King Abdullah’s Big Spending Spree

Shortly after the Arab uprisings began, King Abdullah announced a robust spending plan worth $130 billion. There was no mystery about the program’s intention. Whereas Tunisia, Egypt, Libya, and countries saw unrest and ultimately the ousting of rulers, Saudi Arabia tried to get out ahead of any grievances that might challenge the monarchy. Government spending jumped 23 percent in 2011 as a result. It could rise another 11 percent this year.

The $130 billion package included: tens of thousands of new jobs at the Interior Ministry; a new minimum wage for public sector employees; bonuses for civil servants; assistance for the unemployed; funding for religious organizations; 500,000 new affordable housing units; and other programs that would simultaneously address public needs and guard against popular agitation. Most importantly, King Abdullah announced the program before any unrest threatened the status quo.

Three other huge commitments were made last year by King Abdullah. Along with members of the Gulf Cooperation Council (GCC), Riyadh agreed to give $20 billion in assistance to Oman and Bahrain over the next decade. Both countries saw unrest in 2011. While Bahrain’s crisis became existential for the ruling family, Sultan Qaboos of Oman has so far remained firmly in place. As in Saudi Arabia, the money will be spent on programs that improve conditions for average citizens, thus insulating rulers from criticism and renewed calls for reform. (Clearly, it’s too late Bahrain.) Beyond the GCC, Saudi Arabia promised $4 billion in bilateral aid to post-revolutionary Egypt and $1.4 billion to the monarchy in Jordan. And, to cap off 2011, Saudi Arabia finalized a $60 billion arms deal with the United States last December.

Saudi leaders plan to spend hundreds of billions of dollars in order to make new friends, protect old ones, and expand its military in case of conflict with Iran. But can they afford it? The short answer is “Yes.” The Kingdom can comfortably spend this kind of money without jeopardizing its long-term financial integrity or the regime’s hold on power. For a variety of reasons, we should not assume that last year’s spending spree was actually a self-defeating or desperate act.

First we should consider the duration of these expenditures. When it comes to Saudi Arabia’s domestic spending plan, some of the costliest components—like affordable housing for half a million families—will take years to be realized, as massive construction projects must be undertaken. By spreading out the investment, the burden is less painful for the state treasury. Bonuses, on the other hand, were a one-time deal, while a fixed minimum wage and new jobs will be on the books for years to come. Much of the spending is still years away, however.

Remember too that Saudi Arabia will not provide all of the funds for the GCC “bailout.” Even then, $20 billion in total aid will be delivered over a decade’s time. Bilateral Saudi aid to countries like Egypt and Jordan doesn’t appear front-loaded either. As I wrote for the Middle East Policy Council this month, “Thus far Riyadh has deposited $1 billion into Egypt’s Central Bank. The Islamic Development Bank, based in Saudi Arabia, has also promised another $1 billion in assistance. $4 billion was pledged last year but has yet to be provided in full.”

Saudi development aid is broken down into smaller projects that must be agreed upon by the recipient and the donor. In Egypt for instance, these projects include water supplies, irrigation systems, and seed storage facilities. Since they are subject to negotiation, they are also subject to delay. Any delay will grant Saudi Arabia more of a cushion when it comes to spending. The same goes for the U.S.-Saudi arms deal. It may be worth $60 billion—but that price tag covers the entire life-cycle of the jets purchased, including upgrades and maintenance. We’re talking about a 10-15 year deal. $60 billion doesn’t seem that impressive when spread out over a decade.

Conventional wisdom still holds that the Saudis want the highest price per barrel so that they can pay off all these big commitments. But even this is an oversimplification. What the Saudis fear most is a sustained period of high prices that destroys demand and encourages alternative energy development. As sellers of an essential commodity, however, they also are pained when prices fall too low. This is why the Saudi oil minister consistently says $100 per barrel is the magic number for both buyers and sellers.

“Break-even” oil prices are the most cited estimates for those who want to gauge whether or not an oil producer is in trouble. Many assume that if the price of oil falls too low that Saudi Arabia will face greater unrest at home. At the end of June, Saudi Arabia’s “break-even” price was $70 per barrel, according to Fitch Ratings. The price of oil stands at $104 today. Contrary to some claims, Saudi Arabia does not need exceptionally high prices to balance the nation’s checkbook.

Central bank data shows the country’s net foreign assets amount to nearly $600 billion. Just last year, the Kingdom posted a budget surplus of $81 billion. This year’s surplus could be even larger, since Saudi production has risen to historic levels, and prices jumped in the first quarter of this year due to geopolitical anxiety.

In Saudi Arabia’s case, we have to ask: do these “break-even” estimates account for higher Saudi volumes? Last year, the Kingdom pumped between 8.5 and 9 million b/d on average. This year they’ve pumped closer to 10 million b/d—and, for the first three months of the year, oil prices were inflated by the risk of war with Iran. In March, they touched $128. Prices have eased since then; for a time, they dipped below Riyadh’s preferred threshold of $100. But they’re back up around $105 and could stay there.

Even if prices fell again the Saudis might be able to make up for it with volume. It’s worth noting that sanctions targeting Iran are now in full effect. Saudi Arabia will pump at high rates in order to address the markets needs as a result. I should also point out that the Kingdom ran deficits before—in the 1980s and 1990s—back when prices bottomed out and you could buy a barrel of oil for $20 or less. The monarchy still managed to stay on top, albeit at a different time when democrats and revolutionaries weren’t driving regional politics.

I don’t think it’s a stretch to say those who frame Saudi spending as a desperate act also want revolution to break out in the Kingdom. Saudi Arabia’s continued stability in a time of unrest offends many who think the system is morally and spiritually bankrupt. Financially, however, Saudi Arabia appears quite durable, even though the monarchy has made multi-billion dollar commitments both at home and abroad.

The rentier state endures.

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