by Mariam Fam
The Middle East’s big oil exporters, racking up growing profits after the oil-price surges of recent years, have been spending the windfall more cautiously than during previous oil booms.
But as they grow more confident that relatively high oil prices will endure, their spending has started to pick up—and likely will continue to increase, with some big development projects in the offing, economists say. That could send more petrodollars streaming back to some oil-consuming nations, reducing global imbalances.
Imports of goods and services in the Middle East and Central Asia are on track to reach an estimated $679.8 billion this year, up 21% from last year, according to an International Monetary Fund report. They are projected to jump again next year, to $769.6 billion, the report estimates.
Saudi Arabia, the world’s top exporter of oil, is expected to import $112.7 billion of goods and services this year—a 28% increase from last year, the report says. The IMF expects Saudi imports to climb to $137.4 billion next year.
Analysts say it has taken a while for oil exporters, burned by overspending in the past, to design big investment projects requiring high financing. Mohsin Khan, director of the Middle East and Central Asia Department at the IMF, says oil producers in the Mideast and North Africa on average spent only 30% of their oil-revenue increases between 2002 and 2005. That compares with about 75% after oil-price increases in the 1970s and early 1980s, he says.
Part of the reason for the restraint: Oil exporters in the region now have fewer immediate infrastructure needs than in the past. Moreover, says Youssef Ibrahim, a commentator on Middle East affairs, some of the spending during previous booms went into projects that turned out to be boondoggles.
"In Saudi Arabia, you would see a huge amount of real-estate construction that was just white elephants because they didn’t study it carefully," says Mr. Ibrahim, who is based in New York. "The first volley did produce a lot of infrastructure, but sometimes you had what I call bridges going to nowhere."
In this boom, by contrast, oil producers in the region started by building up dollar reserves and reducing debt. Saudi Arabia said yesterday that it would run a record budget surplus of 265 billion riyals ($71 billion) in 2006—up 24% from last year—and would plow more than a third of that into paying back debt. Saudi Arabia reduced domestic debt to 41% of gross domestic product by 2005 from 97% in 2002, according to the World Bank. Still, spending is picking up on infrastructure and new oil and gas projects, economists say. In a strong signal it will try to prevent oil prices from sliding further, the Organization of Petroleum Exporting Countries said it plans to slice its output by an additional 1.9% starting Feb. 1. It remains to be seen if the cartel’s members will actually implement the decision, which calls for a collective cut of 500,000 barrels a day. Crude prices dropped to $56 a barrel in November. Crude for January delivery settled at $62.21, down $1.22, or 1.9%, on the New York Mercantile Exchange yesterday.
In Saudi Arabia, public housing, schools and hospitals are going up, analysts say. Meanwhile, Dubai, which already has reshaped its profile with skyscrapers and boasts glitzy malls, has announced plans to build the world’s largest hotel as part of a $27 billion resort project, another step toward becoming an international tourism hub.
Most of the region’s imports come from Europe. To a lesser extent, U.S., Chinese and Indian companies are growing fast in the region. Unlike in the past, some infrastructure needs and projects are being addressed by private-sector investment. In what was hailed as a sign of economic reform and a step to create more job opportunities and diversify the economy, Saudi Arabia has announced billions of dollars in projects to build economic cities such as the King Abdullah Economic City, a giant private-sector project featuring a seaport, a financial island and an industrial district.
New projects mean more imports may be needed and a round of long-term spending by oil producers could recycle oil money back to other parts of the world and oil importers. The GCC —the Cooperation Council for the Arab States of the Gulf, also known as the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Oman and Bahrain—offers an example.
The GCC countries’ investment plans for 2006 through 2010 total more than $700 billion, including projects in the oil and gas sectors, infrastructure and real-estate, some of them under public and private sectors partnerships, the IMF says. According to the IMF’s Mr. Khan, Oman has embarked on an estimated $10 billion of investment intended for the next five years largely in the liquefied-natural-gas area. Saudi Arabia is believed to be planning to spend about $70 billion over the next five years to boost oil and gas production and refining capacity.
While some economists argue oil exporters may increase their savings as they have fewer infrastructure needs, Mr. Khan says he saw no evidence of that, especially since some of these countries spend not just at home but on investments elsewhere in the region.
The IMF report says many oil producers have been taking steps in the right direction—developing their private sectors, boosting infrastructure and generating jobs. The challenge for these countries now, the report adds, will be to make sure spending plans are accompanied by structural reforms that translate into increased productivity. Mr. Khan says GCC countries need to work on unifying rules and regulations across the bloc’s markets and to allow more foreigners to invest there. Steve Brice, Standard Chartered Bank’s Dubai-based regional head of research for the Middle East and South Asia, said other needed changes include improving the legal infrastructure needed to enforce contracts and to start or close businesses.
