DUBAI: A lavish payout to public employees ordered by Saudi Arabia’s new King Salman will help to sustain the kingdom’s consumer boom and reassure financial markets that the government is not slashing expenditure in the face of low oil prices.

On Thursday, Salman ordered the immediate payment of two months of bonus salary to all state employees and pension to retired government workers, in a string of decrees which also reorganised the economic policy-making apparatus.

The announcement did not give a monetary figure, but Saudi Arabia’s 860 billion riyal ($229bn) state budget plan for 2015 said salaries, wages and allowances would comprise 50 per cent of total spending.

That implies the new payout, announced a week after Salman succeeded his brother Abdullah as king, will be worth up to around 70bn riyals — about 8pc of the original budget, or 2.5pc of last year’s gross domestic product.

Other benefits announced by Salman will increase spending further. He ordered payments to students, grants to professional associations and sports and literary clubs around the country, and 20bn riyals in spending to improve electricity and water services, though it was not clear if the utility spending was part of a previously announced plan.

A Reuters poll of economists earlier in January found them predicting GDP growth of 3.2pc this year, down from 3.6pc in 2014, on the grounds that the plunge in oil prices would cause the kingdom to slow some energy and petrochemical investments and make the government more cautious about spending in general.

Salman’s announcement on Thursday suggested the government remained willing to spend heavily despite the hit to its oil revenues from low prices, and that GDP growth this year might therefore be higher than originally expected.

“I believe it will be growth-supportive — especially on the consumption side,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Saudi retail industry shares such as Jarir Marketing, United Electronics and Fawaz Alhokair , plays on the kingdom’s fast-growing private consumption, may benefit.

Salman’s announcement appeared to take a step back from a pledge in the 2015 budget, which was announced in December when he was already overseeing economic policy, to “rationalise” spending on public salaries.

But it is in a long Saudi tradition of welfare handouts at times of political transition or tension. The 2015 budget plan projected a deficit of 145bn riyals; the actual deficit now looks likely to be much larger, but with government reserves at the central bank totalling some 900bn riyals, Riyadh can easily cover such shortfalls for now.

Salman may intend to recoup some of the costs of his handout through economic and bureaucratic reforms.

Thursday’s decrees kept the identity of key economic ministers unchanged, suggesting to many observers that major, politically sensitive reforms — such as cutting energy subsidies, or large tax shifts — are not on the cards for now.

“With the oil, economic and finance portfolios remaining steady, I do not expect to see wider change in policy,” said Malik.

Published in Dawn, February 1st, 2015

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