The general theme of the spending is aimed at improving living conditions, particularly for those on lower incomes. Some of this redress is to be made through direct financial subventions, while some is aimed at addressing pressing social issues, such as the shortage of affordable housing. Not all the publicly-revealed line items were costed, but Samba estimates suggest that the total package of measures amounts to some SR458 billion ($131 billion).
 

The biggest single element of spending is SR250 billion to fund the construction of 500,000 new housing units, over an unspecified time period. The lack of affordable housing remains a major social issue in the Kingdom, where the outstanding deficit is at least half a million units, and probably more. Overseeing this effort will be the newly-created Ministry of Housing, which will assume all duties and responsibilities of the General Housing Authority. The latter still sees a SR15 billion increase in its capital, suggesting that it will have a role to play in financing new developments.

To roll out this number of units in a reasonable time frame, the authorities will need to use private sector developers. These contractors could come from the Gulf, but for speed and cost effectiveness East Asian contractors (especially South Korean) seem likely to be utilized. In any event, it will take time to draw up plans and identify contractors, while the best way to free up land to build on has also to be addressed. Given this, the bank thinks only a small fraction of the SR250 billion housing allocation will be spent this year.

In terms of generating demand-side finance, the King's announcement appears to indicate that the Real Estate Development Fund (REDF) will have a key role to play. The REDF, which provides low-cost loans to Saudis for home purchases, sees its capital boosted by SR40 billion. It has also been instructed to speed up its loans approvals process; currently, waiting times run to many years, the Samba report said.
 

But despite the REDF's recapitalization, the depth of pent-up demand for housing and the scale of the government's plans suggest that private finance will need to play the major role. As such, there is increased speculation that the long-awaited mortgage law might be approved within the next few months. After months of deliberation, the law has now been approved by the advisory Shoura Council and now just needs Cabinet and then royal approval. The law has been in this position before, and there is certainly no guarantee of immediate passage, but the king's focus on housing suggests that further lengthy delays are unlikely.

Aside from housing, there is support for small businesses through a SR30 billion recapitalization of the Saudi Credit and Savings Bank, which provides interest-free loans to Saudi SMEs. Bank finance for SMEs is more readily available in Saudi Arabia than in most countries in the region, but there are still constraints, and the recapitalization of the SCSB is part recognition of that fact, as well as the key role that SMEs play in employment, Samba said in its report

The recapitalization of these various state-owned entities is likely to take place this year (there is no reason to delay) and will be recorded as spending by the central government. However, disbursements by these institutions will be made only gradually, and consequently the general government position might not change dramatically, at least this year.

The government has also earmarked an additional SR16 billion in spending on health facilities which, along with education, remains a priority area for social investment. Spending on health has been substantial, but public health facilities are still struggling to meet demand, and the government is keen to attract more private investment to the sector. As with most construction projects, lead times can be long-particularly when other projects are vying for raw materials-and we think that less than a quarter of this extra allocation will be disbursed this year.

Much of the rest of the spending pledges represent direct income support for Saudis. The largest single element of this is the additional two months' salary for all Saudi public sector employees which we estimate at SR32 billion. The government has also extended its 15 percent cost of living allowance payment for public sector employees. This is nominally large at SR37 billion, but is simply a roll-over of a measure that was introduced in 2008, and does not represent any "new" spending as such (we had already factored this into our previous spending projections).
 

One spending commitment that is new is unemployment benefit for all Saudi job seekers for one year. According to Samba this will cost the government just under SR11 billion a year. However, payments are not scheduled to start until November and therefore the full fiscal burden will not become apparent until 2012.

The other line items are comparatively minor in financial terms, but-with the exception of spending on 60,000 new Ministry of Interior recruits, which will take time to hire-should be disbursed this year. In total, the bank said SR196 billion or 43 percent of the total pledged will be spent in 2011, though this includes the SR37 billion inflation payment and transfers to state-owned bodies that may not be disbursed until later. We now forecast that central government spending will reach SR839 billion this year-a third higher than in 2010.
 

