Saudi Arabia - Global Financial Crisis - Jadwa

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Saudi Arabia and the Global Financial Crisis
Brad Bourland

Saudi Arabia and the Global Financial Crisis
Brad Bourland, Chief Economist, Jawda Investment
December 2008 Monthly Bulletin

The world is passing through an unprecedented financial crisis. Global financial conditions worsened to the point that the financial system almost ceased operating in early October. Conditions have since improved, but not without massive wealth destruction, as banks have been forced to write down hundreds of billions of dollars, huge financial institutions have gone bankrupt or been bailed out by governments and stock markets have plunged.

The crisis occurred against the backdrop of a deteriorating global economy and appears to have pushed much of the world into recession. The IMF expects the developed economies to shrink for the first time since the 1940s next year. With demand disappearing, commodity prices have collapsed and exchange rates have been highly volatile as investors have sought safe havens.

No country in the world will be spared from the effects of the financial crisis and ensuing global recession. For Saudi Arabia, it has completely shifted the focus of economic policy from controlling inflation to restoring confidence in the financial sector. We see the following key implications for the Saudi economy.

Oil prices will be significantly lower than previously anticipated and reduced production will exacerbate the impact on oil revenues.
Finance for local and foreign companies doing business in the Kingdom will be less easily available and more expensive.
Economic growth will slow as problems accessing suitably priced financing and lower oil revenues hinder project implementation and hurt confidence.
Lower oil revenues will mean the end to the huge budget and current account surpluses of recent years.
Sharply lower commodity prices and a strengthening of the riyal will cause inflation to fall back rapidly over the next 12 months.

As a result, headline economic data will look very poor in 2009 in comparison with previous years. However, this does not mean that the economic boom is over. Dynamism within the domestic economy has been propelling the economy forward over the last few years and we think the healthy growth momentum within the non-oil sector will be maintained (albeit at a slower rate than we had previously forecast). The welcome slimming down of the project pipeline should prevent some marginal projects from being undertaken and spread the remainder over a longer period that will help alleviate some of the bottlenecks that have developed throughout the economy.

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Source: Jadwa Investment

Brad Bourland

Mr. Brad Bourland Brad Bourland is head of research at Jadwa Investment, Riyadh. From 1999 through 2007 Brad was the Chief Economist at Samba Financial Group, formerly Saudi American Bank, in Riyadh, where he published regularly on issues related to the Saudi and global economies and the world oil market. He appears frequently in the domestic and international media and is a regular public speaker. Before joining Samba, Brad spent an 18-year career as diplomat, economist, and manager with the U.S. Department of State. During the last three years of his diplomatic career he was in Riyadh as the American Embassy's First Secretary responsible for financial affairs, where he analyzed the Saudi economy for the U.S. Government and conducted financial aspects of US-Saudi relations. Brad has his BA and MA magna cum laude from the University of Utah, and is a CFA (Chartered Financial Analyst) charterholder.

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