of last year looks set to continue.

Substantial refinancing requirements remain the main risk factor for bonds, especially in Dubai, which has nonetheless seen risk perceptions improve markedly.

Q1 was marked by a impressive consolidation of the equity market rally that began to take shape the in the closing months of last year. Saudi Arabia and Dubai led the rebound with gains in excess of 20 percent during the quarter. Elsewhere in the region, however, the gains remained in the single digits or altogether absent.

IPO activity lagged far behind the positive secondary market momentum, however. The region saw a total of only two new offerings during the quarter, both of them in Saudi Arabia. The total value of the Q1 IPOs was a modest $78.4 million, which was significantly down on the already modest total of three listings worth $212.2 million. By contrast, 1Q11 saw only one offering worth $17.9 million.

Recent months have seen the GCC markets shed the persistent sense of malaise that has held back their performance for a number of years. This improvement has been particularly palpable in Saudi Arabia where a 5 percent rebound during 4Q11 was followed by a further 22.1 percent advance in 1Q12. The strong upward progress has gone hand in hand with a strong positive momentum in the daily value of trading.

Having remained well below SR10 billion a day throughout 2011, the total rose to more than SR20 billion at its peak and has remained fairly firmly in the double digits in recent weeks.

Also the Dubai market has experienced a comparable turnaround during the opening months of this, closing the quarter 21.8 percent up, in a sharp contrast to a 5.5 percent drop in 4Q11. The performance of the other regional bourses has been more muted, however. Abu Dhabi and Kuwait were up by some 6 percent and Bahrain by just under a percent. Qatar and Oman were virtually flat.

The increase in overall optimism seems closely linked to the global market situation where the erstwhile worries about the US dollar have somewhat diminished and a temporary respite was observed in the eurozone crisis after the latest Greek bail-out deal. Even though both stories possess considerable potential for renewed deterioration, the news flow, at least for now, turned decidedly less negative.

But also the Gulf region has made good progress in boosting investor confidence. Most GCC governments have significantly boosted their spending in areas such as housing, job creation, and social benefits which has addressed persistent social concerns but also boosted economic activity, NCB noted.

The fiscal implications of the increased spending have been manageable thanks to high oil prices and increasing production. Specifically, Dubai has benefited from signs of bottoming out in the housing sector and indications of progress in addressing its leverage burden without major discontinuities. In general, the economic fundamentals remain attractive and the growth prospects benign.

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