Saudi Arabia Economy - Brad Bourland

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Update on Global and Local
Financial Conditions - Oct 22
Brad Bourland

Update on Global and Local Financial Conditions - Oct 22
Brad Bourland, Chief Economist, Jadwa Research

Economic concerns push markets down

Further steps have been taken to bolster the financial sector in the US as the extreme financial stresses of recent weeks continue to unwind. These were not enough to boost stock markets which were hit by disappointing third quarter results and ongoing concerns about the health of the global economy. The US dollar has strengthened significantly.

Yesterday the US Federal Reserve pledged up to $540 billion for the purchase of commercial paper (short-term debt issued by corporations and banks) from money market funds. Money market funds are large investors in commercial paper and have historically been considered almost as safe as bank accounts. However, one large fund was heavily exposed to Lehman Brothers debt after that bank collapsed last month and was unable to maintain the $1 per share value that is essential to the viability of these funds (a value of below $1 per share indicates that investors have lost money). This triggered large withdrawals that have placed pressure on an important component of the US financial sector (almost $3.5 trillion is invested in money market funds); the reluctance of money market funds to invest in commercial paper has widespread implications throughout the economy, as many companies rely on it to finance their day-to-day operations.

This move helped to further improve interbank rates and other indicators of financial stress. However, stock markets fell following poor third quarter results across a broad range of sectors. The US Dow Jones industrials index fell by 2.5 percent and the S&P 500 was down by 3.1 percent yesterday. Asian markets have closed sharply lower this morning, with Japan, South Korea and Hong Kong all down by over 4 percent to new four-year lows. European stock markets fell by 0.5-1.5 percent yesterday are down by a further 1-2.5 percent this morning. GCC stock markets have also opened lower; the Saudi market is down by 3.3 percent, Dubai down 3.1 percent and Kuwait down 2 percent.

Another notable feature of the last few days is the strength of the US dollar. It is currently at an 18-month high against a basket of currencies of its leading trading partners and has risen further against the currencies of many emerging market countries. The dollar has benefitted from its status as a safe haven and has seen large inflows from US hedge funds and other institutional investors that have liquidated foreign investments and moved into cash. It also benefits from market sentiment that interest rates need to fall much further outside the US than inside it and that as the first of the leading global economies to enter recession, the US may also be the first to emerge from it.

Implications:

Oil prices have stabilized over the last few days (WTI is around $71 per barrel) as the markets wait to see what occurs at the Opec summit on Friday. It seems inevitable that Opec producers will agree to a cut in production. Ahead of the summit, figures of between one and three million barrels per day have been floated. Opec will be keen to put a floor on oil prices, which have halved since early July, but will not want to damage the exceptionally weak global economic outlook. Lower production for Saudi Arabia will reduce GDP growth and lower the budget and current account surpluses. However, it is important to consider that economic performance was very strong in 2007 when WTI averaged $72.3 per barrel and production was 8.7 million barrels per day; a potential scenario for next year.

The strength of the dollar (and therefore the riyal) should help to lower inflation by reducing prices for imported goods. Since the end of July the riyal has appreciated by 17 percent against the euro (the eurozone is Saudi Arabia�s largest source of imports), 18 percent against the British pound and 7 percent against the Japanese yen. The stronger exchange rate should particularly help reduce food prices as it coincides with lower global food prices. For example the price of Indian basmati rice has fallen by 12 percent since mid-September and the Indian rupee has fallen by 16 percent against the riyal since the end of July.

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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