MUSCAT: The Arab Gulf Cooperation Council countries, including Oman, will be adversely affected by the sliding oil prices and they may run into unaccustomed budget deficits in the next fiscal.

Oil fell below $34 yesterday to its lowest level in more than 4-1/2 years despite pledges by the Organisation of the Petroleum Exporting Countries (Opec) this week to remove 2.2 million barrels per day from its supply, which will be the largest ever reduction by the producer group.

The Arab Gulf states will take a double hit from the collapse in oil prices and deep crude output cuts, economists said yesterday.

Omani government has drawn up alternative plans in case oil prices continue their slide, Ahmed bin Abdulnabi Macki, minister of national economy and deputy chairman of the Financial Affairs and Energy Resources Council, said on Wednesday.
Oman has modified its 2009 budget estimates recently which are now based on an assumed price of $45 per barrel of oil against the originally decided $55.

“While low oil prices will have its impact, the government has alternative plans in case prices fall to lower rates than the current,” Macki said, addressing a Majlis Al Shura session on Wednesday.

Macki said the Omani economy would continue its growth by at least three per cent. He added that the government would go ahead with its development programmes, but “there will be re-arrangement of priorities.”

Huge surpluses amassed during a six-year boom when oil prices rallied as much as seven-fold compared with 2002 levels will allow the Gulf states and other oil producing nations to keep on spending to sustain local economies during a global recession.

However, even if oil averages $45 a barrel next year, there will be significant budget deficits in Oman, Bahrain, and Saudi Arabia,” said Simon Williams, senior economist at HSBC in Dubai.

“We need to keep the shortfalls in perspective, however. Next year’s deficits won’t even begin to approach the value of the surpluses generated over the past five years.”
The Gulf posted record fiscal surpluses this year.

Arab Gulf states have expanded their budgets swiftly since 2002, striving to capitalise on soaring oil to diversify their economies away from gas and oil revenues.

Governments poured billions into developing financial hubs, setting up tourism hot spots, building up industry and petrochemicals and speeding up construction projects to accommodate streams of new expatriate residents.

As a result, the oil price needed to keep budgets balanced has risen substantially across the Gulf, and those with the largest populations to support — namely Saudi Arabia, home to 25 million people — are most at risk of deficits.

From posting a surplus exceeding 20 per cent of gross domestic product this year, the world’s top oil exporter, Saudi Arabia, would ring in a deficit of 8 billion riyals ($2.13 billion) next year if the price of US.crude averages $70 a barrel, Jadwa Investment said.

“With oil revenues accounting for around 85 percent of total revenues, the collapse in prices and lower production will have significant implications for the government budget,” the Riyadh-based investment firm said in a research note this week.

Steep Opec cuts could reduce Saudi Arabia’s oil revenues by 40 per cent next year, Jadwa estimated.

While a sustained oil price slump would have a drastic impact on oil producers’ spending power, high oil prices have allowed Gulf central banks to enhance their cash cushion against any downturn and to build up huge sovereign wealth funds.

The Gulf made export earnings of 2.2 trillion in the five years to June, according to estimates of Saudi Arabia’s Samba Financial Group.

“In the short term they would probably accept small surpluses or deficit because the cash cushions they have created with sovereign wealth funds can bear the burden,” said Giyas Gokkent, head of research at National Bank of Abu Dhabi.

Saudi Arabia has pledged to spend $400 billion on deqvelopment and investment in the next five years and the UAE has also committed to keep expanding public spending even as it forecasts an abrupt fall in economic growth.

The United Arab Emirates can break even with oil between $35 and $40 a barrel, one of the lowest prices in the Gulf, he said.