Arab oil producers reluctant to dig into reserves

By Simon Webb and Daliah Merzaban

KUWAIT/DUBAI (Reuters) - Arab oil producers, loath to dig too deeply into their massive foreign reserves, will raise public spending only cautiously as they seek to guide their economies through the global recession.

A slump of more than $110 in the price of oil to under $36 a barrel from its peak last July has brought an abrupt halt to an explosive phase of regional growth, battering confidence among private investors and straining government budgets.

So far, Arab states have pledged they will pick up the slack to keep the momentum going and urged the private sector not to run away -- even if it means posting small budget deficits this year for the first time since the oil boom began in 2002.

But as economists cut back 2009 economic growth forecasts to almost zero for Saudi Arabia and the United Arab Emirates, the region will be wary about how much it draws down its immense reserves.

The slump in global asset values makes it a bad time to sell foreign investments and repatriate reserves, analysts said.

"They will rightly be cautious in their spending choices because revenues are not under their control," said Simon Williams, regional economist at HSBC.

"I think they will spend more and there will be a willingness to run deficits ... but I expect the region to be careful and ensure that its priority projects that have the first claim on public funding."

In the six years to 2008 Saudi Arabia amassed surpluses from oil export revenues of $378 billion, according to HSBC estimates.