King's initiative will cost country's coffers around SR135 bn
Saudi Arabia could be forced to withdraw nearly SR98 billion ($26 billion) from its swelling overseas assets to fund a major social aid programme announced by King Abdullah bin Abdul Aziz this week, a key bank in the Gulf country said on Tuesday.
The initiative is expected to cost the world's dominant oil power nearly SR135 billion ($36 billion) as it covers allowances to nearly 450,000 unemployed Saudis as well as many other benefits.
The Kingdom's foreign assets, controlled by the Saudi Arabian Monetary Agency (SAMA), central bank, has sharply risen over the past year because of strong oil prices, swelling by nearly SR16.77 billion ($4.47 billion) in January alone.
The increase came after crude prices soared to one of their highest averages of $89.58 for the month. SAMA's foreign assets stood at SR1.668 trillion ($444.8 billion) at the end of January, 8.7 per cent more than a year earlier and the largest holding for SAMA on record.
The holdings in January surpassed SAMA's previous record in November 2008, after which the country was forced to draw down its reserves to finance its budget during an oil price slump in 2009, when it suffered from a large deficit.
The state's investments in foreign securities - which comprise long-term, low-risk investments such as bonds - grew 10.9 per cent in January while deposits with banks abroad slipped 0.4 per cent, the slowest pace of growth since February 2010.
"A word of caution on foreign assets: while oil prices promise to remain elevated due to regional turbulence, the government has also embarked on a SR135 billion citizen support package that aims to support nationals, including plans to provide jobless Saudis with an unemployment benefit for the first time," Banque Saudi Fransi (BSF) said in a study sent to Emirates 24/7.
He cited recent comments by the Saudi finance minister who said this extra spending to cover the plan would come from reserves.
"It is likely SAMA will draw down deposits with banks abroad in the coming months, which may reduce the central bank's overall foreign asset holdings or at least slow down growth," BSF chief economist John Sfakianakis said in the six-page study.
"We estimate about SR98 billion could be drawn down to support the programme, which pledged to expand public sector employment and made permanent a 15 per cent cost of living increase introduced in the last three years. Our preliminary calculations show an additional cost of just SR45 million for the wage bill... costs related to the 130,000 permanent public sector employees were already accounted for in the budget."
Sfakianakis said he believed that in the longer term, pensions will exert greater pressure on the government in the coming decades. "Expanding the public work force is a short-term solution that will fast long-term challenges. However, Saudi Arabia has raised oil output to as much as nine million barrels per day, compared with about 8.5 mbpd in January, in a bid to quell price pressures resulting from a decline in output from Libya."
Sfakianakis said that as regional political turmoil continues to unfold, BSF is reviewing its oil market forecasts, which initially foresaw Saudi crude oil production of 8.48 mbpd in 2011 and an average WTI oil price of $82.50 a barrel.
"The extra production and higher prices - $89.8 average price for U.S. oil and $103.7 for Brent crude in February - will nonetheless offset a good deal of the burden of any additional budgetary spending this year by the government."
© Emirates 24|7 2011
