The last economic plan of the Saudi Crown Prince comes with great risks

Photographer: Fayez Nureldine / AFP / Getty Images

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Of Saudi Arabia the latest economic plan carries a high risk: although it could help increase investment, it could also affect government finances.

Crown Prince Mohammed bin Salman wants the biggest 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 to spend money locally.

The idea is that their spending on new infrastructure and technology will be high enough to accelerate the country’s growth and cause a job boom.

The de facto leader’s strategy is to “sacrifice current profits for future investment,” said Karen Young, a resident scientist at the American Enterprise Institute in Washington. piece. “There is a generational change: a time to build and create a post-oil era, but in the short term, the government will deplete its resources.”

Here’s a look at the likely impact on the budget and 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, has transferred $ 110 billion to the government in 2020 through shareholder payments, royalties and income taxes, a decrease of 30% over the previous year.

Lower dividends from the state, 98% owned by the state, would “weigh on government revenue,” according to James Swanston of Capital Economics.

He is not convinced that additional investment in the economy would lead to a substantial increase in taxation by other industries, at least in the short term.

However, Aramco said it could support its dividend, which was the largest in the world last year $ 75 billion. It was helped by the rise in Brent crude by almost 30% in December to $ 67 a barrel as more nations emerged from the stalemate. And last week the company announced a deal whereby a US-led consortium will invest $ 12.4 billion in pipelines.

A stronger balance sheet and a higher cash flow can allow him to both keep the dividend and invest more locally.

Salaries and settlements:

Wages and pensions for state workers are expected to reach 491 billion reais ($ 131 billion) this year, accounting for almost half of total government spending. 990 billion rials. However, if oil prices remain above $ 60, Saudi Arabia could only cover wages from crude oil sales, according to Ziad Daoud, chief economist of emerging markets for Bloomberg Economics.

That this is happening is a crucial part of Prince Mohammed’s 35-year-old initiative. The country has managed to increase non-oil revenues from 166 billion reais in 2015 to 358 billion reais in 2020.

But there is a catch. Much of the improvement was due to settlements with some of the richest people in the kingdom, which began in 2017 with what were known as The Ritz-Carlton arrests, which are part of the prince’s anti-corruption effort.

“The increase in oil revenues in Saudi Arabia is only partially organic,” Daoud said. The agreements “represent one-fifth of non-oil revenues. These settlements will end at some point. When they do, not only will non-oil revenues stop rising, but they will fall. In order to achieve sustainable growth, the kingdom must increase productivity and increase non-oil exports. ”

Sovereign Wealth Fund:

If the budget – whose deficit reached 12% of gross domestic product last year – is expanded due to lower payments from Saudi companies, the $ 400 billion sovereign wealth fund could raise the weakness.

The public investment fund is already positioned to lead the local economy. Prince Mohammed has promised to spend at least $ 40 billion a year at home by 2025, creating new cities, resorts and 1.8 million jobs.

“The budget is increasingly focused on managing the government’s daily spending, rather than on an engine of economic growth,” said Mohamed Abu Basha, head of macroeconomic research at the Cairo investment bank. EFG-Hermes Holding. Capital expenditures “are mainly transferred to the PIF and the institutions of the sister state”.

High taxes

Saudi Arabia projects that employees’ salaries will be in line with the last two years

Source: Ministry of Finance of Saudi Arabia

Duration impact:

In December, the government projected revenues of Rs 849 billion for 2021 and a fiscal deficit of 4.9% of GDP.

At the time, oil was trading at just $ 50 a barrel. It has now reached a point where Saudi Arabia can balance its budget, according to the International Monetary Fund.

However, the lasting impact of the pandemic on Saudi business and global energy demand means that the kingdom’s finances are still precarious, according to Abu Basha.

“The growth of future oil revenues will continue to depend on dividends from all these state investments,” Abu Basha said. “This further increases fiscal vulnerability.”

“With the assistance of Matthew Martin.”