New Saudi King To Focus Economic Policy On Jobs As Oil Sags

Saudi Arabia’s new king is expected to focus economic policy on creating jobs and multi-billion dollar infrastructure projects to prevent tumbling oil prices from causing social tensions or undermining business confidence.

King Salman, who took the throne in the early hours of Friday after the death of his brother King Abdullah, inherits an economy that faces its biggest challenge since the global financial crisis in 2009.

The world’s top oil exporter relies on hydrocarbons for 90 per cent of its state revenues, but oil’s slide is slashing that income. The government has projected a record $38.7 billion budget deficit for 2015 and if Brent crude stays around $50 a barrel, the shortfall will be much bigger.

The new king must juggle that fiscal picture with pressure to bring down the unemployment rate – which was 11.8 per cent last year, according to official data – as he manages the political transition in the months ahead.

Emad Mostaque, strategist at Ecstrat, an emerging markets consultancy, said Salman would face pressure to ensure public support with state sector wage increases and other populist steps.

“These may well include expensive measures such as free housing for young married couples and a potential consumer debt jubilee, where the government takes over payments,” he said.

Other economists and businessmen think Saudi Arabia, facing the risk of years of cheap oil ahead, no longer has the leeway to throw money at problems in the way it once did.

John Sfakianakis, regional director of asset manager Ashmore in Riyadh, said the country could not endlessly keep lifting expenditure in an environment of much lower oil income.

He noted that the 2015 state budget, announced last month, envisaged a nominal spending increase of 0.6 per cent from the 2014 budget plan – the smallest rise in over a decade, and a small cut in inflation-adjusted terms.

But he said heavy state spending would continue on job creation, education to achieve a competitive workforce, upgrading the healthcare system, and massive projects such as the $22.5 billion plan to build a metro rail system in Riyadh by 2019.

Many of these projects are central to the long-term challenges which Salman will face: curbing rampant growth in domestic oil consumption so that it doesn’t eat up supplies available for export, and diversifying the economy beyond energy so that Saudi Arabia can survive when its crude runs out decades from now.

“The leadership knows it has to address these issues to ensure the future of the country. There is already a consensus on this in the government,” Sfakianakis said.

REFORMS

A tantalising possibility is that King Salman could now accelerate some economic reforms that have been proceeding only slowly, and introduce new ones that have been on hold because of their complexity and political sensitivity.

For example, the Kingdom has been opening up to more competition in some sectors such as aviation, and moving towards making its legal system faster and more transparent in handling commercial cases. It will begin opening its stock market to direct foreign investment this year.

Authorities have so far largely held off on other reforms, such as cutting huge energy subsidies to reduce waste and ease the burden on state finances. They have been considering for years whether to tax undeveloped land, in order to force more land into the market and ease a housing shortage.

One possible social reform, allowing Saudi women to drive, could give a major boost to the economy by making it easier for women to work, encouraging car ownership and eliminating the need to hire hundreds of thousands of foreign chauffeurs.

Salman has the bureaucratic skills to push such reforms; as governor of Riyadh Province for over 40 years, he worked with technocrats and traditionalists to engineer the development of the capital from a desert town into a major city.

But as crown price, Salman already played a major role in running the economy over the past several years, so policy bears his imprint. Few economists expect him to abandon his gradual, consensual approach to reform.

“Stability and continued progress will likely be the theme,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Financial markets are likely to be pleased by the way in which the succession occurred. In the past, the Saudi stock market periodically fell because of rumours about Abdullah’s health; on Friday, Salman named his half-brother Muqrin as heir, forestalling any fears of political instability.

“The stock market is likely to take the smooth way in which the succession was handled as very positive,” Sfakianakis said.

Financial instruments used by foreign investors to hedge against economic risk in Saudi Arabia, forward dollar/riyal contracts and credit default swaps, moved little in the hours after Abdullah’s death.