Saudi Arabia – next of the big spenders

Just days after taking power in Saudi Arabia after the death of his brother, King Abdullah, the new monarch, King Salman Bin Abdul-Aziz, used a tried and tested method of responding to either political or economic uncertainty in the kingdom: fiscal largesse.

King Salman, 79, announced payouts worth upwards of US$30 billion to state employees, mirroring the tens of billions handed out in subsidies by King Abdullah several years ago. Then, as now, Saudi employers followed suit, announcing bonuses for millions of employees across the kingdom.

It is little surprise perhaps, given how much was made in the wake of King Abdullah’s death about consistency following King Salman’s succession, with key ministers retaining their posts and public comments from the new king stressing that his brother’s policies towards both oil production and the domestic economy were to remain.

But with oil worth half as much as it was in June last year, plenty of economists are questioning whether Saudi Arabia can afford to stay the course. Unlike in the past, King Salman’s payouts will have to come out of Saudi state coffers and substantial though they are – US$740bn, or 98 per cent of GDP, at the last count – they are finite.

“The additional spending package is likely to stimulate consumption and activity in the short term [but] handouts will likely come at the cost of a wider budget and current account deficit,” says Jean-Michel Saliba, a Middle East and North Africa (Mena) economist at Bank of America Merrill Lynch, who estimates the deficit at 18.7 per cent of GDP this year.

Mr Saliba adds that between October and December 2014, a total of $22bn was shaved off Saudi Arabia’s reserves, showing that the government is having to dip into its significant rainy day fund to keep the wheels oiled in the current climate.

“This suggests that the drawdown in reserves could be rapid in the lack of fiscal adjustment if oil prices remain low for long. The package also raises questions as to policymaking preparedness as to medium term fiscal challenges,” says Mr Saliba.

But it is not only generosity or the urge to mollify a concerned populace that motivates the subsidies and payouts by the kingdom’s rulers. With little option for investment outside of the Saudi financial market, most recipients of bonuses spend them in the local market. Indeed, Mr Saliba expects a 0.5 per cent boost in GDP.

John Sfakianakis, the director for the Middle East at the Ashmore Group, estimates about 80 per cent of the salary and pension supplements that came as part of the new king’s $30bn package would benefit the local economy directly, as newly-flush Saudis go out and spend in the kingdom’s malls and car sales forecourts.

“Given that oil is not at $20 but now at $60, the macro picture of Saudi Arabia can easily sustain acts of social benevolence,” says Mr Sfakianakis, whose investment firm focuses on emerging markets. Both political analysts and economists have been bullish on the governing credentials of the new king, who spent more than five decades as the deputy governor and then the governor of Riyadh.

During that substantial tenure, King Salman led a city that morphed from a mid-sized town to a major urban metropolis of more than five million people.

“(He) established the higher commission for the development of Arriyadh, which helped develop Riyadh, avoiding red tape and government procurement policy by having its own budget. Since becoming Crown Prince, he has made more than eight official visits in Asia, Europe and the US,” says Mr Sfakianakis. He also inherited a country that was in relatively sound financial shape.

At some $740bn, the total foreign exchange reserves of the Saudi Arabian monetary authority (Sama) are at their highest rate since the 1960s. Meanwhile, government debt was just 1.6 per cent of GDP in 2014, compared with more than 100 per cent in 1998, according to BAML’s figures.

“Saudi Arabia has the means to wait out the oil market … We do not doubt that the Saudi authorities have the willingness and ability to conduct their new oil policy regime in the near-term,” says Mr Saliba.

Many Saudi watchers have taken comfort that key figures in the government have remained under King Salman, including Ali Al Nuaimi as the minister of oil. Mr Sfakianakis also notes that one of King Salman’s sons, Prince Abdul-Aziz, is also a seasoned oil economist who has been part of the ministry of petroleum for many years and served as the assistant oil minister in the 1990s.

“On oil policy matters, we do not expect any change of course at this point,” says Mr Sfakianakis.

“Oil policy has been defined by technocratic decision making over decades. Even a change of personalities will not alter Saudi Arabia’s oil policy,” he says.

But while King Salman certainly appears to be staying on the course forged by his brother, Jason Tuvey, a Middle East economist at Capital Economics in London, says the new king could encounter challenges in the year ahead relating to both the ‘Saudisation’ policy – which ensures companies employ nationals – and subsidies.

“Efforts to bring more Saudi nationals into work in the private sector risks putting upward pressure on firms’ wage bills. [Also,]the government could undertake measures such as subsidy cuts to mitigate the impact of lower oil prices on the public finances,” says Mr Tuvey, pointing to comments from central bank governor Fahad Al Mubarak that suggest the government will tackle energy subsidies soon.

And while the fall in oil prices will mean Saudi Arabia is set to run twin budget and current account deficits this year, large savings and a low level of debt mean these should be easily financed. Mr Tuvey does not expect the same rises in public spending going forward, but an aggressive tightening of fiscal policy is also unlikely. “King Salman has … hinted that there will be little change to domestic and foreign policy and the Saudi authorities look set to continue to resist pressure from smaller Opec members to cut oil output in order to shore up prices,” he says.


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