Saudi Arabia’s latest economic plan comes with a big risk: while it might help boost investment, it could also hit the government’s finances.
Crown Prince Mohammed bin Salman wants the kingdom’s biggest companies — including oil giant Saudi Aramco and chemical maker Sabic — to reduce their dividends, most of which are paid to the state, 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 jobs boom.
The de facto leader’s strategy amounts to a “sacrificing of current profits for future investments,” Karen Young, resident scholar at the American Enterprise Institute in Washington, said in an opinion piece. “There is a generational shift: a moment to build and create a post-oil era, but in the short-term, the government will be exhausting its resources.”
Here’s a look at the likely impact on the budget and the economy, which was hit hard last year by the coronavirus pandemic and crash in oil prices.
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.
He’s unconvinced the extra investment in the economy would lead to a substantial boost in the government’s tax take from other industries, at least in the short term.
Still, Aramco has said it can sustain its dividend, which was the world’s biggest last year at $75 billion. It’s been helped by Brent crude’s rise of almost 30% since December to $67 a barrel as more nations emerge from lockdowns. And last week the firm announced a deal that will see a U.S.-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.
Wages and Settlements:
Wages and pensions for state workers are expected to reach 491 billion riyals ($131 billion) this year, accounting for almost half of total spending of 990 billion riyals. 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.
Whether that happens is a crucial part of the 35-year-old Prince Mohammed’s initiative….
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