U.S.-Saudi Arabia - Brad Bourland - Conference - CIT / New America Foundation

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ITEM OF INTEREST
May 15, 2009

U.S.-Saudi Relations in a World Without Equilibrium
Conference Transcripts -- Session 2
Brad Bourland

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 Brad Bourland, Chief Economist for Jadwa Investments and Former Chief Economist for Samba Financial Group.

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
Brad Bourland
Chief Economist, Jadwa Investments
Former Chief Economist, Samba Financial Group

[Brad Bourland] Thank you Jane. I live and work and gain my livelihood in Saudi Arabia, so I thought I would address this this morning by answering several questions that come to me in relation to the financial crisis, global recession, and how it affects Saudi Arabia. And I�ll throw in Jane�s question at the end as well. Those questions are first, what�s the impact of the slump in oil prices over the past year? Second is our, and by our I mean Saudi Arabia�s, is our economic boom over? Third, what are our financial conditions like? And fourth, what�s happened in our markets, and what�s happened to our investors? And then fifth I�ll turn back to Jane�s question and take a look at where I think Saudi Arabia�s economy stands particularly in relation to the United States, when we get to the other side of the ballot, when we move beyond the recession, and things go back to normal.

So first the implications of the slump in oil prices. As you know, oil prices have lost a hundred dollars a barrel in the past year, and Saudi Arabia�s producing about a million barrels a day less than it was producing last year, and that adds up to significantly lower oil revenues. But in the previous four years, since the oil boom started, and I peg that to the end of 2003, so from 2004 through 2008, while the rest of us here in America were leveraging to the hills and going on a spending binge, Saudi Arabia was saving and reducing its debt. So the government of Saudi Arabia, these two Excellencies with us today, accumulated foreign assets that grew from about 100 billion dollars in 2004 to about 450 billion dollars today, and the simulative expansionary budget that the government has announced for 2009 includes about a 15 billion dollar deficit. At the same time, the government has reduced its debt from a high in 1999 of by our calculations close to 120 percent of GDP down to again by our calculations at JADWA today to between 12 and 15 percent of GDP. So a fifteen billion dollar deficit for a stimulus budget in Saudi Arabia is easily covered by the very large accumulation of foreign assets and the pay down of government debt over the past several years. So the government is poised very well to withstand what has been a substantial drop in oil prices, but at a price of 50 dollars a barrel it�s a very comfortable position, and I would suggest that it�s actually quite comfortable for the long term. Now, our view at JADWA is that oil prices will rebound to an area between 60 and 90 dollars per barrel, but at 50 dollars per barrel, that�s not too bad, and that actually in 1999, if projected forward 10 years and said in the midst of a global recession, oil will be formulating a bottom or a base in the peak of the recession at 50 dollars a barrel, you know we�d all have been saying our wildest dreams have come true. For oil producers, that�s a very strong price, and Saudi Arabia�s well positioned in that kind of price environment. So the slump in oil prices has not had a significant impact on government finances, and will not, and the government is poised to stimulate the economy and keep it growing, and that gets me to my second question � what are the prospects for our economic boom? Well, I think we move in 2009 to a period where the government has to be the prime driver of growth and it is doing that with the government budget that is not only at an all time high but the increase in spending on a percentage basis is one of the largest in several years, and that�s quite interesting at a time of downturn. So the government says I�ve heard that his excellency the governor of� several times that we run in Saudi Arabia counter-cyclical policies and indeed when things were great, the government saved money and now as things have turned down a bit, the government is spending more money to stimulate the economy. And that�s part of that counter-cyclical policy. So the government will be an important driver of the growth in 2009, and we were certainly affected by the downturn globally. An important distinction to make, for those of you that have just lived through this in the United States, is that in emerging markets, this hit us very recently and very hard. In the United States, it started with a peak in housing in mid-2006, and then started to gradually deteriorate over the course of 2007, and then sharply deteriorated in September last year, with the failure of Layman Brothers. But in emerging markets in Saudi Arabia, it all just hit us hard, starting with the failure of Layman Brothers last year. To me, on that day the recession in the United States became globalized � became instantly globalized, and it hit us quite hard. Hit us in our stock market, and it hit the performance of the economy, and it was reflected in caution of consumers, businesses in their spending and plans, and in the fourth quarter of last year we felt that. But the answer to the question �is the boom over?� � I don�t think it�s over, but I think it changes a bit. A year ago, we were in an economy that was becoming a bit overheated and the issues of the day were inflation, which was sharply rising and in double digits, and upward pressure on the exchange rate. Today, those are not the issues of the day at all. They have largely dissipated. But we�re not going into a prolonged period of low growth, if we come out of this downturn with oil prices between 50 and 70 or 80 dollars a barrel. And with growth that by our forecast will be between 4 and 6 percent for the private sector. And with dropping or at least containable inflation, then that�s a better and more sustainable growth picture that is still a boom, but not a boom that leads to bust, which is not what anyone wants. And I would just highlight for the audience here that does not spend much time in Saudi Arabia that if you hear stories about Dubai, Saudi Arabia did not have a property bubble � that�s unique to other parts in the region, but not Saudi Arabia, so we don�t have that adjustment that we�re working through. Much of the growth of the past few years was mega-project oriented, and all of that that is government-driven or driven by Saudi Aramco continues with the exception of some re-tendering that is going on to capture the declining construction costs in the world, but that goes forward unabated. Where there is some issue is in mega-projects that are purely private sector � petrochemicals for example � and the problems there relate to financing.

