Saudi Arabia distributes $130 billion

In the aftermath of the mass unrest in the poor countries of northern Africa and the Middle East, King Abdullah of the rich oil country Saudi Arabia quickly decided to distribute over $130 billion, which equals the amount the country earns from oil export in eight months, through various grants and programmes.

The first financial package was announced on February 24ththe amount back then was $36 billion and the goal was to prevent the unrest in foreign countries from spreading into Saudi Arabia. The objective of the programme was to spend money on improving the country’s education and health system, and building infrastructure. Public sector workers received a 15% pay raise and the amounts of unemployment benefits and the education allowance paid to students were increased.

The second financial package was announced less than a month later, on March 20th, and its total amount is $94 billion. The package was given the highly appropriate name “21 Royal Commandments”. This is a truly massive package, as it comprises 21% of the state’s GDP in 2010 or 56% of the country’s actual budget expenditure in 2010. The financial packages of February and March together comprise approximately 30% of the country’s GDP, which is now being injected into the economy. Some of this money will be used immediately, but some of the funds are allocated for projects that cover several years and will support the economic growth of Saudi Arabia also in 2012 and 2013. The unemployment benefit was increased to €370 per month, minimum salary to €560 per month, all public servants received a ‘bonus’ that equalled their two months’ salary and all students received a ‘bonus’ equalling their two months’ education allowance with the March package. The state decided to build 500,000 new homes for the country’s poor people. How can a state afford to spend this much? The answer in this case lies in the high oil prices, which will fill the hole in the budget with oil revenues in eight months, and the country’s reserves of $450 billion also increase its confidence to make such decisions. The IMF forecasts that with the support of these financial packages the real growth in Saudi Arabia’s GDP in 2011 will be approximately 7.5%.

Saudi Arabia has the biggest oil reserves in the world and it is the second largest oil producer after Russia. Oil production gives 40% of the country’s GDP and as much as 80-90% of its budget revenue, which means that Saudi Arabia’s ability to spend money is quite directly associated with oil prices. The company responsible for drilling oil in Saudi Arabia is Saudi Aramco. The capital city of Saudi Arabia is Riyadh, which is located in the centre of the country. The state’s official language is Arabic and its population is approximately 25 million.

Although many people are saying that the oil reserves of Saudi Arabia are quickly running out (they claim that the production quantities of existing fields are decreasing as much as 8% per year and the state compensates for this by opening new oil rigs), the reality is that nobody knows it for a fact and opinions of the country’s actual oil reserves vary on a very large scale. One of the best known faces from Saudi Arabia, King Abdullah’s nephew Prince Al-Waleed bin Talal, who has amassed a fortune through successful investments on international stock exchanges and real estate markets, appeared on the financial channel CNBC in May, where he also confirmed that to his knowledge, any fears of the Saudi Arabian oil reserves running out are exaggerated. Al-Waleed, who is among the top 30 wealthiest people in the world according to Forbes magazine, claimed that the country, which currently produces approximately 9 million barrels of oil per day could actually produce 12.5 million barrels per day and, if certain technical additions were made, even 15 million barrels per day (although the ambassador of Saudi Arabia in OPEC has said that the country is not planning to increase its potential production quantities to more than 12.5 million barrels per day in the next two decades). According to Al-Waleed, the state should have enough oil for another 95 years at current production quantities, but as we said before, no one really knows for sure.

Saudi Arabia’s oil deposits are located mostly on the country’s eastern coast:

Source: Saudi Aramco

There are many interesting companies listed on the Saudi Arabian stock exchange. A good example of these is one of the world’s largest industrial, steel and chemical companies Saudi Basic Industries Corporation (SABIC). SABIC trades at 11.6 times of its profit forecast for 2011 and 10.3 times of the profit forecast for 2012, and the dividend rate remains between 3% and 4%. The sales revenue of SABIC should increase by approximately 22% in 2011 and 10% in 2012. The biggest integrated dairy company in the Middle East, Almarai, also trades on the Saudi Arabian stock exchange. The company was listed in 2005 and according to a Forbes survey it was one of the best-known Arabian brands in 2006. Almarai’s stock trades at 15.4 times of the profit forecast for 2011 and 13.3 times of the profit forecast for 2012, and the dividend rate remains between 2% and 3%. The sales revenue of Almarai is expected to increase by approximately 15% in 2011, 14% in 2012, and another 13% in 2013. The population and purchase power of the Middle East are increasing, which helps Almarai grow even further. Banks with attractive valuations can also be found on the Saudi Arabian stock exchange, like elsewhere in the Middle East.

The graph below shows the movements on the Saudi Arabian stock exchange in the last 10 years – it survived a stock market bubble in 2004 and 2005, and a crash in 2006. The global recession also reduced the country’s stock market values by approximately 55% in 2008.

LHV Persian Gulf Fund plans to start investing in the Saudi Arabian stock market this summer.

We would like to remind you that all existing and new investors can enter the LHV Persian Gulf Fund (links here and here), which invests in the energy rich countries of the Middle East, without the usual 2% entry fee, i.e. free of charge, from April 8th till June 8th (incl.).

Joel Kukemelk

Fund Manager, LHV Persian Gulf Fund

Read our earlier articles about the energy-rich countries of the Middle East:

United Arab Emirates – the rise of Abu Dhabi and the recovery of Dubai

Qatar – the biggest exporter of liquid gas in the world

This article is published for informative purposes only and does not constitute a recommendation to sell or buy the securities mentioned.