Saudi Arabia Economy - Brad Bourland

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Update on Global and Local
Financial Conditions - Oct 16
Brad Bourland

Editor's Note:

Today we are providing another snapshot of economic developments with a perspective on implications for the Gulf, provided by Mr. Brad Bourland, Chief Economist at Jadwa Investment in Riyadh. We previously shared a copy of his global and local financial conditions report on October 8, 2008.

Update on Global and Local Financial Conditions - Oct 16
Brad Bourland, Chief Economist, Jadwa Research

Global stock markets have recorded their biggest one-day declines since the crash of 1987 on fears that the world is heading for a deep recession. Data released yesterday showing falling spending and rising unemployment has focused investor�s minds on the bleak economic outlook and emphasized that the performance of all companies, not just those in the financial sector, will be hurt. The new data was for August and September and indicates just how weak the global economy was before it entered into the worst of the financial crisis.

The key economic news from yesterday was:

US retail sales fell by 1.2 percent in September, their biggest monthly drop for three years.

Unemployment in the UK rose at its fastest pace since 1991 in August, while average earnings growth was the weakest in five years at 3.4 percent, well below the prevailing rate of inflation, which hit 5.2 percent (a 16-year high) in September.

New car sales in the EU in September were the lowest since 1998 and 8.2 percent less than in September of last year.

US Federal Reserve Chairman Ben Bernanke gave a very downbeat assessment of the US economy, saying that the turmoil in financial markets poses a �significant threat to economic growth� and that even if financial markets stabilize �broader economic recovery will not happen right away�.

Financial conditions have again improved modestly. Pledges of even greater liquidity by global central banks have further reduced interbank rates; though the decline is most pronounced for overnight lending and interest rates for funding over a longer period remain highly strained. Nonetheless, government bailouts of the financial sector continue. Today UBS received a $5 billion injection of capital from the Swiss government and the Swiss central bank agreed to take on up to $60 billion of its troubled assets. In addition, Credit Suisse got a $9 billion injection from private investors (including a subsidiary of the Qatar Investment Authority). Disappointment over the pace of improvement in financial conditions has added to stock market woes.

In response to mounting concerns about the economic outlook, the US S&P 500 and the Japanese Nikkei 225 both recorded their largest one-day fall since the crash of 1987; the S&P 500 slumped by 9 percent, while the Nikkei was down by 11.4 percent. European markets have opened sharply lower this morning (the UK is down by 3 percent, German down 3.3 percent and France down by 3.5 percent) after falls of 6.5-7.5 percent yesterday. Those GCC markets trading today are also being hit; Dubai is currently down 6 percent and Kuwait down 1.5 percent.

Implications:

The economic outlook for Saudi Arabia is deteriorating. Oil prices dropped below $75 for the first time in over a year yesterday and could well slip below $70 per barrel by end-Friday. We expect Opec to cut production in order to defend prices of around this level (though its next scheduled meeting is not until November 18) and indications are that Saudi Arabia has taken off the market much of the supply increase it introduced in the summer. Lower oil production and prices will dramatically reduce the budget and current account balances, though in both cases we still expect relatively comfortable surpluses.

Lower oil production will cut our forecast for real GDP growth. Growth in the non-oil private sector (the main driver of economic growth in recent years) is also expected to suffer. Recessions abroad will hit demand for exports and the tough financial conditions, both globally and locally, will increase the cost and reduce the availability of financing (IPOs throughout the region are being put on hold). Nonetheless, it is encouraging that some private sector companies are pushing ahead with new financing deals�Dar Al-Arkan and Saudi Hollandi Bank have announced plans for sukuk issues�and those investors with large cash holdings (including the government) should benefit from the recent rapid decline in raw material prices.

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
[email protected]
Head office:
Phone +966 1 279-1111
Fax +966 1 279-1571
P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia
http://www.jadwa.com

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