POV: Saudi Arabia’s pay-cut reversal

ECONOMIC UPDATE

On April 22, King Salman bin Abdulaziz issued a number of royal decrees that reshuffled administrative posts, appointed new ministers, adjusted several fiscal decisions and established a national security center.

Last September, Saudi Arabia decreased ministers’ salaries by 20 percent and scaled back financial benefits for public sector employees in one of the most drastic measures to offset the drop in oil prices. As part of the royal order, the government is to return all allowances, financial benefits and bonuses to civil servants and military staff. Government officials said the reinstatement of benefits was made possible by a better than expected fiscal situation after two years of cost-cutting.

An estimated two-thirds of all working Saudi nationals are employed by the public sector, making this a substantial welcomed change for businesses and consumers alike. This is estimated to be 1.2 million Saudi households, and with an average of 5-6 per household, the reversal of the cuts is expected to benefit around 6-7 million of the population (roughly 30%).

AREAS OF OPTIMISM

The true total value of the public sector salary increase remains unclear however. With such a high proportion of Saudis in the public sector who will be impacted by this royal order, this increase in disposable income is expected to have a positive short-term impact on consumption, not least in the lead up to Ramadan.

  • IMMEDIATE BOOST IN CONSUMER CONFIDENCE: The most recent austerity measures caused consumers to tighten their wallets, with consumer spending on household goods dropping by almost 50%* and consumer confidence in Q4 2016 by 6 points**, placing the Kingdom below the global average. This reversal is expected to boost Saudi consumer confidence, which will in turn reflect on their weekly/monthly shopping basket.
  • CHANGE OF FATE FOR THE PERIOD OF RAMADAN: Consumers are also expected to be more responsive to offers and promotions as domestic demand recovers, especially before and during the normally high consumption period of Ramadan and leading into the Eid gifting period.
  • POTENTIALLY MORE TRAVEL ON THE HORIZON: With travel allowances, bonuses and raises restored, there should be  a positive impact on the airline and leisure businesses as well, as more consumers will feel encouraged to spend on vacations, especially considering this will be the longest summer in the Kingdom. OMD’s Future of Saudi Arabia research has shown that the country’s appetite for travel is still high despite the economic climate and this decree could further incentivize Saudis. Let’s not forget that Saudi Arabia is a key “source market” for most travel and transport businesses.

AREAS OF VOLATILITY

Although this decree means higher disposable income, there are several other factors at play that may make the impact unclear. The economic decline of the past two quarters resulting from low oil prices has caused significant volatility in the market, which could entice residents to save the extra money rather than spend it. In addition to that:

  • SETTLING PENDING DEBTS COULD LOWER SPENDING: Some governmental employees did not reschedule their debts/loans post the cuts last September. This ultimately means some residents will use the money to pay off their loans rather than increase their spending.
  • BANKS’ POSITION ON LENDING: While the reversal in cuts will lead to some growth, it will only be felt when banks increase their risk appetite for lending, which is not yet the case. This will need some time to take effect (estimated to be at least 2 month) and is directly related to the banks liquidity tied to government payments to large corporations.

While a lot remains grey, according to Emerging Market Intelligence and Research (EMIR), companies should aim to tap into this increased disposable income in the short term by incentivizing consumers to spend, keeping in mind there is an anticipated positive consumption trend that should spill over into the anticipated economic growth in Q4.

*Source: TNS
**Source: Nielsen

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Faisal Shams

As managing director of OMD Arabia, Faisal leverages his unique talent in turning communications into effective business solutions. Always aiming higher, he is now transforming the approach of both OMD and its clients, fast-tracking their digital transformation.

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