Saudi Crown Prince’s latest economic plan carries major risks

Photographer: Fayez Nureldine / AFP / Getty Images

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Saudi Arabia’s the latest economic plan poses a major risk: while it may help boost investment, it could also affect government finances.

Crown Prince Mohammed bin Salman wants the largest companies in the kingdom – including the oil giant Saudi Aramco and chemical manufacturer Sabic – to reduce their dividends, most of which are paid to the state, and spend the money locally.

The idea is that their spending on new infrastructure and technology will be large enough to accelerate the growth of the country and cause a boom in jobs.

The de facto leader’s strategy amounts to a “sacrifice of current profits for future investments,” Karen Young, a resident scholar at the American Enterprise Institute in Washington, said in an opinion. piece. “There is a generational shift: a moment to build and create an era for oil, but in the short term the government will use up its resources.”

Here is an overview of the likely impact on the budget and the economy, which was hit hard last year by the coronavirus pandemic and the collapse in oil prices.

Oil money:

Aramco, the world’s largest oil company, transferred $ 110 billion to the government in 2020 through shareholder payments, royalties and income taxes, a decrease of 30% from the previous year.

According to James Swanston, lower dividends from the state-owned firm 98% will “weigh government revenue”. Capital economics.

He is not convinced that the extra investment in the economy will lead to a significant boost in the government’s tax burden on other industries, at least in the short term.

Still, Aramco has said it can sustain its dividend, which was the largest in the world last year $ 75 billion. This has been helped by the rise in Brent crude oil since December by almost 30% to $ 67 a barrel as more countries come out of closures. Last week, the firm announced an agreement with which a US consortium will invest $ 12.4 billion in its pipelines.

A stronger balance sheet and higher cash flow can enable it to maintain the dividend and invest more locally.

Wages and settlements:

Government workers’ wages and pensions are expected to be 491 billion ($ 131 billion) this year, representing almost half of the total expenditure of 990 billion riyals. But if oil prices remain above $ 60, Saudi Arabia may only be able to cover salaries from crude sales, according to Ziad Daoud, chief economist for emerging markets for Bloomberg Economics.

Whether that happens is an important part of the 35-year-old Prince Mohammed’s initiative. The country has managed to increase non-oil revenues from 166 billion riyals in 2015 to 358 billion riyals in 2020.

But there is a catch. Much of the improvement comes down to settlements with some of the richest people in the kingdom starting in 2017 with the launch of the Ritz-Carlton arrested, part of the prince’s corruption against corruption.

“The growth in Saudi Arabia’s non-oil revenues is only partially organic,” Daoud said. The agreements “cover one-fifth of non-oil revenues. These settlements will be completed at some point. If this happens, revenue from non-oil will not only stop rising, but it will also fall. To reach sustainable growth, the kingdom must increase productivity and increase non-oil exports. ”

Sovereign Fund:

If the budget, the deficit of which reached 12% of gross domestic product last year, is stretched due to lower disbursements from Saudi companies, the $ 400 billion sovereign wealth fund could stand a chance.

The Public Investment Fund is already positioning itself to drive the local economy. Prince Mohammed has promised that it will at least spend $ 40 billion a year at home until 2025, creating new cities, resorts and 1.8 million jobs.

“The budget increasingly focuses on managing the day – to – day spending of the government rather than being a car of economic growth,” said Mohamed Abu Basha, head of macroeconomic research at the Cairo-based investment bank. EFG-Hermes Holding. Capital expenditures “shift mainly to PIF and sister state institutions.”

Solid fees

Saudi Arabia projects salaries will match the last two years

Source: Saudi Ministry of Finance

Lasting impact:

In December, the government expected revenue of 849 billion riyals for 2021 and a fiscal deficit of 4.9% of GDP.

At the time, oil traded at barely $ 50 a barrel. The International Monetary Fund is now estimating it to a point where Saudi Arabia can balance its budget.

However, the lasting impact of the pandemic on Saudi businesses and global energy needs mean that the kingdom’s finances are still uncertain, Abu Basha said.

“The increase in future non-oil revenues will henceforth depend on the dividends of all these state-owned investments,” Abu Basha said. “It further increases fiscal vulnerability.”

– With help by Matthew Martin