Oil soars but no sign of new Gulf boom

The days of the Rolls Royce abandoned in the desert for want of a spare tyre are long gone as Gulf states have too many pressing demands on their budgets.

March 17, 2000, 05:13 PM

DUBAI (Reuters) - Stratospheric oil prices would have once been an excuse for a spending spree by Gulf Arab states.

Gulf citizens less crazed on shopping sprees In the heady days of the 1970s and early 1980s when a barrel of crude rocketed above $30, oil-rich Gulf governments could hardly find enough ways to spend their new found wealth. But the days of the Rolls Royce abandoned in the desert for want of a spare tyre are long gone. Now, even as oil prices again hit $30, Gulf states have all too many pressing demands on their budgets.

"The oil price bonanza is not really as great as it seems to be," a Gulf economist, who asked not to be named, told Reuters.

Populations have doubled since those early boom years, so oil revenues are now spread more thinly.

Gulf governments, which still look to oil export earnings for the bulk of their revenues, have bigger defence budgets, the consequence of two major regional wars in the 1980s and 1990s.

And some are facing an issue unheard of 20 or so years ago -- debt. Some Gulf Arab states have built up substantial borrowings during the leaner times. For them, higher revenues offer the chance to chip away at those debts.

Saudi Arabia, the regional oil giant which controls 25 percent of the world`s oil reserves, typifies the new era.

Windfalls but no rash spending

The kingdom is estimated to earn an extra $2.5 billion for every $1 rise in a barrel of oil, but recent windfalls have not translated into rash spending.

"The government is getting much higher revenues this year than it anticipated. It may increase spending a little bit because of that, but they are quite cautious I think these days," Brad Bourland, chief economist at Saudi American Bank (SAMBA), told Reuters.

The kingdom`s domestic debts have been rising steadily as budget deficits, like other Gulf Arab states, have become a regular feature of the government`s accounts. This year`s budget forecasts a reduced shortfall of about $7.5 billion.

Economists have estimated Saudi Arabia`s domestic debts -- the kingdom studiously avoids international borrowing wherever possible -- at about $130 billion, or roughly equal to the country`s gross domestic product (GDP).

"There is larger debt and that`s why I don`t think spending will increase dramatically," Bourland said, adding that high oil prices would enable the state to move the budget into surplus so it could start paying down debt and rebuild foreign reserves.

Rapid population growth is also putting pressure on the government to reform an economy which has been state-dominated.

With up to half the estimated 15 million Saudi citizens under the age of 25, the state can no longer afford to guarantee jobs and wants private enterprise to play a bigger role.

Driving the change is Crown Prince Abdullah, who has been running day-to-day affairs in the kingdom since King Fahd fell ill about five years ago. He sent a stark warning to Gulf states in December 1998 when he told them the oil boom days were gone.

He has announced plans to revise tax laws, relax a ban on foreigners owning Saudi property and allow up to 100 percent foreign ownership of firms to attract investment and expertise.

Economic reform stilll slow

But reform in conservative Saudi Arabia, as in many other Gulf Arab states, is at best slow. Plans for the new investment law were announced last year, but have yet to see daylight.

Economic liberalistation has moved faster in states such as Oman, a medium oil producer by regional standards, or Qatar, which has borrowed billions of dollars to develop gas fields.

Nearby Kuwait and the United Arab Emirates have faced less pressure because of large oil reserves and big portfolios of foreign assets, but even there issues such as privatisation and opening up to foreign investment are moving up the agenda.

"They really don`t have any alternative but to carry out reform. The only thing that may happen (because of higher oil prices) is the pace may slow down," the Gulf economist said.

He said defence spending had "jumped at least two-fold in real terms in the past 15 years", adding that economic expansion in the region was only just keeping up with population growth.

The economist put the region`s expected annual real GDP growth at between three and five percent, compared with an annual population rise estimated at between three and 3.5 percent, leaving little room for lifting per capita incomes.

As well as facing these economic realities, Gulf oil producers are painfully aware of how unpredictable their main source of income is. A little more than a year ago, crude prices dropped below $10 a barrel after a sustained crude glut.

In Oman, a Finance Ministry economist said the government was keeping spending tight, in part to rebuild foreign reserves to the level before the 1998 and early 1999 oil slump.

The country has continued to press ahead with privatisation plans and other reforms even as the oil price recovery has eased pressure on state coffers.

But the Omani economist said spending could increase in the third quarter once the government felt more financially secure.

Qatar also reflects this new caution. It has amassed public sector debts estimated last year by the U.S ratings agency Standard and Poor`s at 140 percent of GDP, largely built up to pay for developing the country`s huge gas reserves.

A senior Qatari official speaking about the country`s budget for 2000/2001 said in February: "There is no going back to loosening the purse strings. On the contrary, don`t be surprised if there is some cut in the final spending figure

http://www.akhbar.com/article/0,1690,Business-15906,00.html

-- Martin Thompson (mthom1927@aol.com), March 18, 2000