Shares rally across Gulf on $67bn Saudi plan

Fresh spending programme to provide for construction of 500,000 homes in kingdom.

Saudi stock traders take orders. The Tadawul All-Share Index rose on the back of a spending package announced by the Saudi king.

The Saudi Arabian stock market rallied to close up more than 4 per cent after King Abdullah announced a US$67 billion (Dh246.09bn) plan to build houses in the kingdom.

The new round of government spending follows a $38bn investment package announced by King Abdullah weeks ago, taking the total amount to $105bn.

Investors reacted positively, pushing stocks across the Middle East higher as western missiles hit targets in Libya in the opening salvo of international efforts to create a no-fly zone over that country.

The spending package "will be a huge benefit for the people of Saudi Arabia", said Mohammed al Jasser, the governor of the Saudi Arabian Monetary Agency. "I believe it will result in a major shift of economic development of Saudi Arabia, especially in areas of accommodation and employment."

But Nouriel Roubini, a professor of economics at New York University and the founder of Roubini Global Economics, said the measures could drive prices higher in the kingdom.

"The commitment towards housing and education is a more productive end of the spending," Prof Roubini said. "Some of the increases in spending could result in inflationary pressures."

Saudi Arabia's central bank has battled cost-of-living increases, with the kingdom's inflation rate falling to 4.9 per cent in statistics released yesterday. It was the first time inflation had been below 5 per cent since last April.

The Saudi stock market's benchmark measure, the Tadawul All-Share Index, saw significant gains yesterday, rising 4.5 per cent to 6,343.79. The increase was the largest on the index in two weeks.

Gulf stocks followed, with the Dubai Financial Market General Index rising 2.5 per cent to 1,509.82, and the Abu Dhabi Securities Exchange General Index increasing 0.6 per cent to 2,602.26. Qatar's stock exchange also rose, by 2.5 per cent to 8,395.02.

The spending package, the second announced by King Abdullah since his return to Saudi Arabia after going abroad for medical treatment, consists of $67bn to build 500,000 houses and funds for military and religious groups that backed the government's ban on domestic protests.

It also raises the value of subsidised mortgages provided to Saudi nationals to 500,000 riyals (Dh489,668) from the current 300,000 riyals.

A number of Saudi companies, including Saudi Basic Industries Corporation (Sabic), Saudi Aramco and Al Rajhi Bank, will pay staff two months' of wages in bonuses, the Saudi Press Agency reported on Saturday.

A royal decree also set a minimum wage of 3,000 riyals (Dh2,938) a month for Saudi employees, while some companies will increase their hiring of Saudi nationals, the agency said.

Some business leaders were bullish that the Saudi spending programme would allow for improved returns throughout the region.

Arif Naqvi, the chief executive and founder of the private equity company Abraaj Capital, said: "The region will react positively. I think a lot of opportunities will come out of it."

But others said the government's spending plans, while positive for the economy as a whole, could also serve to entrench some of the deeper social issues the kingdom faces.

"The current economic policies are going to do a lot to alleviate economic hardship and distribute wealth throughout the population very quickly.

"It's unlikely, however … that it will increase employment for locals," Kito de Boer, the senior director for the Middle East at the management consultancy McKinsey& Co said.

"It will clearly increase allocations for jobs in the government and security services. But will it increase levels of employment of nationals in the private sector? No, it might even make it worse … by making them even more expensive [to hire] than they were before."

A report from Banque Saudi Fransi added that reform was needed to support the king's efforts to improve housing.

"Many young Saudis could be compelled to rent instead of buy due to comparatively low rental yields, keeping a strain on already high rents and reducing ownership rates," the report said.