* A sharp oil price fall would hurt public finances
* GCC budgets could fall into deficit around 2017
* Most states have enough savings, $1.6 trillion in 2011
* Deleveraging of European banks could pressure liquidity
DUBAI, Oct 29 (Reuters) - Most Arab oil exporting countries in the Gulf should plan to reduce growth in government spending to make their budgets more sustainable, as their combined surplus could turn into a deficit around 2017, the International Monetary Fund said on Monday.
``While expansionary fiscal policies helped the region weather the global financial crisis, given the healthy economic expansion currently underway, the need for continued fiscal stimulus is diminishing,'' the IMF said in a report.
``Most GCC countries should therefore plan to reduce the growth rate in government expenditure in the period ahead.''
In 2011, total state spending in the six Gulf Cooperation Council economies -- Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain -- jumped by some 20 percent in dollar terms, the IMF said. Governments were responding to unrest in the Middle East by boosting social spending.
The GCC's combined fiscal surplus reached 13 percent of gross domestic product last year, the IMF estimated, and it is projected to remain at roughly that level this year.
But the leap in spending lifted the oil price levels needed to balance budgets to record highs, making the countries more vulnerable to a downturn. Oil export receipts account for over 80 percent of government revenue in the region.
``Along with continued increases in government spending, fiscal and external surpluses are, with unchanged policies, projected to decline in 2013 and beyond, with the combined fiscal surplus turning to deficit around 2017,'' the IMF said.
It noted that the outlook for oil prices was extremely uncertain.
``A rapid deterioration in the global economy could bring about developments similar to what the region experienced in 2009, including a sharp fall in oil prices and disruptions to capital flows,'' the IMF said.
In a downside scenario, the IMF assumed a $30 oil price drop that started in 2013 and lasted through the medium term.
``The GCC in aggregate would under the downside scenario go into deficit by 2014, and all GCC economies would run fiscal deficits by 2017,'' it said.
Bahrain and Oman would stand out with budget deficits of 16 percent of GDP, but Saudi Arabia would also reach a double-digit deficit, the report estimated.
EXPOSURE TO FOREIGN BANKS
Most Gulf countries have used oil windfalls to build up their external assets, which would let them keep spending even if their budget balances turned negative.
``Although most GCC countries have sufficient savings to cushion even a sizeable shock, a prolonged drop in oil prices could test available buffers,'' the IMF said.
Under its baseline scenario, the GCC's combined, public external assets are projected to exceed $3 trillion by 2017; in the downside scenario, they would be $2.2 trillion but still above a projected $1.9 trillion at end-2012, the IMF said.
In 2011 those assets, which include sovereign wealth fund holdings and central bank reserves, were estimated at about $1.6 trillion or over 110 percent of GDP, the report showed.
The IMF also said further deleveraging and retrenchment by European banks, which have been hit by the sovereign debt crisis in their region, could lead to liquidity pressures in the GCC.
``A sharper scaling back of European banks from the GCC is likely to affect long maturity syndicated loans since they require more expensive long-term funding sources,'' it said.
European bank claims on the GCC fell by about 2 percent from a year earlier in the first quarter of 2012. But the UAE and Qatar saw drops of 23 and 19 percent respectively in lending by euro area banks, the IMF said.
European bank claims on the GCC amounted to $220 billion in the first quarter of this year, out of $328 billion for all foreign banks, with British banks having a large presence in the UAE and Qatar while the French dominated Saudi Arabia.
Financing from euro area banks is small across the GCC at under 10 percent of GDP, except for Bahrain, the IMF said. Exposure to banks from Greece, Ireland, Italy, Portugal and Spain is under 2 percent of GDP in all GCC countries, it added.
Funds provided to global banks by the GCC amounted to $462 billion in January-March, the IMF also said, adding that the GCC's banking systems were now in a stronger position than before to withstand external financial pressures.