GCC states warned high oil is not forever
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GCC states warned high oil is not forever

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Current account surpluses have ballooned in the Gulf Cooperation Council states but their expenditures increased too

Oil price declines and rising inflation could undermine the current prosperity of the six Gulf Cooperation Council (GGC) states, analysts and policymakers warned at the IMF annual meeting in Tokyo.

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates have around $2.2 trillion held in foreign assets and their combined current account surplus is around the same amount, which would mean they are safe from economic shocks.

“In 2011 oil economies benefitted from the [region’s] political turmoil as prices spiralled, and this has continued into 2012,” Institute of International Finance regional director George Abed said.

But oil markets are defined by their volatility. “We remember that only in the recent past the price of oil has been at much lower levels,” IMF Middle East and Central Asia Department director Masood Ahmed said. “In budget planning purposes it is always useful to introduce an element of a margin to be able to have some buffers to protect yourself against a period of low oil prices.”

The IMF forecasts 6.6% real GDP growth for Middle East and North Africa oil producers this year, including 6% for Saudi Arabia and 6.3% for gas-rich Qatar. But this will fall back to 3.6% in 2013 — 4.2% for Saudi Arabia — the Fund said this week.

Officials point out that he IMF never forecasts oil prices, but its economists use a basket of crude futures to feed into their forecasts. The Fund’s lower growth forecasts thus reflect market sentiment that oil prices will fall as global growth falters in the next year.

Current account surpluses have ballooned with the price of oil exceeding $100 a barrel. Abed noted that with a population of 42 million, GCC governments will have accumulated a $2.2 trillion surplus by end-2012, but that will start to fall back in 2013 as the spending burden rises.

Oil economies have boosted state spending by 18% annually since 2005 to offset the threat of social instability. Abed said that only Saudi Arabia, with its huge oil reserves, could sustain spending at those levels.

IMF managing director Christine Lagarde used talks in Riyadh preceding the Annual Meetings to call on GCC leaders to do more to tackle inflationary pressures and accelerate reforms that will help create jobs for nationals. Lagarde pressed the point that some more robust policy measures are needed so that Gulf economies can introduce more reforms while oil prices are high.

Inflation is under control, GCC official argue, but analysts say that is not guaranteed to last. Andrew Cunningham of financial consultancy Darien Middle East said that rather than prudent policy implementation, it was “softer food prices and a robust dollar [that] are keeping GCC inflation under control.”

For now, “these two global factors are more important determinants of GCC inflation than the injections of cash into local economies made through the budgetary process in the wake of the Arab Spring,” Cunningham said.

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