By Asa Fitch
Lower oil prices are threatening to curtail the spending that
energy-rich Persian Gulf governments have used to shore up support
since the Arab Spring.
A continuing decline in prices could curb foreign-asset
purchases by the governments of Bahrain, Oman, Saudi Arabia, United
Arab Emirates, Qatar and Kuwait and put a drag on the
post-Arab-Spring construction growth that has benefited
multinational contractors.
Such a reconsideration could have implications for global asset
markets, for regional politics and for the pace of a development
boom into which governments have pumped hundreds of billions of
dollars and from which many foreign companies have profited.
Leaders in the Gulf have begun talking more openly about
spending adjustments and economic diversification away from
energy.
Oman's minister of oil and gas, Mohammed al Rumhi, said this
month that the price decline is "a challenge, because the country
depends on oil," according to the Muscat Daily. "Oil prices going
down will affect the state budget," he said.
High oil prices have helped Gulf governments in their attempt to
head off the kind of unrest that toppled regimes in Tunisia and
Egypt in 2011. To keep their citizens content, the royal-family
hegemonies used their energy-fueled fiscal muscle to start building
schools, hospitals, housing for citizens, roads and other social
projects.
Government spending by the Middle East's oil exporters jumped
above $700 billion in 2011 and grew by about 15% annually until
this year, when estimates show the rate of increase slowing,
according to the Institute of International Finance
"If revenues are not forthcoming, something has to give," said
John Sfakianakis, the Middle East regional director for Ashmore, a
U.K.-based emerging-market asset manager. "Eventually some of these
huge projects will have to slow down."
If oil prices, which have dropped to below $80 a barrel from
more than $100 a barrel in July, continue to stay low, this
slowdown could persist.
The scale of the coming budget problem is biggest in Saudi
Arabia, the Gulf's leading economy. Saudi Arabia spent $265 billion
last year, according to International Monetary Fund estimates. If
it doesn't alter fiscal policy, it is on pace to run a budget
deficit amounting to 1.4% of economic output next year, despite its
enormous wealth.
Saudi Arabia needs oil to trade at about $97.50 a barrel this
year to sustain its spending without running a deficit or tapping
reserves, according to the IMF.
Oil prices fell below Saudi's break-even budget level in July
and have remained below it since. The break-even levels for the
Gulf countries apart from Qatar and Kuwait are already above
current oil prices.
Light, sweet crude futures settled at $76.51 in New York on
Friday. Brent crude, the leading European oil benchmark, traded at
an average of around $110 a barrel between 2011 and 2013.
Spending also has ballooned in the U.A.E., where Abu Dhabi
pledged last year to build $90 billion of projects through
2017--many of them with the help of foreign companies. Bahrain,
Qatar, Oman and to a lesser extent Kuwait have been on spending
sprees, too.
The Gulf's big energy exporters, including Saudi Arabia, Kuwait,
the U.A.E. and Qatar, could try to fight the decline in oil
prices.
As some of the most influential members of the Organization of
the Petroleum Exporting Countries, the cartel of big oil producers,
they could agree to cut output in a bid to buoy prices.
But the group has so far failed to reach any consensus about
reining in production, and it is unclear how much impact OPEC would
have on prices if it did act.
The countries also could issue debt or tap into government
savings if current oil receipts can't pay for planned expenditures,
tiding them over while they make budget adjustments.
In the U.A.E., for example, there was "no need now to adjust
very quickly to lower revenues" because of the existence of the Abu
Dhabi Investment Authority and other sovereign asset pools, said
Harald Finger, the head of the IMF's mission to the country.
Still, Gulf countries are reluctant to drain sovereign-wealth
funds, together estimated at more than $1 trillion, leaving
spending cuts as the only other option outside of borrowing.
Such cuts, however, could endanger spending that has been a boon
to foreign companies and investors. U.S. construction company
Bechtel Group Inc. and Germany's Siemens AG won contracts to help
build a $23.5 billion metro in Riyadh last year, while Royal Dutch
Shell PLC signed a deal in 2012 with Qatar Petroleum to build a
huge new petrochemicals complex in Qatar.
If Gulf countries do decide to dip into sovereign funds, it
could force a pullback by some of the world's most active
institutional investors.
Gulf funds have spent billions of dollars in recent years on
everything from London real estate to Australian and U.S.
infrastructure, and have served as key financial backstops for
large Western banks in the throes of the financial crisis. Funds in
Abu Dhabi and Qatar helped rescue Citigroup Inc. and Barclays PLC
in 2007 and 2008.
In an era of greater austerity, funds may still make new
investments using dividends and investment gains, but the flow of
Gulf money into international markets could be slower.
The shift toward domestic spending has already prompted changes
in sovereign-fund allocations in Qatar, where more new energy
revenues have been flowing directly to the government, bypassing
the Qatar Investment Authority, its main sovereign-wealth fund. The
QIA "has been changing its strategy, becoming less illiquid and
Europe-centric on the international side and more engaged in the
local economy," said Victoria Barbary, the director of
Institutional Investor's Sovereign Wealth Center, a London-based
research group.
The IMF, meanwhile, recently reiterated calls to rein in
spending. Christine Lagarde, the IMF's managing director, in
October said Gulf countries needed to balance budgets more urgently
given the oil-price decline.
The financial realities faced by oil-rich Gulf countries and the
investors and companies that have grown used to high prices are
stark.
"I think the Gulf economies will have to project fiscal
discipline," Mr. Sfakianakis, the Ashmore director, said. "They
don't want to be seen as profligate."
Write to Asa Fitch at asa.fitch@wsj.com
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