By Tom Arnold and Rebecca Bundhun
Gulf states have announced expansionary budgets for 2009 to complete infrastructure projects.
With the global downturn calling a halt to foreign-backed and private sector investment, Gulf states have announced expansionary budgets for 2009 in a bid to complete some of the most ambitious infrastructure projects in the region's history, and rekindle economic growth.
In a dusty corner of the saudi desert, 100km north of Jeddah, one US firm is pinning its hopes on what once was a quiet oasis, and is now a buzzing hive of construction activity.
The desert strip, a landscape of construction cranes and cement mixers, is poised to become King Abdullah Economic City (KAEC), the jewel in the crown of Saudi's Arabia's expansive infrastructure plans, and a guaranteed cash cow for firms such as Turner Construction International (TCI).
As the global economic crisis brings work to a shuddering halt on building sites across the US, European and now Gulf skylines, the firm is becoming ever more reliant on government-backed mega-projects such as the $120bn KAEC.
"It's reassuring we've got that behind us," admits Martin Toogood, business development manager for TCI, project manager on the 10-year scheme by the Red Sea. "We shouldn't be looking at [private] development projects in places like Dubai now - we are looking more for government-backed projects, like universities and hospitals."
Toogood is all too aware that with the Gulf reeling from the affects of the economic slowdown, private sector projects are drying up fast as investors and speculators beat a hasty retreat from the market. Instead, the burden of boosting economic growth has fallen firmly on the shoulders of the region's governments.
And they have responded in bold fashion, pouring more than $1.4 trillion into a series of grand schemes, including the economic cities in Saudi, the Doha Convention Centre & Tower in Qatar, and Dubai's Metro light rail transport system.
Finance ministers began 2009 by announcing expansionary budgets, with the hope that a spending splurge may kickstart their stuttering domestic economies. Saudi Arabia, Dubai, Oman and Qatar have all announced huge capital expenditure plans for the year for major infrastructure projects.
At the same time, however, the price of oil - the main revenue source for Gulf coffers - has dropped over 60 percent from a record summer 2008 high of $147 to $36 a barrel. Crude has dropped below the ‘break-even' points that some states have budgeted on and as a result, many are expected to fall into budget deficit in 2009 - some for the first time in years.
However, economists argue a policy of spend, spend, spend is what is needed in an effort to stimulate shattered confidence in the private sector and reverse a slowdown in economic growth.
"It is very useful to have governments leaning against the wind and having expansionary fiscal policies," says Giyas Gorkkent, head of research at National Bank of Abu Dhabi (NBAD). "What the governments are doing is trying to offset the anticipated decline in the other categories in order to prop up growth."
By spending their way through the crisis, Gulf economies are adopting a similar approach to Western governments, which are introducing various debt-funded stimulus packages.
A top priority for incoming US president Barack Obama will be the delivery of the largest public works construction programme since the inception of the country's interstate highway system half a century ago. In Europe, Germany's coalition government last week agreed a controversial economic stimulus package worth about $67bn, covering investments in railways, roads and schools.
But the deep pockets of Gulf governments mean they are far better placed to press ahead with public works programmes, argues Standard Chartered economist Mary Nicola.
"The key thing with the GCC countries is that they do have surpluses - they can afford it," she says. "If you look at most of the western countries, they have deficits."
The finance ministry of Saudi Arabia, the world's largest oil producer, has projected planned expenditure of $127bn for the fiscal year, up from $109bn in 2008. The government has already said the downturn will not disrupt the delivery schedule of KAEC, the biggest property development in the region.
Instead, the Kingdom has announced a massive programme of public spending as part of its 2009 budget. This includes ploughing $32.6bn into education, building 1500 new schools, a new female university campus in Riyadh, and the Medical City for King Saud University.
Across health and social services, $13.9bn will be spent on building 86 new hospitals with a capacity of 11,750 beds, in addition to sport clubs, social centres, social welfare and labour offices and support for schemes aimed at eradicating poverty, still a pressing challenge for the country.
In the transport sector, the Kingdom is spending $10.5bn on the development of 5400km of new roads, in addition to expenditure on ports, airports, railways, inter-city roads, intersections and bridges.
"In the case of Saudi Arabia, they're spending when there are bad times and they're saving during good times," says John Sfakianakis, chief economist at SABB. "You will see a lot of capital spending, anything related to infrastructure you will see spending.
And these are "bad times" - at least in comparison to the last July's $147-a-barrel peak. The government's projected revenue from oil is just $109bn for 2009, down from a record $293bn in 2008.
