Tuesday, April 05, 2011

Saudi Arabia’s Second Public Spending Package Does More than Diffuse Political Pressure

FT: Saudi King Disappoints Reformists
Saudi News Today: Arab Stocks Volatile Ahead of First Quarter Results

On March 16th, Saudi Arabia’s King Abdullah announced a substantial public spending package of approximately $130 billion. The public spending announcement came just weeks after the first $36 billion dollar public spending package was announced in late February 2011. With fears of instability growing in the region, and with an eye on the unraveling unrest in neighboring Bahrain, King Abdulla announced the second public spending package. The key initiative of the March package is building five hundred thousand additional homes with a total of $66.7 billion dollars. Other public spending programs under the second package include decreasing education costs, providing an additional two months stipend to students, creating 60,000 additional interior ministry jobs, and increasing minimum wage to $800 dollars a month, among other initiatives.

Commentators attribute the second, much more substantial public spending package to fears by the royal family of unrest spreading to Saudi Arabia. With a large unemployed youth population—approximately 25% of all Saudi youth is unemployed—the royal family has been under pressure to invest profits generated by high oil prices towards public projects. For an extended discussion on youth unemployment in the Middle East and North Africa region see Youth Unemployment Highest in the World for MENA. Saudi Arabia is an absolutist monarchy without a parliament, and much of the profits from the oil-rich country remain with the royal family. The recent capital infusion has successfully calmed political tension, although it hasn’t completely diffused the situation. Outside of mitigating political risks, the effect of public spending has been to increase the value of the regions’ stock markets.

While King Abdulla’s immediate goal appears to be calming the population in an effort to prevent protests like that in Yemen, Oman, and Bahrain, the public spending promise has had a positive effect on many Middle East stock markets. The large public spending package means more jobs, political stability, and that more capital will work its way through the money multiplier (meaning that that capital will multiply as it works its way through financial markets). The prospect of such stability and fiscal benefits often triggers the stock market to accumulate value given the likelihood of positive market developments. While other factors are also at play, the stock markets in Egypt, Kuwait, and Abu Dhabi have fared well in the last two weeks.

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