GCC government spending set to remain strong: Study

28/04/2012 07:52 AST

The GCC governments are continuing to support economic activity in important ways at a time when efforts are underway to drive the massive infrastructure pipeline in a bid to foster more inclusive growth through the greater prioritization of areas such as housing, the National Commercial Bank (NCB) in its latest "GCC Financial Market Quarterly".

The higher-than-expected oil prices and a tendency to increase production are allaying near-term concerns about overspending and fiscal sustainability, although notably the UAE authorities have taken steps towards fiscal consolidation. The IMF expects overall public sector spending in the UAE to drop by some $5.6 billion this year as the key government authorities seek to rebalance their books after a period of aggressive spending.

"Although private equity deals are still small in number, the market is seeing more activity with some expectations of a rebound going forward. The main source of concern is the relative retreat of European lenders from the syndicated loan market. They have served as a key source of capital for some regional economies and the ability of regional and non-European banks to fill the vacuum is in considerable doubt," the report said.

The opening months of 2012 saw an impressive revival, albeit still somewhat uneven, of activity virtually across the breadth of the GCC financial markets. Reduced regional and global risk aversion helped bridge some of the persistent gap that has existed between market behavior and the economic fundamentals. Nonetheless, while the underlying outlook remains positive, the multitude of structural weaknesses globally still continues to pose a risk of significant discontinuities.

Kuwait serves as an example of the broader regional tendency to continued fiscal permissiveness. The government is planning to increase spending by 13.4 percent to KWD22 billion ($79 billion) in its FY2012-13 budget. The government’s conservative revenue estimate is KWD14 billion ($50.3 billion) based on a price assumption of $65 per barrel. Qatar has postponed its FY2012-13 budget to late May due to accounting changes.

The performance of the regional stock exchanges has reflected the improving mood with substantial gains over last year’s lackluster performance. Progress was particularly strong in Saudi Arabia and Dubai. Nonetheless, IPO activity has remained subdued and the pipeline vulnerable to changing market conditions.

The GCC bond and sukuk markets have led the positive progress with particularly welcome developments in the sukuk space. Saudi Arabia saw its first sovereign-backed issue while there are signs of private companies tapping the market. Overall, the remarkable rebound of last year looks set to continue. Substantial refinancing requirements remain the main risk factor for bonds, especially in Dubai, which has nonetheless seen risk perceptions improve markedly.

Q1 was marked by a impressive consolidation of the equity market rally that began to take shape the in the closing months of last year. Saudi Arabia and Dubai led the rebound with gains in excess of 20 percent during the quarter. Elsewhere in the region, however, the gains remained in the single digits or altogether absent.

IPO activity lagged far behind the positive secondary market momentum, however. The region saw a total of only two new offerings during the quarter, both of them in Saudi Arabia. The total value of the Q1 IPOs was a modest $78.4 million, which was significantly down on the already modest total of three listings worth $212.2 million. By contrast, 1Q11 saw only one offering worth $17.9 million.

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Saudi Gazette