Although the budget does not give oil assumptions, analysts at investment bank EFG-Hermes believe the government's budget is based on a forecast average of $40 to $45 a barrel. However, based on the bank's estimate for actual spending in 2009, it forecasts a break-even oil price of $54.5 as more likely.
A recent EFG report predicts the Kingdom's fiscal balance will fall into deficit in 2009, equivalent to 3.1 percent of GDP, for the first time in seven years. But EFG says with strong fiscal surpluses accumulated over the last six years, the government's net foreign asset (NFA) position has increased substantially, enabling it to "easily cover the deficit."Sfakianakis agrees that Saudi is particularly well-placed to implement such a strategy. "It's a good budget," he says. "Imagine if they had brought the budget down in terms of spending by 30 percent. I think that would have a psychological effect and also it would impact the real economy."
Rocked by a crisis of confidence in its banking sector and a correction in its real estate market, Dubai has similarly announced an expansionary budget aimed at bridging a shortfall in private investments. Public spending is expected to reach $10.3bn in 2009, 42 percent up from $7.2bn last year, the emirate's department of finance has announced. However, the emirate will run a $1.1bn budget deficit. Revenues are expected to stand at $9.1bn, compared to $7.2bn in 2008.
Commenting on the budget, Nasser Bin Hassan Al Shaikh, director general, Dubai Department of Finance, said: "We are confident that this budget plan will help consolidate our markets and keep our economy healthy while creating a thriving environment to grow inward investment, ensuring long-term success for the emirate."
Dubai is focusing on spending on public works in 2009, with projected investment in infrastructure swelling by 33 percent from last year to $3.3bn. Transport is a particular focus.
The emirate is using revenue earned from selling the naming rights for Metro stations to part fund the construction costs of the $4.2bn two-line system, scheduled to open in September. The government is also pouring $2.3bn into the social sector, with health services, education, social and public housing set to benefit.
But if oil continues to trade below the UAE's break-even price of $37, the Dubai government may have to consider selling foreign assets or debt financing to meet its budget, says Eckart Woertz, economist at Gulf Research Centre.
"If there is less money available from oil revenues or bank financing there will be more recourse for government financing, either through the sale of foreign assets or debt financing," he says.
Earlier this month, the Federal National Council, which represents about 20 percent of total government spending in the UAE, approved an increased budget for this year of $11.5bn. As far as Abu Dhabi is concerned, even if oil stays below $30 a barrel for a sustained period, the emirate has saved enough of its oil revenues to continue to spend at current rates for several years without the need to borrow, according to Moody's Investors Service.
Finance chiefs in Oman have begun the year in bullish fashion too, insisting the country will not hold back on any development projects.
Presenting a budget with a deficit of $2.1bn, Omani officials told reporters earlier this month the plans were agreed at the oil price of $45, the same price used to compose the 2008 budget. However, if oil stays below $45 then the state will reduce expenditure.
Nevertheless, it remains to be seen whether the GCC states' spending sprees will prove effective at spurring economic growth. "It's definitely a plus," argues Gorkkent at NBAD. "Infrastructure spending trickles down in terms of creation of jobs, in terms of contracts for companies, and so on. So government spending has what we call this multiplier effect on the broader economy."
However, while policy action might be necessary to stimulate the economy, it may not be enough. What is needed more than anything, economists stress, is a return of confidence.
"The share of government spending in overall economic activity is not as high as consumption spending, investment spending and net exports all put together," concludes Gorkkent. "Unfortunately, it is probably not sufficient to offset the declines in all the other sources of growth."
That may be the harsh reality, but for global enterprises such as TCI, at a time when new business is thin on the ground across the private sector, Gulf government-backed projects are worth their weight in gold.
Saudi Arabia is determined to push ahead with ambitious plans to build six multibillion-dollar economic cities by 2020, despite the collapse in oil prices and sliding exports, which will seriously dent the Kingdom's revenues.
"Saudi Arabia has traditionally demonstrated that it does tend to spend even when people expect that it will not spend, even when it has declining oil revenues," says John Sfakianakis, chief economist at SABB.
Indeed, the Kingdom's 2009 budget shows Saudi set to run a deficit for the first time in seven years, after it announced an expansionary fiscal policy, with planned expenditure of $126.8bn. A comfortable build-up of foreign assets and surpluses is expected to help the Kingdom spend its way through the crisis.
At the Global Competitiveness Forum (GCF) in January, GCF CEO Abdulmohsen Albadr insisted that lower oil prices will not derail Saudi's plans to diversify its economy through projects such as the $120bn King Abdullah Economic City.
