U.S.-Saudi Arabia - Muhammad Al-Jasser - Conference

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ITEM OF INTEREST
May 15, 2009

U.S.-Saudi Relations in a World Without Equilibrium
Conference Transcripts -- Session 2
Muhammad Al-Jasser

Editor's Note:

Last week a major forum addressing the state of and prospects for the relationship between the United States and the Kingdom of Saudi Arabia was convened in Washington by the New America Foundation (NAF) and the Committee for International Trade (CIT) of the Saudi Chambers of Commerce and Industry. Distinguished speakers spent the day providing perspectives and insights on what the relationship should look like, how economics was shaping the national security picture vis a vis the relationship, the challenges for America in the region and how the perspective on these challenges look from the Saudi Arabian point of view.

Today we are pleased to provide the transcripts from the second session, "Economics as a National Security Imperative: Challenges for Saudi Arabia and the U.S." Among the featured speakers was His Excellency Muhammad Al-Jasser, Governor of the Saudi Arabian Monetary Agency.

Separate emails will provide each panelist's remarks and the question and answer period transcript. Transcripts for the remaining panel and luncheon remarks will be provided over the next few days. You can find all of the conference materials and related links at a new SUSRIS Special Section. [ "U.S.-Saudi Relations in a World Without Equilibrium" - Conference Special Section ]

Video MP3

U.S.-Saudi Relations in a World Without Equilibrium
Conference Transcripts -- Session 2
His Excellency Muhammad Al-Jasser
Governor, Saudi Arabian Monetary Agency

[Muhammad Al-Jasser] Thank you very much. I guess I can still say good morning to everybody, if I can see. Next time, I�m going to ask Brad to be at another city when I�m speaking, because he has stolen some of the thunder from my talk. I thought counter-cyclicality was my baby, and you weren�t supposed to touch it. But I will still read the statement, just as the minister said, I spent a lot of time working on it, and I�m not going to let anybody take that right from me.

I think it�s the theme of this get together is critical to all of us. And I think that the issue that was raised in the morning session about interdependence, be it in energy or be it in other areas is very critical. And for us to enhance and appreciate that interdependence, I think we need to understand each other better, and it was mentioned also. To understand each other better will be helped if we explain ourselves and listen to each other better than has been the case. And I think today I will try to use that, a theme, to explain how we in the central bank, in the Saudi Arabian Monetary Agency, do our business and therefore hopefully you will appreciate what we do and how we do it. Of course, this is not a very �sexy� topic. This is the dismal science in economics. So you will have to bear with me. But I think if we were to understand why Saudi Arabia has avoided the pitfalls of the financial meltdown and how we have protected our home front in that sense, it will be quite an achievement if I can do that. And I think as friends who are interdependent and trying to depend that interdependence, I think it will be important to appreciate that contribution. When you go into a crisis, good friends are friends who have protected their home front and they�re not a burden on the community of nations. And I think that type of contribution should not be overlooked. I�m glad I wasn�t asked to speak about sovereign wealth funds, because I had a lot to say about that, but that was two years ago, and therefore Heidi mentioned it. I was tempted by it, but I�m going to avoid that.

So let me at the outset then also thank the organizers to inviting me to speak today. And, as I mentioned, I will share my thoughts with you on the importance of counter-cyclical policies for macro-economic stability. We are going through a period of unprecedented financial turmoil, historic erosion of wealth, and serious threat to financial stability. The worst combination is to have a recession and a financial crisis simultaneously. We have seen an aggressive fiscal stimulus and monetary policy response to the crisis, as well as the use of unorthodox monetary measures. Let us hope that these measures will prove to be effective in containing this crisis. The economies have always experienced business cycles. Each cycle is unique in its length, the depth of the trough and the height of the peak. At the peak, there is euphoria and people feel the cycle has been abolished. � The present crisis was made worse by a long period of loose monetary policy, but at its roots are also to be found in� regulation and the so called self-regulation of financial institutions. But let�s face it, self-regulation is no regulation. The result was that the banks indulged in unrestrained leverage, helped by the impact of accounting rules and the questionable practices of raiding agencies. In my observation, there was a natural tendency to pro-cyclicality in the financial system. This has been especially true in the last few years with the asymmetries in the global economic order, where the surplus economies supplied credit to the advance deficit economies. During and economic boom or expansion, bankers are prone to excessive optimism and the supply of credit rises, fueling asset price inflation. Bank supervisors see robust earnings and low levels of problem loans. Governments see rising employment and tax revenues from the financial sector, and so there is a tendency towards regulatory� and regulators competing with each other to offer the lightest touch. In such euphoria, governments run budget deficits, which are easily financed. Rising asset prices create a large wealth effect and stimulate consumer demand and wage growth. Inflation appears subdued and loose monetary policy further encourages growth. Government safety nets in the form of deposit insurance or implied guarantees of financial institutions encourage risk taking and further leverage until the bubble bursts. In short, financial pro-cyclicality accentuates and exacerbates the cyclical tendencies of economic activity. In an economic downturn, banker�s optimism turns into pessimism. Asset quality deteriorates and it becomes obvious that the banks have inadequate levels of reserves. Regulators get tougher as earnings collapse. This situation forces banks to go for higher provisions, resulting in a contraction in bank credit, and an increase in risk premium charged to borrowers. Consumers are hit first by the fall in asset prices especially housing, so they reduce spending. The fall in employment levels exacerbate the economic downturn and cause more unemployment, which reduces private sector spending even further. Governments increase their budget deficits, which tend to crowd out productive, private sector borrowing, and make their debt to GDP levels even higher. This is where we are.

