Sunday 11, February 2018 by Jessica Combes

Saudi consumer respite buys time for reforms


Bank of America Merrill Lynch (BofAML) has released its Global Emerging Markets Weekly report, with a section on Saudi Arabia by their MENA Economist Jean-Michel Saliba.

The combination of royal grants and Household Allowance disbursements more than fully shelter Saudi households from the costs of fiscal reform costs, which should allow real private consumption growth to hover around 2017 levels. Further out, Saudisation efforts and targeted stimulus should support consumption. This is especially as the bulk of reforms directly impacting Saudi households have already been carried out.

The introduction of the Household Allowance in December 2017 partially shelters Saudi nationals from the cost of fiscal reforms. Eligible households number three million, covering 10.6 million persons in total (c52 per cent of the Saudi population). It is estimated that almost 67 per cent of eligible households (two million) receive full coverage of cSAR900/month. The smallest partial coverage payment is SAR300/month. The Household Allowance nevertheless is less generous than the initial guidance in the Fiscal Balance programme, which proposed payments of up to SAR1,200/month. The SAR32 billion allocated in the 2018 budget to the programme, versus current annualised costs of SAR25 billion, may provide flexibility.

The Cost of Living Allowances represent a large increase of c10 per cent for earnings of Saudi nationals, boosting real incomes. When it comes to employed nationals, the Cost of Living Allowances alone nearly fully cover the higher cost of living due to fiscal reforms. See here for the breakdown of the January 2018 Royal Order.

It is likely total household income will be on average only modestly affected by fiscal reforms this year, with average earnings declining by SAR119/month, c1.0 per cent of total. The impact is however differentiated, depending on Saudi- and non-Saudi households. Saudi households will probably earn on average SAR239/month more following the government disbursements. This represents a modest 1.5 per cent increase in average household income, and varies between -0.9 per cent to 3.1 per cent, depending on consumption levels.

Expatriate households will, however, bear the full cost of reforms. Although reform costs differ depending on occupation, they represent on average c20 per cent of wages. This is likely to lead to lower outward remittances. As Saudi households represent c75 per cent of total consumption, the impact on total consumption is likely to be much more muted. In the hypothetical scenario where all white-collar and blue-collar expatriate households face the full cost of reforms, average Saudi and non-Saudi earnings would decline by 3.3 per cent.

Sharp hikes to domestic administered prices for gasoline and electricity suggest further increases are unlikely in the short-term. Electricity prices for residential users, which form the Bulk of domestic consumption, are already approaching international prices. The average tariff may now be cSAR22/kwh, versus our estimated benchmark of SAR26/kwh. The latter nevertheless reflects cost of production, which may increase as and if domestic feedstock costs rise higher than projected. Premium gasoline prices are now also, on average, around international prices (c$10/bbl below benchmark).

Authorities are likely to support consumption through a number of measures: (1) implementation of a SAR200bn stimulus package, which will support SMEs and the housing sector; (2) adjustment in coming years to the Household Allowance programme (which may be structured to permanently absorb at least part of the cost of the Royal Order of January 2018 from 2019 onwards); (3) subsidised lending from specialised Credit Institutions (SCIs); and (4) Saudisation.

Successful Saudisation should prove supportive for consumption trends once the dust settles. It will nevertheless cause higher costs and impact business margins for corporates. The eventual replacement of lower-level expatriate labour by higher-paid Saudi labour supports consumption.

This is particularly so given the higher propensity to save and remit of lower-level expatriate labour, which is foregone domestic consumption. Saudisation has to be carried out carefully by authorities, as it could prolong labour scarcity in some sectors given the skills mismatch and nationals’ reluctance or reservation wages. Saudi Arabia is the third largest outward source of remittances in the world with average annual remittances of c5 per cent of GDP over 2011-2016 ($35 billion as of 3Q17).

The introduction of the balanced Nitaqat Saudisation scheme in mid-December could require hiring of c250,000 Saudis to maintain unchanged compliance levels, supporting consumption but weighing on corporate profits.

Authorities announced recently a decree limiting 12 retail jobs to Saudi nationals only as of September 2018. The retail areas are: watches, eye-wear, medical equipment and devices, electrical and electronic appliances, auto parts, building materials, carpets, cars and motorcycles, home and office furniture, children's clothing and men’s accessories, home kitchenware, confectioneries.

There is no statistical breakdown for expatriate employment on these sectors. There are however 304, 865 expatriates working in sales, out of a total of 2.055 million expatriates working in trade. The latter is quite broad, as it encompasses wholesale/retail trade and various functions within these occupations. This may suggest that there are tens of thousands of expatriate jobs that stand to be nationalised by September 2018.

The renewed labour market measures from the authorities are not expected to cause major expatriate departures. So far, there is no noticeable decline in expatriate employment and the expatriate labour force stagnated in 2017. Outward remittances were flattish in 2016 versus the previous year, but down 7.5 per cent over 3Q17. Despite the introduction of expatriate dependent fees and expatriate levies, expatriates will likely still be better off financially in Saudi Arabia than in their home countries. For corporates, there is still not enough of an incentive to switch to employing nationals at the low-skills level end of the spectrum.


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