Gulf finance chiefs urge high spending amid slowdown

DEEP THOUGHT: Oil prices have slumped to below $40 causing concerns among Arab thinkers at a summit in Kuwait City. (Getty Images)

Arab central bankers and finance ministers urged their governments on Wednesday to keep state spending high to shore up domestic economies amid a collapse in oil prices and recession across the industrialised world.

Some Arab states, including top oil exporter Saudi Arabia, already project budget deficits in 2009 as they seek to buoy their non-oil sectors after oil prices slumped below $40 a barrel, almost a quarter of a record July level.

Much of the Arab world, particularly in the Gulf, rely heavily on crude export revenues.

As a result, a downturn in global energy demand has drastically dimmed the economic growth prospects of the region, while a credit crisis leads to a slew of project cancellations.

"There is a need to increase public investment spending," Arab Monetary Fund Director-General Jassem al-Mannai told reporters after the first day of meetings in a week-long Arab economic summit in Kuwait City.

Arab states should also "improve the climate for investments", Mannai said. It is crucial for them to keep spending on infrastructure and adopt monetary policies to provide liquidity to all sectors, he added.

Policymakers from the 22-member Arab League are attending the summit, which will culminate on Monday with a meeting of Arab leaders to discuss the situation in Gaza as well as economic proposals.

Arab countries want to identify tools to help them cope with the crisis and keep economic growth "at an appropriate pace", Kuwait Finance Minister Mustapha al-Shamali said. He declined to disclose details and said any proposals would not be binding.

Saudi Arabia, Oman and Dubai are projecting 2009 budget deficits after recording bumper surpluses during a six-year oil-fuelled economic boom.

"For each dollar the oil price declines, Arab oil revenues fall between $4 and $10 billion annually," Organization of Arab Petroleum Exporting Countries (OAPEC) said in a briefing report prepared for the meeting.

Shamali said Kuwait - which last month scrapped a $17 billion petrochemical venture with Dow Chemical - would be prudent, reducing public spending in all areas except for government employee wages and capital spending for projects.

Arab central banks and governments have adopted a slew of measures, from interest rate cuts to emergency funding facilities for banks and stock markets, to defrost credit markets and try to boost investor confidence.

"There is no need to worry," Saudi Central Bank Governor Hamad Saud al-Sayyari said when asked about the impact of the crisis on Saudi banks. "The results that have come out point to financial health and strength."

Governors from Lebanon and Syria also said their banking sectors were sound. In fact, both pointed to continued inflows of capital into bank deposits, a signal of stability.

But with Qatar's biggest bank reporting a surprise decline in profit in the fourth quarter on Tuesday and Moody's Investors Service issuing a note to warn that UAE banks faced a negative credit outlook, confidence is shaky.

Arab states would discuss setting up an emergency fund to support financial institutions, Ahmed Geweili, secretary-general of the Arab Economic Unity Council, CNBC Arabiya said in a statement, referring to a television interview.

This month, EFG-Hermes said the Saudi economy was likely to contract 0.9 percent in 2009, while Standard Chartered Bank cut its United Arab Emirates growth forecast to 0.5 percent.

Egypt has set an economic growth target of 5.5 percent for the two years starting July 2008, down from 7.2 percent in the 2007-08 fiscal year, saying it expected exports, foreign investments and tourism to get hit by the global downturn. (Reuters)

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