Spending and taking additional measures to filter down the wealth by oil exporters is a necessity, not an option. As the Middle East is grappling with social unrest, Saudi Arabia has no choice but to spend and generate confidence. Handouts and the start of structural reforms are well placed. The country’s political outlook is stable as regional uncertainty continues.
In the space of less than a month (23 February to 18 March) King Abdullah of Saudi Arabia announced a total of 41 Royal Decrees, which include various handouts and socio-economic support programmes. They vary from one-off public sector workers’ bonuses, building half a million housing units, injection of fresh capital into the state’s real estate fund, creating a housing ministry and an anti corruption commission which reports directly to the King, healthcare services, newly-established unemployment benefits, minimum wages for Saudis (public and private), hiring of security personnel and others. The measures aim to lend confidence, and begin to address structural challenges in labour market reform and job creation, affordable housing for the low- to middle-income Saudis as well as addressing filtering-down mechanisms for the oil wealth.
The estimated USD129bn total package amounts to 84% of announced 2011 budget expenditures. The total bill of measures is a substantial fiscal undertaking on top of a budgetary trend which exceeded actual spending over announced spending by an average of 22% over the past five years. However, we believe the fiscal burden will rise but remain manageable. We estimate 31% of the total bill of projects expended in 2011 and 11% in 2012. This year’s actual budgetary breakeven, excluding the new measures, will reach USD80/bl for WTI. Mostly foreign assets (USD444bn) will be deployed to pay for the announced measures. Medium-term fiscal risks loom if extra outlays are added and restraint is not exercised. The measures will cause higher private consumption, leading to higher inflation. Import cost pressures will rise. Inflation is now forecast to rise from 5.3% in 2010 to 5.6% in 2011. Saudi Arabia’s political outlook is expected to remain stable.