Gulf Arab states are likely to keep their large spending packages in place next year, even as major economies withdraw stimulus, as higher oil prices give the world's top oil exporting region enough room to support a fragile recovery.
The global financial crisis slashed income for top Arab economies - Saudi Arabia and the United Arab Emirates - making them drain reserves as they embarked on massive spending plans to help emerge from this year's downturn. But with oil prices more than doubling from last December's lows of around $32 a barrel, most Gulf governments expect to book budget and current account surpluses this year and are more upbeat about 2010.
"Governments around the globe have been running expansionary policies over the past year, but in much of the world high deficits and a rising debt stock means they are running out of room. In most of the Gulf, that's just not the case," said Simon Williams, chief economist at HSBC Bank in Dubai.
"The Gulf's fiscal stimulus may have arrived later than in other parts of the world but is likely to last longer because public finances here are so much stronger than in the developed world or in emerging markets."
A debate on unwinding large piles of fiscal and monetary stimulus is flying high on policymakers agenda globally. China decided last week to rein in some incentives, while the world's central banks plan to withdraw trillions of dollars of support next year as economies recover.
Despite signs of improvement, the economies of Saudi Arabia and the UAE are still expected to shrink by around 1 percent this year as lending remains slow, but new inflows of oil money should help them expand by around 3 percent in 2010. "The fiscal stimuli will continue to be in place in line with efforts to keep the economy growing given what the region has gone through in 2009," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh.
Spending is seen staying particularly high in Saudi Arabia, the world's top oil exporter, which has embarked on a $400 billion five-year spree, and in Qatar with a multi-billion dollar expansion of its natural gas facilities. With oil prices seen staying at around $75 a barrel next year, most Gulf states will run comfortable surpluses despite high expenditures as they are expected to base their budgets on a conservative price of $50 a barrel on average.
"In 2010, we expect the fiscal position to improve with higher oil income," said Monica Malik, senior economist at EFG-Hermes in Dubai. The average price of benchmark US crude to date this year is $61.54 a barrel, comfortably above the $45 a barrel used in Gulf budgets for 2009. Out of the six-nation Gulf Co-operation Council (GCC), only non-OPEC members Oman and Bahrain have not been able to raise spending to the same degree as others due to their limited hydrocarbon resources.
Saudi Arabia is seen showing a budget surplus of 7 percent of gross domestic product next year, after a mere 0.8-percent in 2009. The UAE, which includes the debt-laden emirate of Dubai, should book a surplus of 5.0 percent after breaking even this year. Current account surpluses are also seen showing a sizable widening next year in most of the GCC countries as appetite for imported goods remains below the boom and bust year of 2008 with volatile oil prices remaining the key downward risk.