And that leads me to my third question � what are credit conditions like in Saudi Arabia now? And the first part of the message there is that the banks are fine. The banks are very solid, they�re well capitalized, there aren�t that many so they were easy to regulate and keep, well, I shouldn�t say they�re easy to regulate, but there are not so many that it�s hard to regulate, and they�ve been well regulated, and they didn�t have much exposure to bad assets from the west. They have over the past few months like banks everywhere in the world tightened their lending standards, look a little bit more closely at the credit-worthiness of their customers. But in Saudi Arabia in the banking sector, we�ve not really had any �securitization� of loans on the balance sheets of banks. So what we did hear in much of the rest of the world of originate loans and then sell them off to somebody else quickly doesn�t happen in Saudi Arabia. All the loans in Saudi Arabia are kept on the balance sheets of the banks that originate them, so they know their customers well, because they have to keep the loans. So while there�s been some tightening of credit standards, that�s now loosening a little bit, and credit is easing and it�s being fostered by the easing policies of the central bank. That�s only one leg of the story of the credit market in Saudi Arabia. The very large projects historically have also depended on large syndicated loans with participation from regional and international banks. And that market has largely dried up globally for the time being. The time being actually may last a long time, and there�s an area where I think you have some creeping, protectionism�s not really the right word, but the big money-center banks in London and New York that are receiving government assistance are, there�s a, well not unspoken but a spoken mandate to increase their lending locally in countries where they�re getting the assistance from, and not increase more overseas. So to put it not too elegantly I suppose, it wouldn�t be very popular for Citi Bank, who�s receiving 45 billion dollars in assistance from the U.S. government, to use that money to lend to a petrochemical project in Saudi Arabia. They need to do more lending in the United States with the government money that they�re receiving. So the participation of international banks in loan syndications probably is much reduced for a prolonged period, and the government institutions in Saudi Arabia that lend, there are a couple of them � Saudi Industrial Development Fund, Public Investment Fund � these are stepping up to fill that gap somewhat, but I�m not sure they can entirely fill that void. And then two other important pieces of the credit markets are the debt capital markets, which are bond issuances, and in our part of the world there�s been a sharp growth in Islamic bonds called� over the past few years, and the equity capital markets which is new IPOs on the stock markets, that had been growing very sharply in Saudi Arabia for the past few years. Those two markets are like elsewhere in the world, more� for the time being. But I think as markets improve, those come back fairly quickly. So to summarize that point, our credit conditions are tight, but it�s not because our banks are troubled in anyway, it�s because international banks are not participating in the market like they used to, and the debt and equity capital markets are for the time being constrained.

And then the fourth question is what�s, speaking of markets, what�s happened to our markets and our investors? Well, last year the stock market in Saudi Arabia, which by the way is the national pastime, it lost 60 percent, and in 2006 the market lost 60 percent. So those are two very painful declines. In 2006, the market was in the early euphoric stages of a boom, and was by everyone�s acknowledgement, richly priced � price to earnings ratios were in the high 40s. So when it started to decline, it declined on high a volume as everyone headed for the exits. They expected that to be a bubble that was bursting somewhat. It was different this time, because the market in 2008 is trading at a PE ratio of around 13. The companies listed on the market had great earnings growth prospects. And the market was purely pulled down in strong correlation with global markets and especially western markets, and that�s still true today. So starting in September especially, the market took a sharp downturn and pulled a lot of investors with it on low volume, who weren�t expecting it to go down, and to put it a way one of our clients put it last week as I was trying to explain why this downturn was more painful than the downturn in 2006, he said �of course it was more painful, in 2006 I lost my profits, in 2008 I lost my capital.� And I think that summarizes how many Saudi businessmen feel about the market downturn. So it has inflicted some pain. By our calculation, about 150 billion dollars worth of pain of lost wealth, paper wealth, of the private sector invested in the Saudi stock market. So that�s hurt somewhat, and that�s related to global markets, not Saudi markets.

