Saudi Arabia - Global and Local Financial Conditions - Jadwa

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Update on Global and Local
Financial Conditions - Nov 19
Brad Bourland

Update on Global and Local Financial Conditions - Nov 19
Brad Bourland, Chief Economist, Jadwa Research

Oil prices fell to 20-month lows yesterday, raising the prospect of further Opec production cuts. Global stock markets bounced back, but not by enough to offset the falls on Monday.

The main stock markets in the US and Europe were up yesterday; the US S&P500 climbed by 1 percent, the Dow Jones industrials was up by 1.8 percent and the leading European markets were up by between 0.5 percent (Germany) and 1.9 percent (the UK). However, these gains were not enough to offset the 2.5-3.5 percent losses on Monday. The Japanese stock market was down by 0.7 percent this morning.

The Saudi stock market fell by nearly 4 percent yesterday to close below 5,000 for the first time since March 22, 2004. Further falls in oil and petrochemical prices helped pull the market down. Oil prices slipped yesterday on concerns about the global economic outlook, with the Center for Global Energy Studies saying that global oil demand growth could decline this year, the first annual decline for 25 years. WTI is now trading at $54.4 per barrel, the lowest level since January 2007.

Exceptionally high oil prices had already begun to slow demand growth and the onset of financial crisis and recession in much of the world will further dent demand. Since June the International Energy Agency has slashed its projections for global demand growth in 2008 (to 120,000 barrels per day from 800,000 barrels per day) and 2009 (to 350,000 barrels per day from 800,000 barrels per day). The decline is oil demand is most pronounced in the US, the world’s largest oil consumer. US oil demand in October was 8 percent lower than in October 2007, a decline equivalent to 1.5 million barrels per day.

Implications:

Pressure within Opec is mounting for another oil production cut, possibly in advance of its next scheduled meeting in Algeria on December 17 (there is an informal Opec meeting in Cairo on November 29). We think that in the prevailing economic environment, most Opec producers would be content with prices of between $70 and $80 per barrel. Unless oil recovers to this level, Opec is expected to cut production further this year and during the first half of next year. Lower oil prices and production will slow the rate of economic growth in Saudi Arabia next year and cut the budget and current account surpluses.

While the collapse in oil prices has clear negative impacts on the Saudi economy, prices of other important commodities have also fallen fast as concerns about demand have intensified. Since the end of June the Reuters commodity price index has dropped by 48 percent. The price falls are across the range of commodities, covering industrial raw materials, food products and precious metals.

Lower prices for non-oil commodities will help to reduce inflation and have other positive benefits for the economy. For example, the prices of copper and steel, key construction materials, have plunged by 57 and 36 percent, respectively, since the end of June. Surging raw material prices had undermined the financial viability of some construction projects and these price falls mean considerable savings for those constructors that have financing in place. They also improve the affordability of building homes (more than 90 percent of homes are built by individuals) and are likely to take some pressure off the rental market, currently the main source of inflation.

Lower food prices will also reduce inflation. Prices of basmati rice have fallen by 45 percent since the end of June and are down by 31 percent in the last two months alone. In addition, gold prices, a key determinant of jewelry prices are down by 20 percent since the end of the second quarter. The beneficial effects of lower prices are being compounded by the strength of the dollar (and therefore the riyal). Since end-June the riyal has appreciated by 20 percent against the euro, 25 percent against the British pound, 15 percent against the Indian rupee and 9 percent against the Japanese yen (these regions/countries account for over 40 percent of Saudi Arabia’s imports).

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.

For comments and queries please contact:
Brad Bourland
Chief Economist and Head of Research
jadwaresearch@jadwa.com
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Kingdom of Saudi Arabia
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