"The Saudi budget for 2009 will have a deficit of around $17.4bn, but this will never affect the debt of the country because the surplus we made in 2008 will sustain our spending on infrastructure," Albadr said.
HRH King Abdullah last November announced a $400bn investment and development programme to be rolled out over the next five years.
Oman is less well-placed than some of its Gulf peers to weather the current global financial crisis given that it requires a higher oil price to balance its budget, economists say.
"With its limited oil reserves, its build-up of net foreign assets over the last few years has been more modest than other GCC countries," says Monica Malik, senior economist at EFG-Hermes.
The Omani minister of national economy, Ahmad bin Abdul-Nabi Mekki, in January said that if the average oil price falls below $45 per barrel, the goverment would revise the 2009 budget and cut back on projects.Nevertheless, developers remain confident that work on the new waterfront city in Oman, Blue City, will go ahead as planned. AECO Development, the construction joint venture responsible for delivering the first phase of Blue City, said earlier this month work was on schedule for delivery in 2010.
However, others are less confident. Ratings agency Moody's recently downgraded $399m worth of bonds for Blue City to junk status, reasoning that sluggish sales and a "less favourable macroeconomic environment" could jeopardise the project to the point where "the borrower may find it difficult to continue funding the construction in the longer term." Qatar
Qatar is planning its largest ever budget for 2009, with an increase in spending on development projects. The Qatari government has stated that it is committed to infrastructure projects and the country does not expect a deficit, as it expands its liquefied natural gas (LNG) exports.
A number of experts are predicting that Qatar's economy will experience close to double-digit growth in 2009. The small Gulf state boasts the third largest gas reserves in the world after Russia and Iran, and is the world's largest exporter of LNG.
This growth is expected to help Qatar push forward with in excess of $222bn worth of projects, as it strives to move away from its dependency on energy and become a ‘knowledge' economy.
"The industrialisation process in Qatar is advanced, the infrastructure build-out programme has momentum, and financing is secured for many of the key projects," says Simon Williams, HSBC's chief Middle East economist.
However, in a sign that the Gulf state is not immune to the crisis, the director of Qatar's Ras Laffan Industrial City project recently said it may have to revise projects due to the drop in the oil price. Located 80km north east of Doha, the city already hosts an industrial port and several industrial facilities.
The UAE budget for 2009 is the largest in the country's history, at $11.48bn representing a 21 percent increase from 2008. The UAE is forecasting a balanced budget, but "we are more likely to see expenditures overshooting and a fiscal deficit," warns Standard Chartered economist Mary Nicola.
With a large stash of foreign reserves and the lowest break-even oil price, analysts note that the UAE has substantial room to increase spending.
At the same time, however, the UAE's economy is more exposed to the non-oil sector than other Gulf states and will feel the effects of the current correction in the real estate market, while the crisis also hits the tourism and financial sectors hard.
"The sort of projects where we will see a slowdown is in residential projects like tower blocks," says Mark Blanksby, a construction lawyer and a partner with law firm Clyde & Co in Dubai.
"But in relation to infrastructure works, there's a continuing need and there seems to be quite a lot of infrastructure works still planned. There seems to be a slowdown in residential property but a continuation of infrastructure type work - the roads, the bridges, the railways and that sort of thing."
Analysts at EFG-Hermes last week slashed their economic growth forecasts for the Gulf state for 2009.
With limited oil reserves and foreign assets to its name, Bahrain is left exposed and could fall into large fiscal and current account deficits in 2009, according to analysts.
"I think a country like Bahrain is more challenged [than other Gulf states]," says John Sfakianakis, chief economist at SABB.
Nevertheless, towards the end of 2008, the undersecretary for the Bahraini ministry of finance, Aref Saleh Khamis, was still insisting that all of the "essential" housing social and infrastructure programmes would go ahead, adding that he expects economic growth of five percent or more in Bahrain until 2010.
However, work on the $3bn Qatar-Bahrain causeway that was due to start at the beginning of January has yet to materialise, and according to reports is on hold while the final cost of the project is recalculated.
The turbulent political environment in Kuwait poses a major threat to the country's investment and wider reform programme, according to analysts.
"Kuwait's oil sector, along with wider economic reform, is suffering due to the political impasse between the government and parliament that has resulted in mega-projects being stalled," says Monica Malik at EFG-Hermes.
Kuwait's then-oil minister Mohammad al-Olaim said at the end of December that the Gulf state is assessing investments in the energy sector amid weakening oil prices. The country has a five-year plan to spend $55bn on its oil sector, which is looking increasingly vulnerable.