While the credit crunch has hit the liabilities side of Gulf Cooperation Council (GCC) countries' balance sheets, Standard & Poor's Ratings Services believes the fall in global asset valuations, including in domestic GCC capital and real estate markets, has had a significant and detrimental effect on the value of their assets, resulting in lower net asset positions and higher contingent liabilities for GCC sovereigns. Furthermore, a combination of low oil prices and a decline in oil production is likely to have a significant impact on government revenues across the GCC. However, according to a new Standard & Poor's report published yesterday, titled “GCC Government Assets: Still Affording Protection Against The Global Downturn,” GCC countries are well placed to shield their economies from the turbulence, thanks primarily to their exceptional capacity to pursue counter-cyclical expansionary fiscal policy. Unlike in previous oil prices cycles in the 1970s and 1980s where a sharp decline in oil prices was met with a sharp decline in government expenditure, GCC policy makers have today by and large chosen to smooth government expenditure, which is a critical driver of the non-oil economy. Saudi Arabia, for example, has opted to increase government expenditure by 16 percent, focusing on infrastructure spending, which will rise in 2009 by some 36 percent, the largest ever increase in infrastructure spending in that country. Similarly aggressive expansionary policies with a focus on infrastructure are evident in Abu Dhabi, Qatar, and Oman. “We believe that GCC governments have exceptional fiscal space to implement their counter-cyclical expansionary policies, despite experiencing significant losses on their foreign asset holdings over the past 18 months,” Standard & Poor's credit analyst Farouk Soussa said. “In our view, Saudi Arabia, Abu Dhabi, and Kuwait have the greatest amount of fiscal space to pursue such policies, and we forecast that each could sustain a 10 percent deficit without resorting to debt finance for at least 25 years. Bahrain and Oman are in the least comfortable positions, as their oil resources are more limited than other GCC states and they have therefore benefited relatively less from the windfall in high oil prices in terms of accumulation of assets.” __
