The latest economic plan of the Saudi Crown Prince entails major risks

Photographer: Fayez Nureldine / AFP / Getty Images

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Saudi Arabia The latest economic plan carries a great risk: while it can boost investment, it can also hit public finances.

Crown Prince Mohammed bin Salman wants the kingdom’s biggest corporations – including the oil giant Saudi Aramco and chemical maker 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 country’s growth and trigger a job boom.

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

Here’s a look at the likely impact on the budget and the economy, which was hit hard by the coronavirus pandemic and the oil price crash last year.

Oil money:

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

Lower dividends from the 98% state-owned company would “weigh on government revenues,” said James Swanston of Capital Economy.

He is not convinced that the additional investment in the economy, at least in the short term, would lead to a substantial boost in government tax deductions from other industries.

Still, Aramco has said it can maintain its dividend, which was the highest in the world last year $ 75 billion. It was helped by Brent crude oil surges nearly 30% since December to $ 67 a barrel as more countries come out of lockdowns. And last week, the company announced a deal in which a US-led consortium will invest $ 12.4 billion in the pipelines.

A stronger balance sheet and higher cash flow can make it possible to keep the dividend as well as invest more locally.

Wages and settlements:

Wages and pensions for government workers are expected to reach 491 billion riyals ($ 131 billion) this year, accounting for nearly half of the total expenditure of 990 billion rials. But if oil prices stay above $ 60, Saudi Arabia could cover salaries from crude oil sales alone, said Ziad Daoud, chief emerging market economist at Bloomberg Economics.

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

But there is a catch. Much of the improvement was due to settlements with some of the kingdom’s wealthiest people starting what was known as the Ritz-Carlton arrests, part of the prince’s anti-corruption campaign.

“The growth of Saudi Arabia’s non-oil revenues is only partially organic,” said Daoud. The deals “account for a fifth of non-oil revenues. These settlements will be finalized at some point. If they do, not only will revenues from non-petroleum products stop increasing, but will even fall. To achieve sustainable growth, the kingdom must increase productivity and increase non-oil exports. “

Sovereign Fund:

If the budget – whose deficit was 12% of gross domestic product last year – is stretched due to lower disbursements from Saudi companies, the $ 400 billion state investment fund may be able to pick up the slack again.

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

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

Heavy fees

Saudi Arabia projects employee salaries will be in line with the past two years

Source: Saudi Ministry of Finance

Lasting impact:

In December, the government forecast revenues of 849 billion riyals for 2021 and a budget deficit of 4.9% of GDP.

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

But the pandemic’s lasting impact on Saudi businesses and global energy demand mean the kingdom’s finances are still uncertain, Abu Basha said.

“The impetus for future non-oil revenues will depend on the dividends from all these state investments,” said Abu Basha. “This increases the fiscal vulnerability even more.”

– With help from Matthew Martin