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Saudi Arabia Launches Misguided $19 Billion Stimulus In Desperate Bid To Kickstart 2018 Growth

If you haven’t been living under a rock in recent months, it’s been impossible to miss the turmoil in Saudi Arabia and its relations with the outside world. A few weeks ago we published a piece by Chris Martenson of “If The Saudi Arabia Situation Doesn't Worry You, You're Not Paying Attention”. Martenson argued.

A dramatic geo-political realignment by Saudi Arabia is in full swing…upending many decades of established strategic relationships among the world's superpowers and, in particular, is throwing the Middle East into turmoil. So much is currently in flux, especially in Saudi Arabia, that nearly anything can happen next. Which is precisely why this volatile situation should command our focused attention at this time. The main elements currently in play are these:

  • A sudden and intense purging of powerful Saudi insiders (arrests, deaths, & asset seizures);
  • Huge changes in domestic policy and strategy;
  • A shift away from the US in all respects (politically, financially and militarily);
  • Deepening ties to China;
  • A surprising turn towards Russia (economically and militarily); and
  • Increasing cooperation and alignment with Israel (the enemy of my enemy is my friend?).

Taken together, this is tectonic change happening at blazing speed.

We might add to this list the stand-off with Qatar, the proxy war in Yemen against Iran, the support of Syrian “rebels”, allowing women to drive and, most recently, in a “watershed moment in the development of the cultural economy”, the re-opening cinemas for the first time in 35 years. 

In the latest development, the focus of King Salman (well, his son really) has shifted to the depressed state of the Saudi economy. Back in 2011, you may remember, King Abdullah announced a $36 billion of bribes benefits bribes in an attempt to stave off the uprisings which had destabilised other Arab nations. The then cash-rich Saudi government offered lower and middle-income Saudis pay rises, unemployment benefits and affordable housing. Today, the Saudi leadership has announced a slightly more sophisticated stimulus package, as the Financial Times explains. 

Saudi Arabia unveiled a $19bn (72 billion riyals) stimulus package on Thursday aimed at supporting the struggling private sector as the government tries to revive an economy battered by low oil prices and austerity measures. The package was approved by King Salman and includes subsidised loans for house buyers and developers, fee waivers for small businesses and financial support for distressed companies, the state news agency reported.

It is the first big part of a broader three-year SR200bn ($53bn) stimulus planned by Riyadh as Crown Prince Mohammed bin Salman tries to balance pushing ahead with an ambitious reform programme with the need to implement tough austerity measures as the budget deficit widens. The decline in oil revenue over the past three years has pushed the economy into recession and forced the government to slash expenditure, raise debt and spend more than $250bn of its foreign reserves. The private sector, which is dependent on state spending, has borne the brunt of the economic shock, prompting businessmen to call for more government assistance.

The new 72 billion riyals stimulus package includes:

  • 21 billion riyals for housing;
  • 14 billion riyals for efficient home design and engineering;
  • 5 billion riyals for an export-import bank;
  • 5 billion riyals for an investment program; and
  • 2.6 billion riyals for broadband and fiber optics.

There is an obvious focus on investement-led growth, which we think might be misguided right now (see below). In the meantime, some analysts are characterising it as a desperate attempt to kick-start economic growth in 2018, which does sound about right. Indeed, the IMF is forecasting Saudi GDP growth of “close to zero” in 2017, with government spending declining from 38.6% to 34.3% of GDP. This from Bloomberg.

Crispin Hawes, a managing director at Teneo Intelligence, a political risk consulting firm in London, called the stimulus package “a short-term cost they have to pay to get where they want to go.” “The only way to generate a recovery of growth in 2018 is through fiscal stimulus,” Hawes said. “They can’t withstand multiple years of sub-1 percent growth.”

Other analysts are sceptical about how well the stimulus will integrate government’s goals with private sector capabilities. Furthermore, the recent crackdown on normal business practice corruption, with the detention of 200 members of the royal family, ministers and former ministers and businessmen has hardly inspired the sort of confidence needed for long-term investment, either domestic or overseas funded.

Next week is the budget which the FT expects to be “expansionary”. It will need to be with the introduction of a value added tax and reduced fuel subsidies slated for next year. The leadership unveiled another bribe this week in the form of a cash transfer programme to compensate low and middle-income families. In some ways, things haven’t changed much since 2011, except the House of Saud is more divided, the country is a lot poorer and Saudi’s foreign relations considerably more fragile.