Saudi hardship payments will boost economy, but could impact deficit

Bank of America Merrill Lynch said the payments almost completely cover cost of living increases

Saudi Arabia’s royal order to pay a hardship allowance to government workers could boost the economy but will also impact the kingdom’s budget deficit, according to Bank of America Merrill Lynch (BofAML).

Monarch King Salman ordered a monthly payment of SAR1,000 ($267) to state employees over the next year, alongside an SAR5,000 payment to military personnel in Yemen and a 10 per cent stipend increase for students on January 6.

The payments are designed to help lessen the effects on citizens of increases to fuel and electricity and a 5 per cent value added tax introduced at the start of the year.

Read: Saudi king orders new payments to offset rising living costs

In its weekly emerging markets report, BofAML said the payments represent a 10 per cent increase in earnings for Saudi nationals and would push non-oil GDP growth up 0.9 per cent to 2.5 per cent on a pro-forma basis.

The payments should almost completely cover the higher cover of living due to the fiscal reforms, the bank estimates, but will likely drive overspending of more than $20bn, or 3 per cent or GDP, in the state budget.

Last Sunday, minister of culture and information Awwad bin Saleh Alawwad said the payments would cost the government about SAR50bn ($13.3bn) this year or 1.9 per cent of GDP.

Read: Saudi handouts to cost about $13bn

BofAML MENA economist Jean-Michel Saliba said the bank calculated the real cost could be closer to $16.5bn, or 2.3 per cent of GDP, with the potential to rise to $18.7bn if the government decides to compensate the Public Pension Agency and the General Organization for Social Insurance for the higher disbursements.

The payments also expose the budget to volatility in oil prices as they push the fiscal breakeven price up by $5-$7 per barrel to $85-$90. However, BofAML said this could be offset if oil prices remain elevated at current levels in the mid-$60 range, meaning a deficit of 8.5 per cent.

Read: Oil reaches multi-year highs

More broadly, the bank indicated it was surprising the payments were not made through the kingdom’s household allowance programme, which made its second payment last week.

Read: Saudi makes second payment to household allowance scheme

“This could well undermine the effectiveness and credibility of the Household Allowance program, which was designed to compensate nationals on a means-tested basis,” it said.

While in the longer term the new payments could set a precedent of the government compensating nationals for fiscal reforms as prices are pushed higher.

This could also mean greater difficulty in reforming governments wages in the future, which stood at SAR440bn ($117.3bn) or 17.1 per cent of GDP last year above the budgeted SAR412bn as allowance cuts were reversed.