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CUTTING BACK: IMF says the GCC should cut state spending growth

Unified GCC currency

In 2011, total state spending in the GCC jumped by some 20 percent as governments responded to unrest in the Middle East by boosting social spending.

October 30, 2012 9:44 by



EXPOSURE TO FOREIGN BANKS

Most Gulf countries have used oil windfalls to build up their external assets, which would let them keep spending even if their budget balances turned negative.

“Although most GCC countries have sufficient savings to cushion even a sizeable shock, a prolonged drop in oil prices could test available buffers,” the IMF said.

Under its baseline scenario, the GCC’s combined, public external assets are projected to exceed $3 trillion by 2017; in the downside scenario, they would be $2.2 trillion but still above a projected $1.9 trillion at end-2012, the IMF said.

In 2011 those assets, which include sovereign wealth fund holdings and central bank reserves, were estimated at about $1.6 trillion or over 110 percent of GDP, the report showed.

The IMF also said further deleveraging and retrenchment by European banks, which have been hit by the sovereign debt crisis in their region, could lead to liquidity pressures in the GCC.

“A sharper scaling back of European banks from the GCC is likely to affect long maturity syndicated loans since they require more expensive long-term funding sources,” it said.

European bank claims on the GCC fell by about 2 percent from a year earlier in the first quarter of 2012. But the UAE and Qatar saw drops of 23 and 19 percent respectively in lending by euro area banks, the IMF said.

European bank claims on the GCC amounted to $220 billion in the first quarter of this year, out of $328 billion for all foreign banks, with British banks having a large presence in the UAE and Qatar while the French dominated Saudi Arabia.

Financing from euro area banks is small across the GCC at under 10 percent of GDP, except for Bahrain, the IMF said. Exposure to banks from Greece, Ireland, Italy, Portugal and Spain is under 2 percent of GDP in all GCC countries, it added.

Funds provided to global banks by the GCC amounted to $462 billion in January-March, the IMF also said, adding that the GCC’s banking systems were now in a stronger position than before to withstand external financial pressures.



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