Political unrest in the Gulf threatens private sector spending and investment but thanks to high oil prices, governments have enough financial firepower to prevent their economies from slowing sharply, say analysts.

Protests have touched many countries in the region over the past two months. Except for Bahrain, the direct economic impact in terms of lost output has been tiny. But the protests have highlighted the potential for more trouble if political issues are not resolved, and this is dampening the mood in the private sector, they said.

However, high global oil prices -- themselves partly due to unrest in the Gulf and North Africa -- are boosting energy sectors in the region and giving governments enough cash to spend their way out of trouble.   

"The increase in oil prices will significantly add to growth dynamics both directly and through the wealth effect," said Marios Maratheftis, regional head of research for the Middle East, North Africa and Pakistan at Standard Chartered in Dubai.

Prospects for foreign direct investment in the region "have deteriorated, in the short term even in those countries that have not seen significant levels of protest", said Simon Williams, chief economist at HSBC Bank in Dubai.

"Foreign capital will be more difficult and more costly to access until the market is persuaded that the long-term order has been restored."    
After the global economic crisis, foreign direct investment tumbled by over 70 percent in Saudi Arabia and the UAE in 2009, and by 86 percent in Bahrain. More recent data is not available, but political jitters are delaying a recovery of investment.

Economic losses due to unrest in Bahrain reached $1 billion or about 20 percent of quarterly gross domestic product, NCB Capital estimates.
   
Meanwhile, all of the Gulf economies are benefiting from the rise of US crude oil prices to a 2-1/2-year high above $108 a barrel. A $10 increase in the expected average oil price faced by Saudi Arabia to $92 per barrel should contribute $43 billion to the country's nominal GDP this year, Banque Saudi Fransi estimates; that is roughly a tenth of last year's GDP.

In addition, Saudi Arabia and other countries are boosting state spending aggressively to ease social pressures. High oil prices give them more to spend, but in any case they are willing to run down financial reserves if necessary.

Saudi Arabia announced in February and March that it would spend an additional $130 billion -- presumably over several years -- on housing, bonuses for state employees, job creation and other projects to improve social welfare and the economy.   

This is expected to help drive the state sector's output over 5 percent higher for the third year in a row in 2011, the first time such extended growth in the sector has been seen since the early 1980s.

Taking into account increased oil output to make up for Libya's shortfall, Saudi Arabia's economy is expected to expand 4.5 percent this year and 4.4 percent in 2012, an acceleration from 3.8 percent growth in 2010, a Reuters poll of analysts showed in mid-March.

Saudi stocks have gained 9 percent since the Saudi king announced the latest fiscal stimulus in March.   

"In terms of economic prospects, all these countries are oil exporters and their economic outlook is quite positive if you look over the medium term, particularly Qatar, Saudi Arabia as well," said Dina Ahmad, a strategist at BNP Paribas.   

"These two countries in the Gulf stand out in terms of economic growth and prospects for foreign direct investment."    

In Qatar, where government spending is set to jump by 19 percent in the fiscal year to March 2012, the economy is expected to power ahead by 15.8 percent this year, one of the fastest growth rates in the world, the Reuters poll found.

Economists have cut their growth forecast for Bahrain this year to 3.4 percent from 4.2 percent predicted in December, and their forecast for Oman to 4.1 percent from 4.6 percent, according to the poll. But even here, a slight improvement is expected in 2012.

One supportive factor for Bahrain and Oman is that the richer Gulf countries are providing aid to the hardest-hit economies. Saudi Arabia and other neighbours have pledged $10 billion in aid to Bahrain and the same amount to Oman over the next 10 years to improve housing and social welfare.   

Governments are hoping that such spending will maintain comfortable levels of economic growth until unrest abates and private sector activity regains momentum, perhaps later this year. - Reuters