Broadly speaking The Economist noted last week that governments throughout the Middle East, in addition to their traditional subsidies undercutting food and fuel inflation, are now going above and beyond in a rather cynical attempt to “buyoff economic discontent” and perhaps also halt local bourses’ YTD decline.  Yet as the accompany chart shows, ensuing fiscal positions are anything but uniform.  Import covers for oil importers such as Eygpt and Tunisia, for instance, should be watched closely.  On the other hand, despite the relative enormity of its SAR135bn (USD36bn, 8% of GDP) package to tackle structural challenges facing the economy, including unemployment, housing, education, and general household welfare announced earlier this month, Saudi Arabia’s “largesse” may in fact be cost efficient if for no other reason than rising oil prices (Economist notes that “each $1-a-barrel increase in the price of oil adds about $3 billion to the Saudi treasury, implying that the increase in oil prices this year could add roughly $100 billion to revenues; in turn, net foreign assets (NFA) rose 7.4% y/y in January which analysts see averaging 4% annually this year) will offset much of it: nonetheless, analysts with Barclays project that “the package will increase spending by 14% and will reduce the fiscal surplus from an original forecast of 6.4% to 2.6% of GDP” while “raising the fiscal breakeven oil price of Saudi Arabia to around US$79 b/d (up from US$69.1).”  Moreover, they point out, “implementation risks [of the fiscal package] are non-negligible if not accompanied by additional legal and regulatory changes (notably on the housing front), and significant improvement in the efficiency of public spending.”  Notably, “the problem of [a] supply shortage of lower and middle income housing” will likely lead to “continued short-term pressure on property prices, particularly for developed land and apartments,” despite a 40% capital injection into the country’s Real Estate Development Fund (REDF), whose mandate is to provide interest-free loans to help citizens construct their own homes and/or purchase apartments, guarantees for housing loans given by commercial banks to citizens under certain conditions, and finally additional funds pledged to the General Housing Authority “to speed up the awarding of housing units to needy families.”  With this in mind, Saudi banks remain an attractive sector, especially since M3 (broad money supply) growth trends (up 8% y/y in January and a function of the aforementioned NFA growth), coupled with below-historical average velocity (0.72 compared with 1.03 over the past decade) and rising bank system assets suggest further scope for lending–especially to an increasingly robust manufacturing sector (PMI up 14.4% y/y in January).  Saudi American Bank Group, which [correctly] warned last December that the ever-impending mortgage law was still some time away, noted recently that Saudi banks’ average loan-deposit ratio currently stands at around 80 as opposed to 100 percent or more in other Gulf countries.”

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