Is this affordable? In one sense the answer is "yes". Oil prices are set to average $95 a barrel this year, up from $78 a barrel in 2010, while Saudi Arabia's efforts to calm international markets should see its own output rise by almost 8 percent. Thus, while spending is set to increase by around a third, revenue is forecast to rise by about 20 percent. This will mean a decent surplus of some 3.9 percent of GDP, down from 6.7 percent last year.

Nevertheless, there are two important caveats. First, the balance sheet of the general government has clearly been expanded by the recapitalizations of the REDF, the GHA and the SCSB. The fact that they needed to be recapitalized in itself indicates that they are unlikely to be profit-making, and consequently there may be additional contingent liabilities for the central government in the future, though this is speculative since there are no published accounts for the general government position.

Second, although the central government fiscal position will likely be in surplus this year, the nonoil fiscal deficit is set to balloon. The nonoil fiscal position is a means of gauging a government's fiscal strength if oil revenue were stripped from the equation. In Saudi Arabia, where tax revenues are minimal, the position is always likely to be in sizeable deficit. However, at a projected 80 percent of nonoil GDP the scale of the nonoil deficit is striking. Moreover, it has been increasing steadily over the past ten years, indicating that the government's dependence on oil revenue has grown rather than diminished. This dependence could become more important if "one off" spending appropriations become permanently embedded in the government's current spending commitments.
 
GDP growth

What are the implications for growth and prices of this spending surge? Potentially the most significant medium term boost will come from the housing sector. The size of the impulse from housing will depend to a large extent on whether the mortgage market takes off. But even assuming that it does not, and that the government relies on public finance to fund both demand and supply, then a strong fillip to growth is still in prospect. Samba expects that foreign firms will benefit alongside Saudi contractors from the sizeable construction efforts, as of course will local real estate developers. Producers of industrial materials focused on the construction sector will also do well, while increased homeownership should also provide a boost to spending on furniture etc, though this is only likely to be felt in the next few years.

A more immediate boost to growth will come from the direct government subventions and job creation schemes. The two months' additional salary for government employees - which is likely to be mirrored in much of the private sector - will feed partly into increased consumption with direct benefits for local nontradeable services. However, since Saudi Arabia imports the vast majority of its consumer goods, a good deal of this additional consumption will leak out into import demand, and will not contribute to GDP growth.

It is not all good news for the private sector. Additional salary costs will squeeze profit margins, as will more expensive raw materials, which have been forced up by higher oil prices (this was one reason why business sentiment deteriorated somewhat in March, according to HSBC). Foreign inflows might also slow - If only temporarily - as foreign investors take stock of the changing regional environment. This will mainly be felt in the industrial sector, where inflows of FDI predominate.
 

The oil sector is likely to outperform the nonoil sector in real terms this year. Saudi Arabia has moved to calm jitters in international oil markets by raising crude output to around 8.9 million bpd. The Samba report said this level of output will be maintained for most of the rest of the year, and with gas output and development projects also gaining momentum, real hydrocarbons GDP should rise by 6.5 percent in real terms. Taken together, this should push overall real GDP up by 5.7 percent this year, the strongest rate since 2003 and significantly above the ten-year average of 3.3 percent.
 

The impact on inflation is perhaps more difficult to define, since there are a number of countervailing forces. Domestic food prices have not picked up as much as we were expecting and with the government likely to maintain or increase subsidies, food price inflation may well continue to soften, though much will depend on global weather "events". In the medium term one would expect rental inflation to ease as more housing units are built. However, in the short term the construction of these housing units will require additional expatriate labor - labor that itself will need to be housed, while the more general increase in nominal incomes could also push rents higher. Similarly, the passage of the mortgage law, while welcome, might actually drive prices higher in the short term, as more money chases an essentially unchanged stock of housing. Most consumer goods are imported and their prices should, in theory, be largely immune from the impact of higher domestic demand.