Saudi Arabia Economy - Brad Bourland

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Update on Global and Local
Financial Conditions - Oct 25
Brad Bourland

Update on Global and Local Financial Conditions - Oct 25
Brad Bourland, Chief Economist, Jadwa Research

Global stock markets plunged yesterday as poor economic data from Europe and weak corporate results from Asia and the US further illustrated the global nature of the recession and heightened fears about its length and depth. These falls were accompanied by extreme currency volatility with the dollar and particularly the Japanese Yen strengthening sharply. Oil prices slipped further despite Opec agreeing to reduce production. The continued fall in oil prices and global stock markets means that we expect the Saudi stock market to open sharply lower this morning.

On Friday the US S&P500 and Dow Jones industrials index both fell by around 3.5 percent to reach their low points since April 2003. Asian stock markets also hit multi-year lows, with Japan dropping by 9.6 percent, Hong Kong down by 8.3 percent and South Korea slumping by 10.6 percent. European stock markets also recorded sharp declines; the UK and German were both down by 5 percent and France was 3.5 percent lower.

Among the key factor contributing to the intensification of investor pessimism yesterday were:
Business confidence measures in Europe showed private sector output falling at the fastest rate for a decade.
There was bad news from the corporate sector across a variety of countries and industries. For example, Samsung announced a large fall in profits; Sony halved its profit forecast and Chrysler said it was cutting 5,000 jobs.

The UK economy contracted by 0.5 percent in the third quarter, a much faster rate than was expected. This is the first time in sixteen years that the economy has shrunk.

Recent selling has been aggravated by hedge funds. The strains within the financial sector have badly hit hedge funds, many of whom rely on borrowing. As their performance has deteriorated, many hedge funds are preparing for large investor redemptions by cashing in their risky assets.

Hedge fund selling also contributed to wild swings on foreign exchange markets. On Friday the Japanese Yen hit a 13-year high against dollar and an all-time high against the euro, as investors unwound �carry trades�. The carry trade has been a popular investment strategy in recent years, it involves borrowing in currencies with low interest rates (particularly the Yen) and investing the proceeds elsewhere for higher returns. Now that risk aversion has dramatically increased these trades are being unwound, triggering large purchases of Yen. The dollar also continued to strengthen, with the pound recording its largest one-day fall for 16 years yesterday because of the poor economic growth data. Currencies of important emerging market countries have also been hit; the South Korea won and Brazilian real have dropped by over 20 percent against the dollar so far in October.

Oil prices continued to fall yesterday despite Opec agreeing to a 1.5 million barrel per day cut in production effective November 1. Opec members have been very concerned by the rapid fall in oil prices, which have more than halved since July, and were hoping that by committing to lower production they could stabilize prices. However, even though the cut back was in line with market expectations, WTI fell by 5.7 percent to $63.34 per barrel, its lowest level since May 2007.

Implications:

Opec has indicated that if oil prices continue to slide it could meet again before its next scheduled meeting in December. Analysts will be watching how closely Opec members comply to their new quotas, as historically compliance has generally not been strong. We think there is a chance that oil prices will drop further as the deterioration in the outlook for demand has been accompanied by a reversal in speculative positions. It takes some time to physically lower oil production so it will be a few months before the real effect of the production cut back can be judged.

Under the new agreement Saudi Arabia�s production quota was reduced by 466,000 barrels per day from 8.943 million barrels per day to 8.477 million barrels per day. Production has been persistently above quota over the last 12 months, though we understand that it had already been cut back over the last two months. Lower production combined with lower prices will impact negatively on economic performance. Nonetheless, we believe that the strong internal growth dynamics within Saudi Arabia means that economic performance will remain healthy.

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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