GCC states plan for the worst to avoid recession

10 August 2010

Gulf needs to keep spending to meet long-term strategic goals and to avoid recession. Private sector is unlikely to start spending significantly soon

The GCC economies have always been dominated by state activity. As a result of huge stimulus packages in 2009-10 designed to avoid recession, they have become even more so.

The Gulf governments have awarded 89 per cent of the $149bn-worth of contract awards in 2009, and 79 per cent of the contracts awarded so far in 2010. The figures show a major retrenchment of the private sector, which had mainly been operating in the now much less attractive real estate sector.

In the West, unsustainable budget deficits are forcing governments to cut back on public spending and hope that, sooner rather than later, the private sector will have recovered enough to take up the slack. The Gulf governments have been able to keep spending longer, but are now facing tough choices. The outlook for oil prices, the most important driver of regional economies, is becoming murky. Forecasts for 2011 are being cut as economists murmur about a double-dip recession. If oil stays above $75 a barrel, the Gulf will keep spending.

Any slip below that level, and spending plans in 2011 will likely be revised downwards. That risks exacerbating a regional slowdown that could be worse than what was an was experienced in 2009, when regional powerhouses such as the UAE and Saudi either shrank, or narrowly avoided recession.

More fiscally constrained governments, like those in Dubai and Bahrain, have been largely unable to provide stimulatory spending, resulting in them facing a longer period of stunted growth. Expansionary spending in 2009-10 was the right move to avert a major economic crisis in the region. It also capitalised on lower construction costs for the development of much needed infrastructure in the region.

For now the regional outlook is cautiously positive. The Gulf will keep spending to avoid the economy slipping into freefall. The private sector is unlikely to start spending significantly until real estate prices recover, which even optimistic analysts do not expect until mid-2011.

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