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Gulf economies: just settling for mini-booms.

The economies of the Gulf Cooperation Council countries have emerged astonishingly resilient from the war over Kuwait. But, as Mushtak Parker writes, they will have to live with the legacy for years to come.

DESPITE THE FACT that the Gulf economies have shown remarkable resilience in absorbing the shock of the Gulf crisis, the latter's effects almost two years on will still continue to dominate the prospects of economic growth in 1993. The chances are that growth will slow down and that, instead of booms, officials are talking about mini-booms with real GDP growth rates per annum averaging 4%.

The reasons are very clear. The crisis has exacerbated the need to borrow funds to finance commitments as a result of the Kuwait war. Gulf states will suffer budget deficits perhaps into the next century. There is also a scramble to bolster defence expenditure, which only serves to aggravate the deficit problem. Kuwait, for instance, has allocated an extra $12bn on defence funding over the next 12 years. And if oil prices remain stable at the lower end, this will put extra pressure on expenditure and budgets.

Almost all the GCC states are predicting sharp declines in budget deficits for 1992 mainly because Kuwait war commitments will decline sharply and oil prices have stabilised at around $20 a barrel. Kuwait predicts that its budget deficit for 1992 will drop to $6.06bn from last year's $18.2bn.

This may be optimistic because there too many uncertain factors at play - the price of oil, defence spending, the ability and willingness of local banks to meet the budget funding requirements of the GCC governments. Kuwait also reached an oil production level of 1.5m b/d by the end of last year. According to the oil minister, Ali Ahmed al Baghli, Kuwait should be able to pump 1.7m b/d in the first quarter of 1993, rising to 2.150m b/d by the end of the year.

As governments turn to their banking sectors for debt financing and some international borrowing, the productive sector will be deprived from an important source of funding which will hamper economic growth. Government spending is still the engine of GCC economies, despite efforts to increase the role of the private sector in contributing to wealth and growth creation. The latter at present accounts for less than 35% of GDP.

According to the Gulf Investment Company (GIC), all six GCC member states suffered from budget deficits in 1991 "and the coming years will not be better." Deficits totalled $27bn, of which Kuwait accounted for $18.2bn. About $10.3bn of the deficit was financed from foreign loans, $3bn from local financing and the rest from selling assets abroad and from Treasury bonds.

The only factor that can improve the fortunes of the GCC economies is an increase in oil prices, which in today's bear market is highly unlikely. The big GCC oil producers have invested in oil and gas capacity expansion, but these will only have an impact by the end of the decade. The setting for 1993 will be a difficult one in which governments will have to seek ways of balancing budgets in a period of low oil revenues.

Some governments in the region are already taking austerity steps. Abu Dhabi is freezing new jobs in the government sector and cutting back on unnecessary projects and even on such basics as telephone calls and office furniture. A UAE federal spending watchdog has actually recommended that the emirates introduce income tax as a measure to help reduce the government's budget deficit. Indeed, all the GCC budgets for 1993 will see reduced spending, although this will not be drastic because too severe cuts could cause a real drop in the standard of living, which in turn could lead to social and political instability.

Privatisation, offset arrangements and off-balance sheet project financing such as build-operate-transfer (BOT) are also increasing options for Gulf economies to pay their way. The GCC states espouse the virtues of the free market but their economies are still highly regulated. State ownership, which many GCC states say is through the "accident of oil", is a norm in many areas other than the oil and gas sector.

The gap between free market principles and the reality of state ownership is sometimes bigger than admitted. But the Gulf crisis is now forcing a rethink. The Arab League has already urged governments to open up the oil sector to the private sector. If the economic situation deteriorates in the GCC states, then some countries may well be forced to re-examine their welfare state and tax-free status. Subsidies in public services and farming too are draining resources. None of the GCC states have a well-defined and thought-out privatisation programme.

Saudi Arabia, the world's largest oil exporter in 1992, will not surprisingly offer the best prospects. The government may have budget deficit problems but its economy and banking sector has a staggering SR300bn of surplus private capital waiting to be tapped. No wonder the kingdom is now expecting its private sector to play a much higher profile role in leading national economic development.

The finance and national economy minister, Mohammed Abal Khail, recently confirmed that the Saudi economy as a whole grew by a healthy 6.6% in 1991 and the industrial sector by 9.1% compared with 8.9% growth in 1990. Much of the growth in the industrial sector is attributable to a rise in output in the upstream oil and downstream petrochemical sectors, where Saudi Aramco and Saudi Basic Industries Corporation (Sabic) are continuing ambitious expansion programmes well into this decade.

The kingdom, which possesses the world's largest proven recoverable oil reserves of 260.4bn barrels, is currently pumping 8.45m b/d of crude. Saudi Arabia's current Five-Year Plan (1990-95) also has a projected expenditure of $200bn, underlining the fact that government spending remains the engine of the Saudi economy. Out of an estimated GDP of $104bn in 1991, the oil sector accounted for $39.6bn and the non-oil sector $64.4bn, of which just under $40bn was accounted for by the private sector.

The 1993 budget will be expansionary as the kingdom has embarked on an ambitious programme which aims to increase oil production capacity substantially and diversify the economy. However, the Saudi economy will remain largely dependent on the oil sector for revenues for many years to come, although the government perceives that the promotion of the industrial sector is the best way to lead economic growth in the 1990s.

Most economists in the region expect another large Saudi public sector deficit, perhaps slightly higher than the $8bn forecast of 1992, which is being financed by domestic borrowing. Indeed, the kingdom's banks are now playing a key role in government financing programmes through development bonds and Treasury bills floated by the Saudi Arabian Monetary Agency (Sama). Real GDP growth rate for 1992 is forecast between 6.5% and 7%, although some bankers are more cautious and predict real GDP growth rates of 4.5%.

