Complex Made Simple

Saudi on a spending spree to boost internal economy

Saudi Arabia is a master at manipulating its economic chess pieces to not only increase capital expenditures but also attract foreign direct investments

Aramco, the world’s largest oil company, transferred $110 billion to the government in 2020 Wages and pensions for state workers are expected to reach $131 bn this year The Red Sea Development Co.’s $3.7 bn loan is set to close with a small group of local banks

Saudi Arabia is a master at manipulating its economic chess pieces to not only increase capital expenditures but also attracting foreign direct investments for its major tourism projects. 

Capital expenditures

Saudi Crown Prince Mohammed bin Salman wants the kingdom’s biggest companies to reduce their dividends and spend the money locally.

The idea is that their expenditure on new infrastructure and technology will be big enough to accelerate the country’s growth and cause a boom in the job market.

Aramco, the world’s largest oil company, transferred $110 billion to the government in 2020 through shareholder payouts, royalties, and income tax, a 30% drop from the previous year.

Lower dividends from the firm, 98% state-owned, would “weigh on the government’s revenues,” according to James Swanston of Capital Economics.

Aramco has said it can sustain its $75 billion dividend payout following its partial 2019 IPO, the world’s biggest. It’s been helped by Brent crude’s rise of almost 30% from December to the mid $60s today, and recently the firm announced a deal that will see a US-led consortium invest $12.4 billion in its pipelines.

A stronger balance sheet and higher cash flow may enable it both to keep the dividend and invest more locally.

Read: Healthy competition for business supremacy between Saudi and the UAE heating up

Read: Aramco attracts FDI, raising $12.4 billion selling oil pipeline stakes- IPO dreams evaporate

Wages and pensions in the Saudi budget

Wages and pensions for state workers are expected to reach $131 bn this year, accounting for almost half of total spending of $267 bn. Yet if oil prices stay above $60, Saudi Arabia might be able to cover salaries from crude sales alone, according to Ziad Daoud, chief emerging markets economist for Bloomberg Economics.

The Public Investment Fund (Saudi sovereign fund, PIF) is already positioning itself to drive the local economy. Prince Mohammed has pledged it will spend at least $40 billion a year at home through 2025, creating new cities, resorts, and 1.8 million jobs.

Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG-Hermes Holding said that capital expenditure “is predominantly shifting to PIF and sister state institutions.”

In December, the government projected revenue of $229 bn for 2021 and a fiscal deficit of 4.9% of GDP.

Minimum wage raise in Saudi

The Ministry of Human Resources and Social Development said that the decision to raise the minimum wage calculation for Saudis from $800 to $1,066 applies to all existing and new workers in the Saudi labor market.

The employee, earning less than $1,080, will be accounted as “half worker” in Nitaqat, the country Saudization law, Makkah newspaper quoted the ministry’s spokesperson, Nasser Al-Hazani, as saying.

He also added that this will be applied to the existing private-sector employees as well as the new entrants.

The groups benefiting from the decision are all the private-sector employees with wages subject to social insurance and salaries less than $1080, and not within specific groups, the official said.

Green loan to Saudi Red Sea tourism 

Saudi Arabia is preparing to clinch the first significant funding package for a key part of Saudi Crown Prince Mohammed bin Salman’s program to diversify the kingdom’s economy.

The Red Sea Development Co.’s $3.7 bn loan is set to close with a small group of local banks including Saudi National Bank, Banque Saudi Fransi, Riyad Bank, and Saudi British Bank.

The proceeds will be used to finance environmentally sustainable investment and will have a tenor of 15 years and an interest rate of about 1% above the Saudi interbank offered rate.

The Red Sea Development company first started approaching banks for the loan in mid-2019.

Construction of a new international airport for the area has begun, and the first phase of the project is due to be completed with the opening of four hotels at the end of 2022 and 12 more the following year, Chief Executive Officer John Pagano said in an interview in November.

FDI to Saudi

Foreign investments in the Saudi economy registered record levels by the end of 2020. Monitoring by Okaz newspaper on the basis of government figures showed that the investments hit $567 bn, marking the highest figure in the Kingdom’s history.

This was with an increase of 9.45% in only one year when its value at the end of 2019 was about $495 bn.

Within two years, foreign investments jumped by 31.75%, as the value of these investments by the end of 2018 was approximately $410 bn, and within two years investments worth $130.5 bn entered the Kingdom. The rise in investments follows the Ministry of Investment’s decision to raise the number of licenses granted to foreign investors.

 The licenses granted by the ministry in Q4 2020 to foreign investors reached 466 during Q4, registering the highest quarterly rise. It accounted for a 52% rise compared to Q3, and a 60% increase compared to the same period in 2019. Meanwhile, last December witnessed the granting of 189 investment licenses.