20/01/2010

Now that the global economy has begun to recover from the worst recession since the 1930s, what insights can we derive from the past year and a half for the Saudi economy?

The high degree of connectivity between the Saudi economy and the rest of the world was made abundantly clear. Impacts were felt not only through gyrations in the oil market, the dollar and global trade, but also in the banks, stock market, inflation and consumer spending and saving habits within the Kingdom. The important global role of Saudi Arabia was highlighted by its membership in the G20, the forum of the world’s 20 largest economies charged with formulating fixes for global problems, according to a report released on Monday by the Riyadh-based Jadwa Investment.

Centrality of credit

Perhaps the most important unexpected impact is that the stress point for Saudi Arabia in this recession turned out to be more related to credit than oil. Oil prices tumbled over the second half of 2008 recording a peak to trough decline of 80 percent. However, the recovery was rapid. Oil prices doubled from their December lows in five months and, in early 2010, have traded with quite low volatility between $75 and $85 per barrel. The lower oil prices did not significantly harm government finances, and the impact on the broader economy was muted by strong and consistent government spending. The government built up a huge stock of foreign reserves at SAMA (Saudi Arabian Monetary Agency) during the very high oil prices of the previous years and had embarked on a multi-year ramped-up spending program before the financial crisis hit. Drawing down these reserves allowed the government to maintain its near-term expenditure plans regardless of the downturn in oil prices.

In contrast, Saudi credit conditions were affected much more than we had thought would be the case as the crisis unfolded. Initially it appeared that Saudi banks were among the best positioned in the world to weather the storm. Saudi banks had minimal exposure to the “toxic assets” of the West. They went into the downturn with strong capital adequacy, and the absence of local securitizations — the packaging and reselling of loans — meant Saudi banks were in direct touch with their borrowers and seemed better able to manage their credit risks.

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Arab News