06/01/2013

Big increases in GCC public spending this year are pushing up break-even oil prices for some states and raising concerns about the sustainability of government largesse.

In recent days, Oman and Saudi Arabia have unveiled spending plans for this year that rely on higher oil prices than last year in order to balance their budgets.

Oman's finance minister, Darwish Al Balushi, was quoted by Reuters as telling a news conference last week that the country required oil prices of US$104 per barrel this year to break even on a spending plan of 12.9 billion rials (Dh123.21bn). He did not give last year's break-even price but Deutsche Bank analysts estimate it was $91.60 per barrel.

Saudi Arabia's record 820bn riyal spending target for this year requires a break-even price of $71 per barrel, up from $69 last year, estimates Jadwa Investment, a Saudi investment bank.

Economists expect a similar trend for other GCC budgets this year.

These break-even levels are still below current prices of $111 per barrel for North Sea Brent crude. Still, some observers are worried whether governments will be able to sustain high expenditure levels in the longer term.

"In the last four years we have seen a significant increase in break-even oil prices across the GCC," said Raza Agha, the chief economist for the Middle East and Africa at VTB Capital. "It's a reflection of higher current expenditure in wages and salaries."

Increases in spending in 2011 and last year were supported by rises in oil output to make up for cuts to Libyan output in 2011 and more recently for the dip in Iran's exports as a result of international sanctions.

But this year, oil output is expected to moderate. Saudi Arabia's oil revenue is expected to dip to 829 billion riyals (Dh811.92bn) this year, down from 1.24 trillion riyals last year, according to the country's budget statement.

Oil prices are also forecast to soften slightly this year from last year.

The rise in break-even prices is not an immediate concern for most regional governments.

Many are traditionally conservative in their budget forecasting, underestimating revenues for the year.

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Tom Arnold - The National