Cost of living allowance to Saudi citizens to cost $20 bln: BofAML

The royal order to pay extended handouts to Saudi Arabia’s government workers to match the rising cost of living will support a recovery in economic activity but would lead to the estimated overspending of $20 billion this year, according to a new report by Bank of America Merrill Lynch (BofAML).

Earlier this month, King Salman announced that civil servants would get an extra SAR 1,000 a month to ease the burden of austerity measures. Following the order, several companies, including Saudi Aramco, SABIC, Bahri, Al Rajhi Bank, and National Commercial Bank, have announced a monthly payout.

In the report, BofAML estimated that the monthly payments would push 2018 real non-oil GDP growth up by another 0.9 percentage points to 2.5 percent on a pro-forma basis.

However, while the government's estimate for the cost of the package is about SAR 50 billion (1.9 percent of GDP), the bank’s calculations suggest the budgetary impact of the Royal Order could be close to SAR 61.8 billion (2.3 percent of GDP).

“The cost to the budget could even climb higher to SAR 70 billion (2.6 percent of GDP) if the central government decides to compensate PPA (Public Pension Agency) and GOSI (General Organization for Social Insurance) for the higher disbursements,” the report said.

Moreover, the new order will push the fiscal breakeven oil price up by an estimated $5 to $7 a barrel to $85 to $90 per barrel, BofAML said, warning that while high oil prices would soften the fiscal impact on the budget, they could weaken reforms.

According to the report, oil prices are expected to remain in the mid-$60 per barrel keeping the 2018 budget flat to the 2017 levels in nominal terms (SAR230 billion), settling at an 8.5 percent level of GDP.

While the monthly payments will secure popular support for 2018 fiscal reform measures in the near term, BofAML said it believed the payments would not be phased out in a year.

The handouts “set a precedent and their re-introduction or continuation would be anticipated by Saudi nationals if further fiscal reform efforts push inflation higher,” the bank added.