GCC Spending Plans to Remain on Track in 2012 – EFG Hermes

EFG Hermes: EFG expect expansionary 2012 government spending plans to continue in
the GCC, despite the sharp fall in oil prices. The objective of regional
governments is to have consistency in spending plans and not change tack
as a result of oil price volatility on the back of global uncertainly. We
expect policy to continue to focus on upgrading infrastructure (including
social), growth and job creation. Moreover, a number of GCC countries
have strong public sector wage increases planned for 2012, notably
Kuwait, Qatar and the UAE. We maintain our expansionary spending
outlooks for 2012, with a weighted government spending increase of
11.4% expected in 2012, which should continue to support domestic
demand. We forecast robust weighted non-oil GDP growth of 5.5% in
2012, albeit down from 6.3% in 2011.

GCC Fiscal Leg-Room Remains; Budget Breakeven Supported by
Higher Oil Production

Stability in government spending plans is supported by remaining fiscal
space and strong FX reserve positions. Most GCC countries (ex-Bahrain)
have budget breakeven (BBE) levels of under USD90.0 per barrel (p/b) in
Brent crude terms. With the high oil price in 4M2012, Brent has averaged
USD114.4 p/b YTD. Brent would have to average around USD66.0 p/b for
the remainder of 2012 to average USD90.0 p/b for the year, which we
believe is unlikely. Some GCC oil producers are benefiting from higher oil
production levels, which is lowering their 2012 BBE oil price. We see fewer
downside risks to GCC oil production resulting from the EU oil embargo
on Iran, than the oil price. With the build-up of FX reserves, we believe
that regional governments would prefer to continue to maintain
spending and see a small fiscal deficit than disrupt their spending
objectives. We only expect a reduction in spending plans in 2013 if Brent
remains below USD75.0 p/b, led by investment in external sectors (oil and
petrochemicals), with domestic-related investments staying largely on

Wider Funding Support for the Investment Programme – If Required

We believe that governments will also continue to focus wider policy to
ensure the continuation of the investment programme. We have
highlighted previously the important role of foreign funding for GCC
projects, particularly from Europe. We believe governments will step in to
provide liquidity to the banking sector and direct project lending if any
tightness appears in international or domestic funding markets. In line
with our expectations, the Qatari government increased deposits in the
banking sectors in May following the tightening in liquidity during the
preceding months.