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Gulf Economy Will Rise With State Spending and Oil Prices

Middle East : 07 April 2011

Private industry spending and investments in the Gulf region have been threatened by political turmoil, but the governments retain their financial power to keep the regional economy from slowing down due to rising oil prices, according to analysts.

There have been many protests across the region in the last two months. In terms of lower output there has been little direct impact in the economies, with the exception of Bahrain. Protests in the area have brought the potential for trouble to the forefront should political issues not come to resolution. The mood in private industry has been dampened according to the analysts.

High global prices of oil are aiding the region’s energy sectors, even though the increase in prices is partially caused by the turmoil in Northern Africa and the Gulf region, as well as providing the governments with plenty of spending cash.

Rising oil prices will cause significant growth in a direct way and through wealth, said Standard Chartered’s Marios Maratheftis. He is the regional research head for the Middle East, Pakistan and North African regions.

Foreign direct investment (FDI) has seen deteriorating prospects for the short term, even in the nations where no significant protests have occurred, according to Simon Williams of Dubai’s HSBC Bank.

Williams, chief economist, stated that it will be more costly and difficult to access foreign capital before the market has been convinced that order has been restored for the long term.

FDI in the UAE and Saudi Arabia fell by more than 70 percent in 2009 following the worldwide economic crisis and in Bahrain the FDI dropped by 86 percent. Recent data is unavailable but it is felt that political nervousness has caused a delay in investment recovery.

In Bahrain there has been $1 billion in economic losses, equaling about 20 percent of the quarterly GDP, as estimated by NCB Capital.

In the meantime, all Gulf economies have seen the benefits as the price of US crude oil increased to $108 per barrel and beyond, a high not reached in 2.5 years. If the average oil price of Saudi Arabia increased by $10 above the expected level, to reach $92 per barrel, it would result in an additional $43 billion in nominal GDP in the kingdom, according to estimates from Banque Saudi Fransi. This figure is around 10 percent of the GDP for last year.

Also, Saudi Arabia and other nations have aggressively boosted public spending to help ease the social pressure. Higher oil prices provide more for the governments to spend, but they are prepared to tap into financial reserves if the situation warrants.

An announcement was made in February and March that Saudi Arabia would embark on $130 billion in additional spending, spread out over a number of years and covering state employee bonuses, housing, employment creation and other projects that will see improvements in the economic and social climate.

This spending will help push the 2011 output within the government sector up by more than 5 percent for the third consecutive year. This level of extended growth has not been seen in the state sector since the early 80’s.

When higher oil output has been considered to replace the supply from Libya, the economy in Saudi Arabia is forecasted to see 4.5 percent expansion in 2011 and another 4.4 percent for next year. This growth is much faster than the 3.8 percent growth seen in 2010, based on an analyst poll.

Stocks in Saudi have risen by 9 percent after King Abdullah made an announcement regarding plans for fiscal stimulus last month. When looking at the economic prospects all of the oil exporting nations have a positive economic outlook in the midterm, especially Qatar and Saudi Arabia, according to BNP Paribas strategist Dina Ahmad.

Ahmad stated that these two nations stand out in the Gulf region in terms of growth in the economy and FDI prospects.

Government spending in Qatar is expected to increase by 19 percent during the fiscal year ending March 2012 and 15.8 percent economic growth is forecasted, making Qatar one of the fastest growing nations around the globe according to a Reuters poll.

Growth expectations for Bahrain have been cut back from 4.2 percent expected in December to only 3.4 percent. Expectations for Oman have fallen from 4.6 percent to just 4.1 percent, based on the poll, although slight improvements are forecasted for 2012.

In Oman and Bahrain it is good news that wealthier Gulf nations are giving aid to the economies that have taken the hardest hits. Neighbours such as Saudi Arabia have put forward $10 billion in pledges for Bahrain, with an equal amount for Oman, spread over the next decade and aimed at improving social welfare and housing.

Local governments hope that this level of spending will keep up the comfortable state of economic growth, at least until the region settles down and activity within the private sector picks up again, which could happen later in 2011.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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