Gulf governments maintain spending to drive growth despite oil price slump – report

Governments in the Gulf Cooperation Council have maintained their spending on investments despite the strain that low oil prices put on their budgets, a report by ratings agency Standard & Poor’s showed.

A continuous spell of low oil prices has evoked concerns of hyrdrocarbon-reliant Gulf governments slashing their expenditure on infrastructure projects – a key driver of growth in the region.

“Even though we forecast GCC economic growth will slow and fiscal deficits will emerge following the more than 50 per cent drop in oil prices since June 2014, we expect governments will keep capital investment relatively high as a share of total government spending in an attempt to buoy economic growth,” said Standard & Poor’s credit analyst Trevor Cullinan.

But he warned that such readiness to spend on investments will reduce if oil prices continue to fall and drain government balances.

The report also said that though it believed capital spending on infrastructure projects could be beneficial in the long term, it did not note an infrastructure gap in the region that necessitate expenditure in this sector.

“Government investment may soften the economic slowdown in the short term, but we think longer-term growth will rely more on increasing education in the region, especially among women,” the report said.

The ratings agency added that it expected the regional governments to proceed with some of its strategic projects, which are in line with their economic and fiscal policies.

Earlier this week, the United Arab Emirates minister for Public Works Abdullah Al Nuaimi said that none of the country’s infrastructure projects are delayed due to oil price drop as they have already been budgeted for. However, he said that the government might have to review future projects in accordance to oil prices.

Cullinan said that the GCC governments might diversify their funding sources, anticipating a tough future if oil prices remain bearish.

“We believe GCC governments may also look to domestic and international capital markets to diversify their funding sources, support economic growth, build debt capital markets and slow the depletion of their asset positions,” he said.

Meanwhile S&P predicted that amongst the Gulf countries, Abu Dhabi will see the sharpest fall in government spending as a percentage of GDP.

“We expect Abu Dhabi government spending on housing, schools, and roads will total $90bn over 2013-2017 (about eight per cent of GDP each year). Investment related to expanding offshore oil production capacity will likely amount to about two per cent of GDP on average over the next five years. Capital spending related to Dubai’s hosting of the 2020 World Expo could amount to around $10bn, or about 1.5 per cent of GDP per year spread equally over the next five years,” the report said.