The Fifth Development Plan (1990-95) aims at real GDP growth rates of 7.8% for the industrial sector (excluding petroleum refining) to be financed mainly through an estimated private investment of $7.6bn out of a total investment of $11.7bn. During 1992 there was a strong surge of domestic growth conditions which should continue into 1993.

There is an air of post-Gulf war optimism in Saudi Arabia, which officials and Western businessmen say is poised for a measured boom period during this decade with real GDP growth estimated at a reasonable 4% a year - "not bad considering the international recession," according to Abdullah Dabbagh, secretary-general of the Council of Saudi Chambers of Commerce. Signs of the upswing include the continuing rise in demand for imports, the expansion of the capital market by Sama, a continuation with new projects, and the greater participation of Saudi banks in the economy.

Opportunities for the private sector and foreign investors are particularly good. Saudi Aramco's expansion plan during this decade will cost an extraordinary $37bn, Saudi Arabian Marketing and Refining Company (Samarec's) will cost $5bn and Sabic's plans over $4bn.

From a political risk point of view, there is a sense of strengthened international cooperation and resolve to maintain the security of the region, and therefore the prospects for long term stability and security of the region are encouraging. Private sector officials such as Dabbagh stress that the kingdom "is not a country of shifting sands. Saudi Arabia's internal political stability is without any doubt. The well-being of the Saudi economy is not only good for the kingdom's economy but also for the world economy."

The budget deficit for 1992 is estimated at SR30bn compared to SR25bn in 1990. However, there is reported pressure from the International Monetary Fund (IMF) that the kingdom must try to cut its growing budget deficit. The balance of payments and current account deficit will continue in 1992 but the latter is estimated to register a sharp decline from $13.5bn in 1991 to $3.6bn in 1992 to $3.2bn in 1993, due to rapidly reducing financial commitments to the coalition allies in the war against Saddam Hussein.

The kingdom has had a deteriorating current account deficit for the last decade and together with the impact of the Gulf crisis, this has affected Saudi Arabia's foreign financial positions. According to the Bank of International Settlements, Saudi Arabia's deposits with Western banks fell by 10% in the first quarter of 1992, a trend which is expected to continue through the year. The kingdom's international reserves have also been declining from $16.74bn in 1989 to $11.67bn last year. Likewise, foreign assets have fallen from $60.43bn in 1989 to $56.59bn in 1990.

Lower oil exports and rapid import growth is also set to reduce the trade surplus by $1.9bn during this year, although the surplus should rise marginally by $100m in 1993. Oil production is expected to remain at the current 8.5 b/d, but import growth will be buoyant as domestic demand increases because of consumer confidence and the higher defence spending.

The Gulf states have embarked on foreign investment drives to attract joint ventures through which technology transfer could be acquired. Saudi Arabia, Kuwait and the UAE all have economic offset programmes in place related to defence contracts with the United States, Britain and France.

Once again the kingdom is the big player here - it has the largest and wealthiest consumer market in the Gulf with a population of about 14m and the indigenous population growing at a rate of 3.8% annually. Almost two-thirds of the population is under 21 years old. It is a multinational market since its also has 4m expatriates.

The Saudi family structure is changing with nuclear units replacing the old extended family - creating a surge in demand for housing, cars and other consumer goods. Education standards are better, which means that Saudis are in better jobs with higher expectations. Even social values are possibly changing and the younger generations are less inclined to save and thus have more disposable incomes available. Urbanisation is also growing as rural migration increases.

The kingdom is among the 20 largest economies in the world and the largest in the Arab states, with a total GDP of some $50bn and per capita income of about |pounds~3,225. The Saudi economy, most analysts agree, will remain dependent on oil revenues despite the fact that the government is trying to diversify the economic base away from oil into downstream petrochemicals, minerals, manufacturing and agriculture. The Fifth Development Plan (1990-95) aims at growth rates of 7.8% in manufacturing to be achieved mainly through increased private sector investments. Total investment financing requirement for manufacturing over the Fifth Development Plan period is estimated at $11.7bn, of which the private sector is expected to provide $7.6bn, with the rest coming from the government and parastatal agencies.


GDP: BD1.5bn; $3.9bn GDP per capita: $2,028 Population: 0.52m GDP growth: 1992 2.5%; 1993 3.5% Inflation: 1992 2.0%; 1993 3%

* Bahrain is particularly dependent for its well-being on calm in the Gulf, so the perception of regional security is of crucial significance. It relies on the other GCC countries for its industrial and services activities. Much of its prosperity will be linked to the progress of Gulf economic integration. Bahrain also depends on its wealthier neighbours (especially Saudi Arabia) for financial assistance and budget contributions. Financial stringency in other GCC countries will have a marked effect on development projects.

* The waves of "democratic" reform have now reached Bahrain where a consultative council is due to be set up this year, though without legislative authority. Official sensitivity towards public opinion was also reflected last year in the reduction of electricity and water tariffs for quite uneconomic reasons.

* Growth will accelerate in 1993 as Alba's capacity expansion comes on full stream and downstream aluminium ventures start up. The Arab Shipbuilding and Repair Yard will also increase its capacity. Most encouraging is the expectation that the offshore banking sector will recover its vitality.
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Title Annotation:Outlook 1993; includes related article
Author:Parker, Mushtak
Publication:The Middle East
Date:Jan 1, 1993
Previous Article:Oman: consensus and consultation.
Next Article:Banking: a timely shock to the system.

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