Page 48 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

CHAPTER 1 Floating on Wealth 33

Growth projections are, of necessity, imprecise and subject to
change as conditions evolve. Gulf economies may grow more slowly
or faster than current forecasts suggest, and their fates remain deeply
linked to global energy markets. It appears, however, that through
the world recession and the expected recovery, the Gulf states
will enjoy stronger growth than the world and developed-country
averages.

THE “BREAKEVEN IMPERATIVE”

Fundamental economic growth, discussed in the previous section, is
of course important to the Gulf’s role in the global economy. In assess-
ing the region’s potential for making investments, however, its ability
to sustain budget surpluses is a key factor to consider. When govern-
ment incomes exceed budgetary requirements, wealth flows into
international, regional, and domestic investments. On the other hand,
when public-sector income is insufficient to meet the governments’
needs, reserves must be tapped, and the rate of investment becomes
negative.
The single most important metric in assessing a Gulf govern-
ment’s ability to generate a surplus is its breakeven oil price. This fig-
ure reflects the per-barrel oil price at which a state’s income covers its
public-sector expenses. Above this price, oil income creates a surplus;
below it, there is a deficit. The estimated breakeven oil price of each
GCC state in 2009 is shown in Figure 1.4.
As is evident from Figure 1.4, the breakeven prices for GCC
states vary greatly from country to country. Qatar (for which natural
gas prices are also a key determinant of national income) and the
UAE can break even with oil prices of $24, and Kuwait breaks even at
a modest $34. Even with the high volatility seen in oil prices since
2008, ongoing surpluses in these three countries appear highly proba-
ble and can be expected for the foreseeable future.
Saudi Arabia, the world’s leading oil exporter, faces an esti-
mated 2009 breakeven price of $54. In the current environment (oil
was trading around $60 per barrel at the time of this writing), Saudi
Arabia’s ability to generate a surplus for 2009 is uncertain. The key
question over time will be which grows faster: the steady-state oil
price or the Saudi public-sector budget requirements. Oman and
Bahrain, both of which require oil prices of around $80 for a surplus,
are unlikely to see surpluses in 2009 and 2010, based on current IMF
estimates. 26