World Economy

No Austerity in (P)GCC States

No Austerity in (P)GCC StatesNo Austerity in (P)GCC States

(Persian) Gulf consumers are spending, companies are investing, and governments are announcing record budgets for fiscal year 2015.

It is a weekend morning at the Dubai Mall, a luxury complex with 1,200 stores, and the shoppers are pouring in. A traffic jam has formed in the basement parking area. With passenger arrivals at Dubai’s airport at record highs, retailers expect a good month, Hefex reported.

The 60% dive in crude oil prices since last June might be expected to bring on austerity to the (Persian) Gulf Cooperation Council ((P)GCC), which faces a drop in its income.

But austerity is not happening.

The economic defenses which the (Persian) Gulf states built up after the global financial crisis five years ago, to cope with just such a drop in crude oil, are holding fast and firm.

  Spending Cuts

(P)GCC consumers are still spending, companies are investing, and governments are announcing record budgets for FY 2015. Some economists expect growth in the six-nation (P)GCC to accelerate this year.

A number of building projects could be slowed or suspended, especially in Bahrain and Oman, the smallest and financially weakest economies in the 6-nation (P)GCC. If crude oil stays at current levels for several years, the big (P)GCC economies may be forced into some spending cuts.

But for the now, it is business as usual in Saudi Arabia, the United Arab Emirates (UAE), Qatar and Kuwait, which have accumulated such large fiscal reserves that they can comfortably keep state spending at high levels.

This is sustaining consumer and corporate sentiment as crude oil declines. December purchasing manager surveys in Saudi Arabia and the UAE showed non-oil business growing at roughly the same pace as in June.

Big infrastructure projects have started and government spending is continuing. HeffX-LTN is not expecting a slowdown in retail sales this year in Saudi or the region, and there is no reason to alter investment plans.

The cost to the (Persian) Gulf of cheaper oil is high. If oil were at $110 bbl, as it was in June, they would enjoy a surplus of $300b, now it is about $60b.

But the structure of the (P)GCC’s crude oil industry minimizes the direct impact of price changes on economies. Crude oil export revenues do not flow straight to the private sector but to governments, which decide how much of them to spend.

That means the key factor for economies is not the crude oil price but state budget policy. Government announcements over the past few weeks indicate state spending may fall marginally in real terms this year but will stay high and near record levels.

  Increase Spending

The government of Saudi Arabia, by far the largest (P)GCC economy, plans to raise nominal FY 2015 spending by 0.6% from its FY 2014 plan. Dubai announced a nine percent spending increase, and even Oman plans a 4.5 percent rise.

Top officials of other (P)GCC governments, including Abu Dhabi, Qatar and Kuwait, have said spending on economic development will not be cut.

Some governments are using the oil price slide as political cover to raise taxes or cut subsidies, but are stopping well short of austerity. Kuwait cut diesel fuel subsidies but ruled out similar action for petrol; Abu Dhabi raised utility fees.

So growth in the region looks unlikely to fall much if at all this year, and may actually accelerate if other factors are favorable. For example the initial, negative impact of Saudi labor reforms, designed to push more local citizens into jobs by making it harder to hire foreigners, seems to be fading.

“We project real GDP growth in the (P)GCC region to accelerate in the range of 5.0 to 5.5 percent in 2015 from an estimated 4.7 percent in 2014,” said Joannes Mongardini, head of economics at Qatar National Bank, the country’s largest bank.

Unless there is a cut in public investments which is not expected in the region, we here at HeffX-LTN do not see a major impact on overall business sentiment from cheaper crude oil.

(P)GCC governments will not be able to avoid big spending cuts indefinitely if crude oil prices stay low. With Brent lower than 50, the current level, all of them would probably run budget deficits.


But their financial reserves are so large that they could cope with such deficits for years; the (P)GCC’s foreign exchange reserves and sovereign wealth fund assets are worth over 160% of GDP according to the data.

And at an estimated crude oil price of $60, the assets of the 4 big (P)GCC states could fund public spending at current levels for 5 yrs+ and cover budget deficits for up to 14 years, this all without recourse to debt, while keeping the (P)GCC’s currency pegs to the US dollars.