Coping with Lower Revenues

Saudi Arabia on April 23 unveiled a "balanced budget" for 1982-1983, calling for a 56 percent reduction from 1981-82 in spending on public administration and smaller cutbacks in infrastructure, transportation and communications. Two days later, Kuwait passed a 1982-83 budget with a projected $1.1 billion deficit. The United Arab Emirates had earlier published its first-ever deficit budget. This sudden display of fiscal restraint in the Gulf is obviously related to the sharp fall in government revenues due to the oil surplus and lower oil prices.

All this has prompted American contractors and exporters to wonder whether business opportunities are about to dry up in the boom markets of the Gulf. The answer is no, but there are some trends which U.S. business ought to watch.

Saudi Arabia's $91.4 billion budget actually boosts spending by more than 5 per cent over the 1981-82 plan and by nearly 9 per cent over actual spending last year. More is to be spent on construction and industrial projects; any spending cutbacks will come from reducing administrative overheads. The drop in infrastructure spending reflects the completion of many major projects. The Saudis have stressed that they intend to go ahead with their third five-year development plan without eliminating or scaling down any projects.

For its part, Kuwait is also increasing planned spending by over 5 per cent, to $11 billion. Significantly, Kuwait's earnings of interest and dividends from its overseas investments could this year overtake oil revenues as the government's chief source of income. The two sources together provide some $15 billion a year. Kuwait earned $7 billion on its investments last year and could bring in $10 billion from them this year.

UAE Consolidates

The UAE, which is the U.S.'s third biggest market in the Middle East after Saudi Arabia and Egypt, is the only one of the big Gulf oil producers to talk about revising spending. With its balance of payments surplus reduced by half last year, it is entering a period of "consolidation" in which real annual economic growth rates are expected to be half those of the 1970's.

U.S. analysts are not sure the Gulf states will be able to finance their spending programs without dipping into their huge financial surpluses. However, it is widely expected that their gamble on the future direction of the oil market will pay off when the U.S. and other industrialized countries start before long to step up crude oil imports as the worldwide glut is soaked up.

Still, there are possible implications for the U.S. if the Gulf states do sharpen their pencils on spending. There could be a fall-off in their demand which will only intensify the competition U.S. firms face from Europe and the Far East. U.S. exports to Saudi Arabia, Kuwait and the UAE were worth $9.3 billion in 1981, a jump of 22 percent from 1980. In the first quarter of 1982, the Middle East has grown in importance as an export market, taking nearly 10 per cent of U.S. global exports.

American contractors get some $45 billion a year in jobs in the Middle East, although their competitive edge has been eroded by labor costs, price inflation due to the appreciation of the dollar, and U.S. government rules and regulations such as the anti-boycott and "anti -corruption" laws. It is possible that Japan may already have overtaken the U.S. as the market leader in Saudi Arabia.

Another effect of fiscal stringency in the Gulf could be a reduction in inflows of Arab OPEC surplus capital into the U.S. These totaled $14.5 billion in 1981 and went down to a rate of $2 billion in the first quarter of 1982.

The oil surplus states might also be required to reduce their aid transfers (now the highest in the world, as a percentage of GNP) to the less developed countries of Africa and Asia, and this could in turn reduce business opportunities in those nations as a result of project cutbacks.

Finally, U.S. businessmen travelling to the region recently have noted increasing despair among their Arab partners about U.S. Middle East policies. Many have been told that U.S. business prospects could fade if there is not some indication of real progress in resolving the Palestinian issue. If the biggest spenders in the region start tightening up, U.S. companies could be the first to feel the pinch.