What is next for Saudi Arabia? Asharq Alawsat Newspaper

Markets are beginning to price a shift of contagion from North Africa to some of the Gulf economies, principally Bahrain and Saudi Arabia. The possibility of contagion spreading to Saudi Arabia remains low although markets are pricing a higher risk premium. Bahrain’s future is a leading indicator but there is not enough clarity about short-term political outcomes.

If we learned anything during the most recent financial crisis it is that markets can get it wrong. During the recent Egyptian crisis, oil prices spiked over concerns about the transshipment of oil via the Suez Canal. Markets today are beginning to price contagion effects spreading from North Africa to, principally, Bahrain. Although it is hard to predict the political outcome in the Gulf island, markets are pricing a premium on the risk of contagion to neighboring Saudi Arabia. Aside from making any definite calls on the future outcome of Bahrain, we remain reassuring about Saudi Arabia. The chances of disruption to oil production remain distant as is the likelihood of major unrest. Markets have a tendency to differentiate less during crises and, as we saw during the Dubai debt crisis in 2009, risk premiums spiked for all. Differentiation took time, however.

Saudi Arabia’s ability to carry out distributive policies is obvious, particularly in areas that have important social significance. The government announced an estimated USD36bn spending programme (as much as 8.3% of last year’s GDP) on housing, education and social welfare on top of a 2011 budget which is the largest in its history. Saudi King Abdullah recently unveiled a string of financial support measures geared towards citizens through new unemployment benefits that stand to help youths facing double-digit joblessness rates; expansion of social security safety nets set to target lower-income Saudis; and substantial funds allocated to writing off the debts of deceased borrowers and prisoners. The royal order, which includes 19 components, strives to promote job creation, expedite the supply of housing, and improve funding for education, charity associations, cultural and sporting clubs, and professional associations.