Economic Update

Saudi Arabia: Spending gets a boost

The Middle East | 10 Mar 2011

Public spending is scheduled for a major boost in Saudi Arabia, with education, housing and social measures being specifically targeted by a new economic stimulus and support programme.

Among the key features of the $37bn package, announced on February 23 by Custodian of The Two Holy Mosques, King Abdullah, were cost-of-living adjustments for public servants, additional funding for state bodies that provide housing loans and build low-cost homes, and an expanded programme of welfare assistance. The package also contained more assistance for students studying overseas and those from underprivileged backgrounds, increased funding for vocational training, including allocations for courses for women, and an unemployment benefits scheme for young Saudis.

The new package is the latest in a series of measures by the state to boost and diversify the economy. Last August, the government announced a five-year, $385bn spending programme aimed at strengthening the country’s infrastructure and logistics backbone. The goal is to broaden the base of the economy by reinforcing existing industrial activities, creating new manufacturing capacity, reducing the waiting lists for low- to medium-cost housing, and rolling out dozens of new schools, universities, vocational training centres and health facilities.

One area where the new spending programme will assist is in promoting the development of the private sector. Speaking to OBG just before the latest round of reforms, John Sfakianakis, the chief economist at Banque Saudi Fransi, said that the Saudi Arabian private sector had already benefitted from the state’s fiscal policies, including ensuring access to lending and maintaining the flow of money into the economy.

“The government has been aware of the importance of not crowding out the companies from credit lines by paying upfront for their projects,” he said. “Now the private sector has to look at the growth drivers. Saudi Arabia has natural indigenous growth drives unparalleled in many of the countries in the region.”

With more funding allocated to housing and infrastructure projects, the flow of capital into the economy through the construction, services and real estate sectors is increasing, and traditional leaders in the Saudi private sector will be among the first to see the benefits of the new fiscal stimulus package. “Having adopted a ‘wait-and-see’ attitude for the past several years, the private sector is starting to pick up again and activity is gradually coming back,” Sfakianakis told OBG.

Early results have already been logged, with the investment bank Crédit Agricole forecasting that Saudi Arabia’s private sector would expand by 4.6%, while the overall GDP is expected to grow at a slightly lower rate of 4.2%. This expansion will be supported by an increase in lending to the private sector, with average lending growth anticipated to reach 9% in 2011. These sorts of numbers should help to attract growing investor interest, with Sfakianakis calling the Kingdom “a AAA investment”.

While projections are of course subject to revision, given the instability in the Middle East and North Africa, it is unlikely that the Saudi economy will be deeply affected. Rather, as concerns grow over oil supplies elsewhere in the region, Saudi sources will be well placed on the international market.

Though Saudi Arabia has long followed a policy of managing its production levels to sustain the life of its main fields, the Kingdom has excess production capacity it can bring on-line, should its own economy or the international market require it. Though equipped to pump up to 12m barrels per day (bpd), Riyadh maintains a fairly constant output of around 8.4m bpd, with the excess easily able to fill gaps left should any regional producers go off-line.

Saudi Arabia’s ability to act as the oil market’s “central bank” was key in helping to shore up global market sentiment in early March, as unrest in Libya resulted in the North African country’s output falling from an average of around 1.55m bpd in 2010 to some 550,000-700,000 bpd, according to International Energy Agency (IEA) estimates.

The IEA’s executive director, Nobuo Tanaka, was quick to reassure markets, however, telling the international media on March 2nd that Saudi Arabia could more than cover the decline in Libyan output. “Even if Libya stops production entirely, which we estimate at 1m to 1.5m bpd, Saudi Arabia can fill the gap,” Tanaka said.

Looking ahead, however, there are other potential challenges facing the country, with Sfakianakis pointing to key economic concerns, such as job creation, the availability of housing, moderating disposal income levels and the rising cost of living. While these issues are unlikely to be resolved overnight, the government’s twin social and economic development programmes, representing total spending of around $423bn, should help to address them.

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