$20billion price tag for growth in Saudi Arabiaâ€“BofAML
Royal payments and security spending should drive overspending of c$20 billion (three per cent of GDP) in 2018, while fiscal impulse could push real non-oil GDP growth towards c2.5 per cent, according to BofAML MENA Economist Jean-Michel Saliba.
Fiscal breakeven oil price goes up by c$5-7/bbl to $85-90/bbl. High oil prices soften the fiscal blow but possible permanent spending increases weaken reforms.
span style="font-size: small;">Focus shifts back to growth…
The introduction of discretionary and potentially sticky payments in the January 2018 Royal Order is likely to support a recovery in economic activity. While the 2018 budget only contained a limited fiscal impulse and mega-projects have little immediate visibility, the handouts are likely to support more decisively economic activity.
The royal payments would push 2018 real non-oil GDP growth up by a further c0.9ppt towards c2.5 per cent on a pro-forma basis. The Cost of Living Allowances represent a large increase of c10 per cent for earnings of Saudi nationals, boosting real incomes. When it comes to employed nationals, the Cost of Living Allowances alone nearly fully cover the higher cost of living due to fiscal reforms. BofAML estimated here a monthly increase of SAR1,000-SAR1,2000 in the sensible consumption basket in gasoline, electricity and other goods.
span style="font-size: small;">…at a cost
The Royal Order payments are likely to drive overspending in excess of $20 billion (c3 per cent of GDP) with respect to the 2018 budgeted amount. This includes BofAML’s assumption of flattish military/security spending versus 2017 levels and its own calculations for the budgetary impact of the Royal Order, and the estimated cost breakdown of the Royal Order alongside the Bank’s assumptions in the table below.
The government's estimate for the cost of the package is cSAR50 billion ($13.3 billion; 1.9 per cent of GDP), as reported by the local press. However, calculations suggest the budgetary impact of the Royal Order could be close to SAR61.8 billion ($16.5 billion; 2.3 per cent of GDP). The cost to the budget could even climb higher to SAR70 billion ($18.7 billion; 2.6 per cent of GDP) if the central government decides to compensate PPA (Public Pension Agency) and GOSI (General Organisation for Social Insurance) for the higher disbursements. As things stand, the additional disbursements could strain PPA's overall balance (which recorded a SAR7.3 billion or 0.3 per cent of GDP surplus in 2016) but not GOSI's overall balance (SAR29 billion; 1.2 per cent of GDP surplus in 2016).
span style="font-size: small;">High oil prices soften the fiscal blow for now
The loosening in fiscal discipline exposes the budget to the volatility in oil prices. The Royal Order pushes the 2018 fiscal breakeven oil price up by c$5-7/bbl towards $85-90/bbl. However, oil prices remaining elevated in the mid-$60/bbl could result in the 2018 budget staying flat to the 2017 levels in nominal terms (SAR230 billion) and settle at c8.5 per cent of GDP. This assumes no off-budgetary spending in 2017, as the budget statement appears to indicate arrears were repaid within the budget envelope. Similarly, it is unclear if the SAR40 billion capital increase to the Real Estate Development Fund (REDF) and the Industrial Fund in 2017 has been carried above or below the line.
span style="font-size: small;">A mixed impact on the fiscal reform programme
Near term, the Royal Order payments may secure popular support for the 2018 fiscal reform measures. However, it is surprising that the Royal Order chose to compensate Saudi nationals through discretionary spending rather than through hikes in the Household Allowance programme monthly transfer. This could well undermine the effectiveness and credibility of the Household Allowance programme, which was designed to compensate nationals on a means-tested basis. Nearly all announced payments risk having a permanent impact on the budget. They may not be phased out in a year, especially as they set a precedent and their re-introduction or continuation would be anticipated by Saudi nationals if further fiscal reform efforts push inflation higher.
span style="font-size: small;">Wage bill reform becomes harder
The handouts will likely increase the difficulty of reforming the wage bill if it came to be needed. Authorities reported a 2017 wage bill of SAR440 billion ($117.3 billion; 17.1 per cent of GDP), ahead of the SAR412 billion budgeted amount. This SAR28 billion increase is in excess of the SAR18 billion discretionary wage spending implemented last year (military personnel one-off bonus cost of SAR4 billion, reversal of public sector allowance cuts cost of SAR7 billion, and retroactive reinstatement of public sector allowances cost of SAR7 billion). Labour force data may suggest that military/security personnel salaries, allowances and pension contributions could form c60 per cent of the total compensation of employees reported by the central government, adding to public sector wage bill stickiness.