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Analysis: No sign of oil policy reversal from Saudi Arabia after royal decrees

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Analysis: No sign of oil policy reversal from Saudi Arabia after royal decrees

Dubai — * Deputy oil minister promoted to cabinet post
* Moves highlight pressures of Saudi social contract
* Support of OPEC output cut extension seen likely

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Saudi King Salman's surprise decrees over the weekend that reinstated allowances and bonuses for public sector employees and military personnel is not a sign that the much heralded Vision 2030 economic reforms are being put aside, according to analysts and Saudi observers.

But nor is the policy reversal evidence of any return to the kind of government largesse that some Saudis had become used to.

Rather, the changes amounted to a recognition of a need to correct a year of austerity measures that hit too hard, as the kingdom struggled to adapt to lower oil prices.

The king on Saturday also appointed several government officials seen as close to Vision 2030 champion and Salman's son, Deputy Crown Prince Mohammed bin Salman, which would appear to cement the ambitious economic reform plan.

"Vision 2030 might be detoured from time to time but it represents Plans A, B and C for the government," said Matthew Reed, vice president at Washington-based Middle East consultancy Foreign Reports.

"Most Saudis recognize the system needs fixing, that there is fat to cut. But last year, when state finances looked grim, Riyadh cut to the bone when it suspended benefits and bonuses. It was probably too deep," he added.

Analysts said the decrees make it likely Saudi Arabia will support an extension of the OPEC/non-OPEC production cuts past their June expiry, given that the kingdom needs to continue supporting oil prices to sponsor the employee bonuses.

OPEC along with 13 non-OPEC countries that agreed in December to cut a combined 1.8 million b/d will meet in Vienna on May 25 to discuss the deal.

Oil prices are up some 11.5% since it was signed.

The latest data from the General Authority for Statistics showed Saudi oil export revenues were up 75% year-on-year in February to Riyals 53.16 billion. That was up 21% since September when the austerity measures were taken.


"The decision to reverse the civil service salary and benefit cuts ... will likely have the most significant implications for oil," said Helima Croft, an analyst with RBC Capital Markets, adding she expects Saudi Arabia to "anchor the extension" of the OPEC/non-OPEC deal.

"The reversal shows the limits to austerity and, more importantly, increases the need for higher oil prices," she said.

The government shake-up included the promotion of the deputy crown prince's elder half-brother, Prince Abdulaziz bin Salman the longstanding deputy oil minister, to the position of state minister for energy affairs.

Prince Abdulaziz had been deputy oil minister since 1995, serving under Ali al-Naimi and current minister Khalid al-Falih.

His new remit as a state minister and relationship to energy, industry and mineral resources minister Falih remains unclear, although a source familiar with Saudi thinking said there was "no hint of a policy change coming from this move".

"He is equal in rank to Falih now, as a cabinet minister, whereas before he was vice minister," said the source, who spoke on condition of anonymity. "The two have a good working relationship".

Falih, for his part, said the king's new appointments aimed to strengthen the country's leadership with "young blood".

The royal decrees would "inject new energy in the arteries of the country," Falih said, as Saudi Arabia presses ahead with the Vision 2030 economic plan.

A year ago, the 31-year-old deputy crown prince, known as MBS, announced Vision 2030, which he said would confirm the kingdom as "the heart of the Arab and Islamic worlds, the investment power house, and the hub connecting three continents".

The plan seeks to delink the kingdom's economy from oil prices and open large swaths of it up to private investment through a raft of significant structural reforms that will be largely financed by a sale of up to 5% of state-owned oil company Saudi Aramco through an IPO.

But, stung by stubbornly low oil prices from a global oversupply caused by the surge of US shale production as well as OPEC's Saudi-led pump-at-will market share policy, Riyadh last September slashed subsidies on a range of goods and services, as MBS cited the need to help balance the kingdom's books and wean the country off of its oil revenue dependence.


The move raised the ire of many citizens, with some calling for protests.

Saturday's decrees, which the government said were prompted by increased crude oil export revenues and a decline in the kingdom's budget deficit, reinstated state employee bonuses, with the first payments at the end of May.

These include an extra two months' pay to troops stationed on the border with Yemen, where Saudi Arabia has been fighting a costly war since 2015.

The announcement clearly showed the kingdom's need for the cushion of the welfare state to ease the impact of domestic fuel and electricity prices, as well as taxes, said Fareed Mohamedi, chief economist of energy consultancy Rapidan Group.

Last year, Saudi "social media was alive with fear and criticism of the austerity policy of Mohammed bin Salman," Mohamedi said.

While bonuses may have been reinstated, it is unlikely the government will go back on the subsidy cuts. In fact, most Saudis are waiting for further domestic fuel and electricity price rises in July.

Increases of up to 40% had been widely expected to be included in the kingdom's 2017 budget late last year, but did not materialize.

Instead, the government announced a few details of its planned economic reforms up to 2020, known as the Fiscal Balance Program which it hopes will save around Riyals 362 billion ($97 billion).

The government is still establishing a mechanism, known as the Household Allowance Program, which will protect lower income households from any sharp jump in costs, and to avoid potentially undermining its unwritten social contract with Saudi citizens.

If the increased fuel and power prices are confirmed, it would be the second major hike after the kingdom's dramatic change in policy last year.

"Getting through the next two years without financial disruptions will be the key challenge for the regime," said Mohamedi, a former corporate adviser to Saudi Aramco from 2014 to mid-2016. "Thereafter, [market] balances will tighten and they will be more successful."

--Adal Mirza,
--Herman Wang,
--Edited by Jeremy Lovell,