The current crisis in the center of the financial system globally is sucking in capital. This means that countries at the periphery are losing their access to the capital they need to help maintain growth and keep their financial system liquid. Since the mid-1980s, developing countries have experimented with various measures of stabilization in order to reduce unsustainable fiscal and current account deficits. The Asian financial crisis in the late nineties was a catalyst for the region to pursue second sound economic policies and to accumulate foreign exchange reserves as a cushion against adverse capital flows. This is necessitated by the fact that their currencies are not reserve currencies. Some of these reserves flowed back into the advanced economies and helped fuel an already forming bubble. We have a global financial system but a set of national banking regulators and the result is that global regulatory arrangements are inadequate to handle the systemic risks posed by international banks. Indeed, both our recent experience and the theoretical analysis indicate that counter-cyclicality and fiscal monetary and regulatory policies is necessary to mitigate the adverse effects of economic cycles on global growth. Saudi Arabia has a great deal of experience of managing a counter-cyclical fiscal policy, and the minister and Brad elaborated a bit on that. The volatility of growth of an oil-exporter is much higher than in the United States because of swings in the price of oil. We use fiscal policy to reduce the impact on our domestic economy. When oil income is low, the government runs budget deficits to support domestic demand and investment, and the debt to GDP level rises as a result. At its peak in 1999, the government debt to GDP ratio was over 100 percent, as Brad also mentioned. This debt has been paid down over the last few years to a current level of below 15 percent as the government has run budget surpluses. Again, that�s counter-cyclical. This means we have the flexibility to support demand, and this year the government is running a budget deficit. If the advanced economies had followed fiscal consolidation in good times by reducing their debt to GDP ratio in the last few years, they would have more room to maneuver in their response to the current crisis.

Let me now say a few words about what should be the key attributes of a supervisory and regulatory framework for the banking sector. That includes strong regulatory capital requirements, robust standards for bank liquidity, enhanced risk management, and macro-prudential supervision of bank activities and improved transparency. Counter-cyclicality as a plight to banks, capital requirements would use this so called approach of dynamic provisioning. Banks would have to build up a protective cushion in the form of loan-loss provisions and capital in the upswing of the cycle, so that they can be used in the downswing. This should be combined with a simple approach to liquidity and leverage ratios. In the current crisis, banks became too reliant on inter-bank funds. It is quite prudent to impose a mandatory liquidity ratio for banks in the form of highly liquid marketable assets and cash as a percentage of their deposits. Supervisors also need to combine the micro-prudential work on individual banks with a macro-prudential approach looking at risks to the financial system as a whole. And this will need close cooperation among regulators and financial institutions worldwide.

In conclusion, pro-cyclicality when built into the financial system is undesirable because it exacerbates excessives. The best way to counter excessive pro-cyclicality is to eliminate the practices that contribute to it. These can be fiscal, monetary, and regulatory. Sound macro-economic and financial policies, as well as continued vigilance is the best way to prevent crisis recurring. Financial supervision failed spectacularly in a number of advance countries and we need greater effectiveness in making sure that banks manage their risks better in the future. Supervisors must move towards greater cooperation and more focus on overall financial stability as well as looking at the soundness of individual banks. Financial stability is needed for growth, which in turn sustains macro-economic stability. In short, a strong economy requires a sound financial system, which depends not only on market, but also on prudent though not intrusive public intervention. The famous Wall Street investor Benjamin Graham once said, �The people in Wall Street learn nothing and forget everything.� We must learn the right lessons from this crisis and resist the temptation to go back to business as usual in the financial markets. Let�s not commit the same mistake again.

Thank you very much for your attention.

[Visit the SUSRIS Special Section "U.S.-Saudi Relations in a World Without Equilibrium" for the transcripts from this and other panels and additional resources.]

Session Two Video

Courtesy New America Foundation

Video MP3

Speaker Biography:

His Excellency Muhammad Al-Jasser
Governor, Saudi Arabian Monetary Agency

Muhammad Sulaiman Al-Jasser was appointed governor, Saudi Arabian Monetary Agency (SAMA) in February 2009. He joined SAMA as Vice Governor in 1995. His previous positions include Acting Deputy Minister of Finance for Budget and Organization as well as Executive Director for Saudi Arabia at the International Monetary Fund. He was awarded the King Abdulaziz Medal of the First Order. Mr. Al-Jasser has been and is still involved as chairman and member of the board / council in various organizations and projects. They include Saudi Telecom Co., The Arab Investment Company, �Technical Saudi Negotiating Team� for negotiations with the international oil companies, Eisenhower Fellowships Nominating Committee for Saudi Arabia, Fund for Supporting Research and Educational Programs at King Fahd University of Petroleum and Minerals, Saudi Arabian Mining Co. (MA�ADEN), and Saudi Arabian Negotiation Team on the accession of Saudi Arabia to the WTO, among many others.

Source: New America Foundation / Committee for International Trade

AGENDA

Panel II: Economics as a National Security Imperative: Challenges for Saudi Arabia and the U.S.

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