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Saudi Arabia Is Not Borrowing Money From Abu Dhabi; But The Pain Worsens.

The average spot market value of Saudi Arabia's mix of export crude oils fell to the $8/barrel range during the week and there are signs that the situation could get worse. This has alarmed the leadership in Riyadh. But the Saudi Minister of Economy and Finance, Ibrahim Al Assaf, has denied that the Riyadh government was seeking a $5 billion loan from Abu Dhabi.

The mere notion that Saudi Arabia, by far the biggest oil reservoir in the world, would be forced to borrow money from tiny neighbour Abu Dhabi would have been unthinkable a year ago.

Today Abu Dhabi is by far the wealthiest state in the Middle East in terms of surplus oil revenue and financial assets. In terms of per capita income, the Abu Dhabians have become the richest people in the world.

This was felt by the way Abu Dhabi city hosted the 19th annual summit conference of the Gulf Co-operation Council (GCC) on Dec. 7-9. The venue of the gathering, the Intercontinental Hotel, was again renovated for the occasion in a $20 million project. The broadened highways leading to the hotel were decorated with an endless number of flags and twinkling lights.

For the first time since the council was created in 1981, the summit was attended by non-GCC celebrities, notably including President Nelson Mandela of South Africa who chairs the Non-Aligned Movement, UN Secretary General Kofi Annan and Arab League Secretary General Esmat Abdel Meguid. They were invited by Abu Dhabi Ruler and UAE President Shaikh Zayed Bin Sultan Al Nahyan.

The dazzling display of wealth at the summit did not hide the pain felt by Shaikh Zayed's counterparts because of low oil prices. But there was nothing much they could do to boost their income, apart from urging members of OPEC and non-OPEC exporters to respect their commitment to cut production.

A Saudi proposal for the six GCC states to form a stronger bloc to defend oil prices and cope with the financial crisis faded away before the Abu Dhabi summit ended. A 30-man consultative committee formed in 1998 to advise the GCC rulers, grouped under a Supreme Council, failed to come up with viable solutions to the crisis. The crisis is expected to worsen in 1999 and Saudi Arabia will suffer most.

The rulers were worried that a unilateral oil production cut by the GCC would reduce the member-states' share of oil markets, because the other states of OPEC and the non-OPEC exporters could raise their exports further. A "new GCC approach" was adopted in the margin of the summit on Dec. 8 by the Oil Ministers of Saudi Arabia, Kuwait and the UAE. But they did provide credible solutions.

Despite many years of boom and "diversification" projects, the six GCC states have remained vulnerable to the price of oil. With a population of 26m, their combined GDP is estimated at $235 bn. The GDP of Switzerland, an oil consuming country with a population of 6.5m, is $260 bn. The stock market in Oman has lost 47% of its value since the beginning of 1998, due to the Sultanate's exposure to the Asian crisis. Kuwait has seen a 35% loss of stock market value this year, compared with a drop of about 25% in Saudi Arabia.

However, the very wealthy who are said to account for less than 1.5% of the estimated 15m GCC nationals have more than $800 bn invested overseas, mostly in OECD countries. This capital does not benefit the GCC economies.

Oil still accounts for 54-89% of GCC revenues and Saudi Arabia is the worst hit. The GCC states hold 45% of the world's oil reserves and 15% of the gas reserves. But they only account for 20% of the world's oil production.

Another feature of the GCC summit this year was the fact, mentioned repeatedly by the observers, that all the rulers except two were getting too old. Shaikh Zayed, the host, is in his 80s. Saudi Crown Prince Abdullah Ibn Abdel Aziz - who urged the GCC rulers to form a Gulf common market within a year- and the emirs of Bahrain and Kuwait are in their mid-to-late 70s. Sultan Qaboos of Oman is in his 50s. Only the Qatari Emir, Shaikh Hamad Bin Khalifa Al Thani, is less than 50. By contrast, over 60% of the GCC's 15m nationals are aged less than 30.

The GCC states apply a generous welfare system. Those considered wealthier - like Saudi Arabia, Kuwait and the UAE - still offer their nationals free or heavily subsidized housing, travel, health care, education and utilities.

There are no taxes and most of the national workforce is employed for life by the governments. In return for all this, the nationals have no political role and should continue to accept being ruled by absolute monarchies.

Western suggestions that the governments cut the welfare system are not acceptable to the rulers. Such a measure would mean a breach of an "unwritten social contract" between the ruler and his people; its implications would be very dangerous.

The Saudi Situation: Per capita income in Saudi Arabia has fallen from $19,000 in the first half of the 1980s to about $7,000. For each $1/barrel fall in the oil price, Saudi Arabia loses $2.5 bn in annual income. At the GCC summit Prince Abdullah said: "The age of abundance is over and will not return. We must all get used to a new lifestyle which does not rely entirely on the state... The private sector must assume part of the burden". But he dismissed Western proposals for drastic reforms, saying "perverse ideas hiding behind fancy names are rejected".

Independent observers estimate the deficit in the kingdom's 1998 budget at about $15 bn, i.e., 11% of its GDP, compared to $4.8 bn forecast in January.

Denying that Riyadh wanted to borrow from Abu Dhabi, Minister Assaf said during the past week that the deficit would be covered by internal loans.

Saudi bankers have proposed that the government trim budget spending by about $4.5 bn in order to limit the deficit to $10 bn. They say this can be done by suspending orders made in 1998 but not paid for, including the proposed purchase of expensive defence systems.

Unlike the situation in Asia, the banking system in Saudi Arabia is fairly strong and has the capacity to lend the government up to $10 bn if necessary.

Hamad Saud Al Sayyari, Governor of the Saudi Arabian Monetary Agency (SAMA), says the kingdom's banking sector is able to withstand the situation, having accumulated big savings and capital over the previous years.

The local banks easily provided a $4.3 bn loan to Saudi Arabian Airlines last year to finance the purchase of new passenger aircraft. Last September they played a major role in lending the government $2.6 bn through an inter- national issue using the creditworthiness of Saudi Aramco. This was to be part of a $4.6 bn loan, to be made available in two tranches, to cover the budget deficit. But the government's domestic indebtedness could exceed 100% of GDP if more internal loans are raised; and SAMA has a rule forbidding local banks from lending more than 60% of their total deposits to the government.

Saudi Arabia is a crucial market to many world suppliers to the Middle East.

Most foreign suppliers based in this region have the Saudi market as the main target.

Prince Abdullah Meets Western Oil Chiefs: On Dec. 6, Prince Abdullah met with visiting Texaco Chairman and CEO Peter Bijur in Riyadh. They discussed Texaco suggestions on possible co-operation between the US major and Saudi Aramco in raising the kingdom's revenues. Bijur also met with Oil Minister Ali Naimi and other officials in charge of the hydrocarbon sector.

The talks were a follow up from a meeting Prince Abdullah had in Washington last September with heads of the ten biggest US oil firms. The crown prince and acting ruler asked them to suggest possible areas of co-operation and invited each of them to visit the kingdom before end-1998.

Exxon Chairman and CEO Lee Raymond and his Mobil counterpart Lucio Noto were expected in Riyadh before the end of this month to meet with Prince Abdullah and other Saudi officials. Noto has close friends among key members of the royal family and top Saudi officials. He worked as Mobil executive in Saudi Arabia from 1977 to 1985. Exxon and Mobil are to merge in 1999.
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Article Details
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Publication:APS Review Oil Market Trends
Geographic Code:7SAUD
Date:Dec 14, 1998
Previous Article:The Oil Titans and Global Assets.
Next Article:Work On CPC Oil P/L To Black Sea Begins; Contracts To Be Signed Soon.

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