Well, the last question, which is Jane�s question, is what does this look like on the other side of the abyss? When we come out and there�s no more recession, where�s Saudi Arabia positioned and what does this mean for ties, economic ties with the U.S. and business interests in particular? First, as Jane asked that question I thought recovery from recession will not be even. All countries in the world will not come out at the same time and at the same speed. And those countries who have financial sectors that are more stressed and have to rebuild capital and that are countries that are more leveraged and need to go through a longer de-leveraging process, which is a drag on growth � those countries will recover more slowly. Saudi Arabia�s not in that position, so I think Saudi Arabia is poised to recover very quickly, and in fact, the downturn in Saudi Arabia and the real economy has not been that sharp. And talking to our clients, I�m starting to get the feeling already that we�ve turned the corner in many respects. It�s fairly sector-specific, but the environment of December/January is quite different from the environment now, so I believe we�ve turned the corner. So I think Saudi Arabia comes back relatively quickly. Now Saudi Arabia as a country�s not very leveraged. Saudi Arabia as a country is fairly cash-rich. Saudi Arabia as a country has already become the gravitational, the center of gravity of the economies of the Middle East. I think all of this just becomes greater as we come out of the recession. Saudi Arabia�s not been as prominent as some of the other Gulf-players in buying western corporate assets, and buying companies outside Saudi Arabia, but I think that probably accelerates. Assets are cheap, there�s cash and not much leverage in Saudi Arabia. So it�s well poised to pickup assets around the world at reasonable prices, and I think we�ll see some of that. That makes Saudi Arabia more prominent in the news, and just a more prominent player on the scene. Relatively, it has not struggled so much, and so it will not take so much time to repair the economy, and so will be focusing on growth and opportunities that emerge from the crisis rather than repairing the damage. For Americans and American business out there, I participate in American business groups. We have a delegation here with us from that group in Riyadh. And I�ve been disappointed through the last 8 years to see that Americans have been more emotion-based in their thinking about doing business in Saudi Arabia than fact-based. I�m pleased to see that dissipating. I don�t think it ever goes away entirely, but we are more like that than are those that are closer to Saudi Arabia going out into Asia first, Europe second, the United States third. We�re the most emotion-based about it. I encourage American businesses to come out to Saudi Arabia, to kick the tires, to make your judgments based on the facts. You still may decide that�s not the place to do business, but at least you will have decided it for the right reasons. But it�s quite a different place, and it will be different. One broad trend I would site in that respect is that the region, not just Saudi Arabia but the GCC, is become quite interesting from a consumption perspective. That�s a reason in the past that Americans would expand into Asia, right? 1.3 billion people in China, etcetera, etcetera. But Saudi Arabia and the GCC are quite interesting and compelling from a growth and consumption. They have general improvement in the material well being of the populations there. Their general propensity to consume, meaning buying a lot of American products, is high. And so I encourage you to take a fresh look at it from that standpoint. But it�s not just a good market to be in to produce because of low-cost energy, for another part of the world; it�s a very interesting market to be in to produce, for that market in it�s own right, and Saudi Arabia is the most interesting in that respect. So, come on out and take a look at the place, based on the facts, and I think that over the next few years will be quite an exciting story. I share his Excellency the Finance Minister�s optimism about the economy going forward. I think we have turned the corner. I think we�ll be quite well positioned as the world improves.

Thank you very much.

[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:

Brad Bourland
Chief Economist, Jadwa Investments
Former Chief Economist, Samba Financial Group

Brad Bourland is the head of research and chief economist at Jadwa. He will also serve as a member of the Management Committee and as the chairman of the Investment Committee for the proprietary investments of the company. Brad was the Chief Economist at Samba in Riyadh for almost nine years. There he published regularly on issues related to the Saudi and global economics and the world oil market. He appears frequently in the domestic and international media and speaks publicly on a regular basis. Before joining Samba, Brad spent eighteen years as diplomat, economist, and manager with the U.S. Department of State. During the last years of his diplomatic career he was in Riyadh as the American Embassy�s first secretary responsible for financial aspects of U.S.-Saudi relations, such as participating on the U.S. negotiating team for Saudi accession to the World Trade Organization. Brad has his B.A. and M.A. magna cum laude from the University of Utah, and is a Chartered Financial Analyst charter holder.

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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