As the Middle East burns, Saudi economy glows

Arab world unrest boosts oil prices, swelling country’s coffers; estimates oil output grows from 700,000 to 9.2m barrels a day.

By DAVID ROSENBERG / THE MEDIA LINE
Oil (Do not publish again) (photo credit: Avi Katz)
Oil (Do not publish again)
(photo credit: Avi Katz)
Bahrain and Yemen aside, the turmoil in the Middle East has turned into a boon for Saudi Arabia, as the country’s coffers swell with the proceeds of climbing oil prices and production. And, a series of subsidies and other measures worth as much as $133 billion will help ensure the bounty reaches ordinary Saudis.
National Commercial Bank, a Saudi lender, raised its outlook this week to 5.1% from a previous 4%. Barclays Capital is planning to revise its forecasts shortly as is Bank of America. A Reuters poll of economists taken last week before the second of two government spending plans was unveiled showed the Saudi economy growing by 4.5% this year, slightly faster than previous expected.
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Where unrest and uncertainty are weighing down on most regional economies, Saudi Arabia is an exception these days to the trend in the Middle East.
As supplies from Libya have fallen and worries that other exporters may cut output as well, oil prices have risen about 20% this year. Benchmark Brent crude for May delivery traded at about $115 for a barrel on Thursday. Economists estimate that for every $10 increase in the price, Saudi Arabia can increase its budget by 6% of gross domestic product.
And, with the world’s biggest reserves and excess capacity, Saudi Arabia is benefiting twice over by raising output to fill the Libyan gap. Official figures aren’t available, but the country is believed to have boosted output by about 700,000 barrels a day to 9.2 million barrels.
“On the oil side, recent events have been unambiguously positive,” Daniel Kaye, senior economist for National Bank of Kuwait, told The Media Line.
Meanwhile, two royal decrees announced over the past month call for $133 billion in new government spending – a figure equal to an eye-popping 30% of the country’s GDP. The money will be spent for everything from pay raises for civil servants to building homes to adding more people to the security forces.
No one doubts that the measures are aimed principally at assuring Saudi Arabia’s 26 million citizens aren’t drawn into the spirit of rebellion that has brought down the leaders of Egypt and Tunisia and threatens those in Yemen and Libya. Riyadh has been fearful enough of unrest that, in a rare military action, it dispatched troops to neighboring Bahrain last week to help the king put down protests.
But Kaye of National Bank of Kuwait and other economists said the extra spending will also give another boost to the economy and address some of its structural problems, like a persistent housing shortage and high unemployment.
National Commercial Bank estimates the two initiatives will generate some150,000 jobs directly and indirectly, equal to nearly a third of the estimated number of jobless. Another 60,000 jobs will be creating by hiring more security personnel at the Interior Ministry, a measure that will do double duty by aiding the economy and helping to clamp down on any emergent unrest.
Civil servants will get a pay hike equal top two months’ salary and a minimum wage was set for them at 3,000 riyals ($800). Those seeking jobs – an estimated 10% of the country’s labor force – will be entitled to a monthly allowance of 2,000 riyals.
The $15 billion set aside to build new homes and fund more generous government loans to buyers will go part of the way to easing Saudi Arabia’s housing shortage, economists said.  Credit Suisse forecast the country will need some two million more housing units by 2014.
The amounts involved are huge, but economists said it was too early to gauge the impact they will have on the broader economy. UBS on Wednesday affirmed for now its Saudi growth forecast of 4.5% for this year, said Reinhard Cluse, an economist who tracks Saudi Arabia for the Swiss bank.
“We don’t know how big the overlap is between them [the two announced programs], or how quickly the money will be spent, so that makes it difficult to speak about the impact on GDP growth,” Cluse told The Media Line. “In regard to social spending, it will go to investment in housing and into wage spending. As such, the multiplier effect should be quite good.”
Indeed, the largesse is so enormous that it has sparked jealously among the 800,000 or so Saudis employed in the private sector. A Facebook page “We Are Also Saudis” has served as a forum for griping. “We’re treated as if we’re foreigners,” the page’s administrator writes.
In fact, many private sector businesses have decided to match the government bonus, among them Saudi Basic Industries Corp., American Express in Saudi Arabia, Samba Financial Group, Al-Rajhi Bank, Saudi Electricity Co. Saudi Aramco, Saudi Arabian Airlines, Saudi Telecom Company, Kingdom Holding Company, and Saudi Arabian Mining.
Some analysts have raised the specter of accelerating inflation as all this money percolates through the Saudi economy. Annual inflation slowed to a 10-month low of 4.9% in February, but economists like John Sfakianakis, chief economist at Banque Saudi Fransi, have warned that the government’s handouts may reverse the trend.
Cluse said it was premature to talk about their inflationary impact. The government has the resources to increase subsidies to contain the impact of higher global food prices, which is the chief threat to price stability right now, he said. In can also enforce price regulations if needed, said Cluse, who forecasts consumer price rising between 5% and 6% this year. The handouts may even help cool inflation.
“Housing costs were a big driver of inflation in the past, so spending on new housing can bring down inflation in the medium term,” Cluse said. “But we don’t know how quickly money will be spent, so we don’t know how inflationary it will be.”