Fiddling the figures

What budget shall we conjure up this year? (Photo:AFP PHOTO/KARIM JAAFAR)

In most countries the national budget is a serious matter for debate and proof of a government’s commitment to its citizens. Byzantine quarrels over the issue echo yearly in the halls of parliaments across the globe, with opposition and ruling parties at each other’s throats as they attempt to hammer out a compromise to suit the political and fiscal reality of the day.  In the Gulf Cooperation Council things are much more straightforward; the amounts the rulers decide are translated into what is spent on the ground.

More often than not that means there is little debate over where to allocate spending or if the figures and calculations are compiled in a realistic manner. The trend of GCC sovereign budgets in the wake of the economic downturn has been, and continues to be, to run countercyclical budgets in an attempt to stave off the adverse effects of the recession and to keep the national population happy enough to maintain the status quo.

“It comes back down to a policy driven recovery with significant public spending in the hope that it revives the private sector,” says Oliver Cornock, regional editor for the Gulf Cooperation Council at Oxford Business Group.

Judging from the budgets that have been released for 2011, this policy looks likely to continue, albeit at a marginally lower level than was seen during the fiscal crisis management years of 2009 and 2010. In total, federal budgets active in 2011 (Kuwait and Qatar run fiscal years to March 31) have a target of $297.7 billion in spending.

Questionable settings

That amount originates, for the most part, from the region’s vast hydrocarbon resources. But just how much those resources are worth to each government can make the difference between the budgets being credible reflections of the economy or a ceremonial scrap of paper.

“You [should] take these budgets with a pinch of salt because the oil price assumptions are way off base,” says Ayesha Sabavala, deputy editor and economist for the Middle East and North Africa at the Economist Intelligence Unit (EIU). “Most of these fiscal budgets are extremely expansionary. If they don’t increase the oil price they base the budget on, they are going to have severe deficits showing in all their budget accounts.”

Budget deficits / surpluses across the GCC

Both Saudi Arabia and the United Arab Emirates, the region’s two largest economies, have not specified their oil prices and, according to the EIU, the Emirates’ federal budget does not take into account oil revenues. Kuwait has proposed an oil price for its upcoming fiscal year at $60 per barrel, while Oman and Qatar have also budgeted at $58 and $55 dollars respectively. Most international financial institutions’ estimates for the year are around $90 a barrel and prices have been trending upwards, with Brent crude hitting a two year high of $108 per barrel last month on the back of the uprising in Libya.

There is some logic to the seemingly low expectations of the GCC’s finance ministries. Not long ago oil prices dove from more than $100 a barrel to around $45 a barrel. In the case of budgeting, erring on the side of caution may just be the best way to go. “It’s very easy to think of prices going up and up and up from a Western perspective, but when you go the other way it would be a huge shock if you were banking on $55 a barrel and you got $42,” says Cornock. “It has suited the GCC pretty well to do it this way and will do so for the foreseeable future.”

To be fair, sovereign oil price estimations in 2010 and 2011 have edged upwards in comparison to previous years. Ostensibly, the reason for this is that governments have sought to show greater revenues on their books to mask the effect of rising expenditures needed to keep their economies buoyant and support their wide-ranging subsidy schemes.

A brawl in Bahrain

One nation to recently break the oil price mold is Bahrain, which set a price of $80 per barrel in their bi-annual 2011/2012 budget, before the uprising began in February. Bahrain has also steadily spent a much larger portion of its revenues on defense (around 20 percent of its current budget allocation) than other countries in the GCC.

“The budget introduced in January is obviously not going to stand in light of these protests,” says Sabavala. “If anything we are going to see expenditure rise even more with all the allocations that have been made to families, subsidies and infrastructure spending that is trying to keep the local population quiet,” she says, adding that she expects the regime to survive. “At most they will be able to get rid of the uncle,” she posits, referring to the king’s highly unpopular Prime Minister Prince Khalifa, who has been accused of corruption and is widely blamed for the economic and political marginalization of Bahrain’s Shia majority population.

Smart investment

Another theme of budgets in the GCC is the increasing amount of capital being spent on education. Saudi Arabia alone is planning to spend $40 billion on education while Oman is expected to increase its allocation by $137.8 million to hit $2.4 billion, which is larger than the deficit they are projecting for the whole country.

According to Cornock, these large allocations are part of a general ‘longer-term’ strategy that the different countries are now starting to reflect in their budgets. “They are now able to play the long game: to invest in education and in incubator projects, as well as the public sector, with the hope that it will trickle down into the private sector,” he says. “It’s all there but its all conjecture and none of this will happen overnight.”

Ultimately, whatever allocations are made, many of the budget books are expected to tilt toward surpluses, even if the governments declare otherwise. For example, Kuwait has currently budgeted a deficit of $16 billion on its $64 billion budget but posted a surplus of $21.38 billion during the first eight months of the fiscal year because of high oil prices and under-spending on its budget targets. “All they need is over two months of oil at over $90 a barrel and they are sorted [out],” quips Cornock. “I really don’t think its such a huge argument, and they have significant foreign assets and the KIA [Kuwait Investment Authority, Kuwait’s sovereign wealth fund] is always there to back them up.”

Qatar plays the optimist

On the opposite side of the spending coin is Qatar, which has been enjoying bumper growth while others such as the UAE and Kuwait have been picking up the pieces following the downturn. The country has consistently overspent on its budgets. Now that it has to build world-class infrastructure for the 2022 World Cup it will need to spend even more.

As the country with the lowest oil price setting, a projected $2.2 billion surplus seems almost laughable. There have been some fears, however, that the excess public spending will crowd out private sector initiatives that are essential for growth.

“There comes a point when public spending becomes such a huge part of the economy that inevitably the private sector plays catch-up,” warns Cornock. “The flipside is the contracting and the financing. I mean just think about the opportunities for banks. There will be plenty of opportunity if it is managed correctly and it’s 11 years till that World Cup; that’s a lot of time.”

The same seems to apply for the region’s largest economy. “We have seen that what the Saudi government has projected and what has actually come out in terms of the surpluses has been vastly different, which just goes to prove that a lot of these budgets are not really reflective of what actually happens in the economy,” adds Sabavala.

Whatever the outcome, the economic objective of any government will need to be fulfilled: jobs need to be created. Now more than ever, governments in the region have to be responsive to the needs of their local populations to avoid the kind of social unrest that has toppled governments across North Africa and threatened them across the Arab world.

Subsidies for items such as basic foodstuffs and petrol, in addition to handouts to nationals, run counter to encouraging citizens to seek out private sector employment. For now at least, it seems these practices will remain in place.

Last month, upon the Saudi king’s return from New York where he was undergoing medical treatment, he dished out a whopping $36 billion in new subsidies that included housing loans, unemployment benefits and debt forgiveness.

“It’s a bit of balancing act, and there are contradictory policies that need to be changed in the long term, but it’s not something that is going to be able to be implemented immediately,” says Sabavala. “It will always be about keeping the small local population happy but we see now that this cannot be taken for granted. Local populations are looking for more and more, such as higher wages and more say in the political process.”

First published in Executive Magazine’s March 2011 issue

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