A recovery in oil prices because of better global economic prospects will likely boost the foreign assets of Gulf nations to a new peak, and this will provide them with a strong cushion against any fresh fiscal crisis, THE Washington-based Institute of International Finance (IIF) said in its latest report on foreign assets of Gulf Cooperation Council (GCC) member countries. After the first decline in 2008 in nearly six years due to the global financial turbulence, the foreign assets of the GCC could surge above their gross domestic product (GDP) at the end of next year. The IIF figures showed growth in the GCC's foreign assets would be a result of a surge in their oil export earnings, and consequently current account surpluses. It said the increase in oil revenues would be triggered by a rise in the members' crude output and higher prices, which could average nearly $80 in 2011. As a result, their combined current account surplus will sharply rebound from about $47.4 billion in 2009 to about $124.2 billion in 2010 and nearly $157.2 billion in 2011, according to the IIF. But it will remain way below the record high surplus of about $258 billion registered in 2008. High oil prices fetched the GCC nearly $1.84 trillion during 2004-2009, more than triple the income they netted during the previous six years. Nearly a quarter of the 2004-2009 revenues were earned in 2008 alone. IIF said the six GCC members currently have sufficient financial assets to deal with the fresh crisis. Besides the expected surge in their foreign assets, the combined current account of the six members is also projected to sharply rebound in the next two years after plunging in 2009. The IIF's figures showed the balance would widen due to a projected rise in oil and gas export earnings from about $323 billion in 2009 to $419 billion in 2010 and $457 billion in 2011. This will push the current account surplus from nearly $48 billion in 2009 to $129 billion in 2010 and $165 billion (equivalent to 15 per cent of GDP) in 2011. The fiscal surplus will also widen from three percent in 2009 to 10 percent of GDP in 2010-2011 despite a continued rise in government spending, the IIF said. Its estimates showed the gross foreign assets of the six members have more than tripled since 2002 to about $1.47 trillion at the end of 2009. Net foreign assets, the difference between total assets and liabilities, stood at about $1.049 trillion at the end of 2009. They are projected to soar to nearly $1.34 trillion at the end of 2011, nearly 122 percent of the GCC's GDP. “The large net foreign assets of the region will continue to provide substantial funds to sustain robust government spending levels in the next few years. Benefiting from large current account and fiscal surpluses during the period 2002-2008, gross foreign assets more than tripled to $1.47 trillion at end-2009, with relatively little external debt,” the IIF said. “The current crisis has reduced medium-term growth prospects in the GCC region as well as in other regions. Typically, recessions associated with a financial crisis require time to recover, and globally synchronized recessions are deeper than others. Potential growth in the GCC may also be adversely affected, given the lasting damage to labor markets. This underscores the importance of advancing the structural reform agenda in the region.” However, IIF said the GCC countries need to push ahead with economic reforms to support their asset cushion and ensure sustainable growth away from unpredictable crude sales. It said there are some downside risks to the outlook in the GCC region despite the group's massive overseas assets. “First, a slower-than-expected recovery in the global economy could dampen oil prices. This would adversely affect the region's export earnings, fiscal and external balances and hydrocarbon growth. Second, market concerns about sovereign liquidity and solvency in the euro periphery may turn into a full-blown, contagious sovereign debt crisis,” the report said. “Third, continued weak private sector demand and tighter financial conditions could lead to an increase in corporate distress that could feed back into banks in the region. The sharp slowdown in credit growth, if it persists, may expose problematic loans that have been masked by the generally favorable banking profitability conditions in the region.”
