I am a fan of the IMF’s new regional outlooks. They generally provide more timely – and more topical – information about the major regions of the world economy than either the WEO or the country level Article IV reports.
The most recent IMF Regional outlook for the Middle East and Central Asia confirms something that I have suspected for some time.
The oil exporters started to spend in 2006. As Dick Cheney might say, big time.
The increase in oil spending was implicit in the relatively small increase in Saudi Arabia’s current account surplus in 2006. But the IMF’s regional outlook provides the confirmation.
From 2002 through 2005, about 55% of the increase in the GCC’s total export revenues was saved and only about 45% was spent or invested. Export revenues went up by $243b. The current account surplus increased by $135b. The "savings" ratio would be higher if non-oil exports are stripped out. In 2006, that changed. GCC export revenues increased by about $85b. However, The GCC’s current account surplus increased by only $17b. Roughly 80% of the 2006 increase in exports was spent and only 20% saved.
As a result, the GCC’s overall 2006 current account surplus came in at $176b -- well below the IMF’s initial projections.
In 2006, the oil exporters emerged as an important source of demand for goods and services, not just an important source of demand for financial assets. That no doubt has remained true in 2007. I suspect that strong spending – counting investment in both new oil projects and new buildings as a form of spending – in the big oil exporting economies is a big reason for strong growth in European exports. It also has presumably contributed to strong Chinese export growth.
The imports of the big oil states rose by 20% in 2006. Saudi, Qatari and Kazakh imports grew even faster.
Saudi imports were up more than 36% y/y. Almost all -- 85% -- of the increase in Saudi export revenues in 2006 was spent. That though is in some ways a deceiving calculation. The Saudis were slow – compared to the other oil exporters – at ramping up spending. From 2002 to 2005, the Saudis saved 70% of the increase in their export revenues -- far more than the rest of the GCC (they saved about 40%).
The Saudis 2006 spending spree reflects a decision to spend some of the 2003-05 windfall, not a decision to spend all the 2006 windfall -- overall, the Saudis have saved about 60% of the post 2002 oil windfall, far more than the rest of the Gulf.
Or, put a bit differently, the Saudis still have substantial scope to finance more spending and more investment out of their current oil export revenues.
In a lot of ways, though, the data in the IMF’s regional outlook raises as many questions about the GCC as it answers. Two puzzles jumped out at me.
- First, how can the strong growth in Saudi imports be reconciled with the ongoing real depreciation in the Saudi riyal?
- Second, how can Dubai’s property boom – and the associated surge in investment – be reconciled with the ongoing rise in the UAE’s current account surplus?
As the IMF notes, Saudi, Qatari and Kazakh import growth were all particularly strong in 2006. Qatari import growth isn’t hard to explain. Qatar is in the midst of an full on boom. Soaring inflation rates pushed up Qatar’s real exchange rate. Kazakhstan is in a similar position.
But reported inflation in Saudi Arabia remains quite low – 2.3% in 2006 according to the IMF. Saudi Arabia’s real exchange rate depreciated in 2006. Again. The dollar fell v the euro. And Saudi inflation was lower than inflation in its GCC trading partners as well as US inflation. The cumulative real depreciation in the Saudi riyal since 2002 is -- based on the official data -- about 18%.
Both the scale of the real depreciation since 2002 and the 2006 depreciation are a bit hard to believe.
In 2006, Saudi money growth was close to 20% -- that is a lot lower than the 40% money growth in rapidly inflating Qatar and the UAE, but still substantial. And, as discussed earlier, Saudi imports grew extremely rapidly. Both facts suggest at a bit more inflation and a bit more real appreciation than reported in the official data.
The IMF hints as much. The regional outlook has a special section on the “puzzle” posed by the GCC’s real depreciation (see p. 20 of the .pdf).
One explanation is that the inflation data includes the price of a lot of tradable goods – where China has held down prices – but not the price of non-traded services. Another is that the data simply understates actual inflation: the IMF diplomatically notes"deficiencies in the compilation of price statistics may underestimate actual inflation."
I suspect both explanations have a grain of truth.
The strong rise in the UAE’s current account surplus in 2006 is also puzzling. The UAE includes Abu Dhabi, which has a truly stupendous amount of oil and a huge stock of foreign assets. It hasn’t experienced the kind of boom that say Qatar or Dubai has experienced – though Abu Dhabi clearly has plans to increase its spending. I don’t doubt the increase in Abu Dhabi’s current account surplus. Kuwait has a similar amount of oil – and its current account surplus also went up.
But the UAE also includes Dubai. And Dubai must be running a Spanish – if not an Icelandic – sized current account deficit. It doesn’t have much oil. And its investment in real estate puts Spain to shame. Its deficit should offset some of Abu Dhabi’s surplus.
So what is going on?
Two explanations come to mind:
First, the Emirates isn’t renowned for its timely data. The IMF may be working off a dated forecast. The 2006 current account surplus may turn out to smaller than the IMF currently estimates.
Second, Abu Dhabi’s investment income likely soared in 2006. A 5% return on Abu Dhabi’s investment authority’s rumored $600b (or more) in assets implies investment income (part of the current account) of $30b. That almost as much as Abu Dhabi earned from its oil exports.
The fact that so many oil exporters now have so much stocked away – and are increasingly able to draw on the income from their existing assets to support current spending – is another reason to think that the Gulf’s spending spree will continue.
Update: I am a bit surprised that the IMF's Moshin Khan didn't express a bit more concern about the quite negative real interest rates now prevalent in the Gulf. Inflation may only be in the high single digits, but interest rates are close to US rates, leaving real rates quite negative. That is fueling a lot of spending and investment. I am a lot closer to Cevik than Khan on this: there is a very strong case for a revaluation to help contain still building inflationary pressures.