Introduction
The banking industry in Saudi Arabia has demonstrated resilience in its ability to respond to and absorb the brunt of the global economic crisis (Pathak 2009). The rating agency Moody’s Investors Service attributes the success of Saudi’s banking sector to the Saudi government’s commitment to supporting the local economy with the implementation of an expansionary budget and infrastructure development. Moreover, the government has in recent years invested revenue derived from the oil industry rather than engage in government expenditures (Pathak 2009).
The Oxford Business Group (2009) reports that ever since the onset of the global economic crisis Saudi banks immediately responded by ensuring that their banks remained liquid (64). However, lending has been restrained so that it is primarily confined to the strongest clientele. This approach is gaining in substance since, in November 2008 the private sector debts to the banking sector was at US$198.4b and dropped by February 2009 to US$195.2b (Oxford Business Group 2009, 64). This is a remarkable feat in light of the fact that the solvency of many banks worldwide, including banks in the US have continued to be an issue as we enter 2010 (International Monetary Fund 2009, xii-xiv).
The researcher will examine the status of the banking sector in Saudi Arabia by looking at its history, its development and current approach to banking in light of the global economic crisis. For comparative purposes the researcher will also examine the status of the banking sector in comparative jurisdictions in the Middle East, Europe and the US. It will be argued that despite its relatively new banking sector, Saudi Arabia’s approach to lending and saving has been largely successful allowing it to successfully absorb the economic crisis while others are struggling to keep their banking sectors solvent. This paper will expose the differences in approaches and explain why the Saudi approach is more successful.
Research questions:
What are the Saudi Government’s fiscal policies in the context of its banking sector?
How have those policies influenced the Saudi banking sector’s policies and practices?
Have those policies been successful in light of the global economic crisis?
What lessons can we learn from the policies adopted by the Saudi government and its banking sector?
Statement of the Problem:
Top economists warned in 2008 that the financial crisis would only worsen if banking systems did not revamp their policies and practices (Three Top Economists Agree 2009 Worst/2009). The current crisis is responsible for business failures, falling consumer wealth, government debts and a downturn in commercial activities (Baily and Elliot 2009, 2). The impact on financial markets was devastating and continues to remain problematic. The International Monetary Fund reports that US and European banks absorbed losses in excess of US1 trillion in respect of bad loans and poor security from about January 2007 to September 2009. The International Monetary Fund estimates that these loses will continue to climb throughout 2010 (FACTBOX-U.S., European Bank Writedowns, Credit Losses, 2009).
The financial crisis which started in the US quickly infected global markets and the produced a global economic shock with a number of failed banks, stock indexes declines and reductions in equities and commodities (Evans-Pritchard 2007). Central banks from around the world took emergency action calculated to inject up to US$180 billion of liquidity in an attempt to temper the spreading economic crisis (Atkins and Cohen 2008). By the end of October 2008 there was a currency crisis which resulted in investors repatriating capital and transferring them into stronger currencies including the dollar, the Swiss franc and the Japanese yen. As a result a number of transition and developing economies were forced to seek support from the International Monetary Fund (Fackler 2008).
The global economic crisis has suffered a gloomy forecast. There are increasing fears that if liquidity remains in crisis, a protracted recession is unavoidable (Goodman 2008, A1). The impact on global economies has been dramatic. With a recession in the US where a number of economies depend on US consumerism, annual GDPs dropped. The drop in Germany was by 14.4 %, 15.2 % in Japan, 7.4% in the UK, 18% in Latvia 21.5% in Mexico and 9.8% in Europe (Baily and Elliot 2009, 6).
Reports coming out of the Arab world in the Middle East are discouraging. In March 2009, it was reported that the Arab world absorbed losses in excess of US$3 trillion as a result of the global economic crisis (Peskin 2009). The United Nations predicted a decline in foreign investment in the economies of the Middle East as a result of a decline in demands for oil (Peskin 2009A). In June of last year the World Bank forecasted that the year would be particularly difficult for Arab States (Peskin 2009B) In September of last year Arab banks lost approximately US$4 billion during the current global financial crisis (Peskin 2009C).
Significance of the Study
Although Saudi stocks fell in 2008 representing its lowest since 2004, the Saudi central bank vice governor, Mohammed Al-Jasser reported that bank bail outs in Saudi Arabia was not necessary. This was so because, unlike the remainder of the world, Saudi banks were not suffering from a liquidity shortage (Karam, 2008). The Council of Saudi Chambers (2009) reported that the International Monetary Fund determined that Saudi Arabia:
…would face the current global financial crises with strong economic fundamentals. The kingdom’s government has worked to strengthen its macro-economic and strengthen its financial sector and implementation of structural reforms to boost private sector-led growth, which culminated in the Kingdom’s efforts in promoting their economic occupation of the ranked first among Arab countries for four consecutive years and ranked sixteenth in the world…
The purpose of this study is therefore to investigate the fiscal policies in Saudi Arabia and how those policies have helped Saudi Arabia weather the global financial crisis with far less difficulties than the remainder of the world, particularly over countries within the Arab Middle East. The fact is, no country has been spared the effects of the global financial crisis. However, banks around the globe have been the subject of government bailouts, but Saudi banks have been able to remain liquid and have for the most part absorbed the global financial crisis. This study investigates how Saudi Arabia has been able to keep its banks liquid and has so far escaped having to issue bail-outs. It is the researchers goal to determined whether or not, Saudi Arabia’s fiscal policies might be a model for other emerging economies in terms of fiscal policies for the ability to absorb economic shocks.
Literature Review
Saudi Arabia is a resource-based growth economy primarily relying on oil revenues in respect of its fixed budget (Wilson 2005, 6). Oil revenues provide approximately three fourths of the Saudi government’s revenue (See Appendix 1 for a balance sheet of key financials for Saudi Arabian Oil Co.). The oil sector is accounts for approximately 35 per cent of Saudi Arabia’s GDP. The private sector accounts for the remaining 65 per cent. Since 1999 Saudi Arabia has witnessed a positive balance of payments current account (Sabri 2008, 144). In subsequent years, the current account balance of payments has enjoyed a surplus increase. Since 2003 and until the global financial crisis, the Saudi government’s commitment to sound fiscal policies together with improved oil revenues resulted in the country’s budget surplus. The Saudi government has taken a cautious approach to this surplus and has used it to draw down on its debts (Shtauber and Shapir 2006, 87).
Rising oil prices have been increasingly beneficial to Saudi Arabia’s economic development and have been managed with a great deal of success so that Saudi has emerged as the world’s largest oil producing country. Saudi Arabian oil exports escalated, showing an increase from US$45 billion in 1999 to US$115 billion by 2004. The increase in oil revenues is primarily responsible for Saudi Arabia’s positive balance of payments, the government’s surplus budget, its ability to successful draw down on the national debt, improving the GDP and investments in general(Shtauber and Shapir 2006, 87).
The country’s current account balance of payments in 2004 yielded a 73 percent increase over the year 2003 and reflected an increase of more than four times that of the year 2002. The private sector also saw growth with from 3.4 percent in 2003 to 5.7 percent in 2004. This growth was primarily accounted for by lower interest rates, liberalizing the telecommunications sector, strong stock market exchanges and as always an increase in oil revenues. The oil revenues were invested wisely in that the government was able to improve key infrastructure which improved investments (Shtauber and Shapir 2006, 87).
Saudi Arabia’s fixed exchange rate has been largely successful particularly because of its foreign currency payment and receipt trends together with the compulsory foreign exchange reserve backing at 100 percent. This backing functions to place a ceiling on the circulating currency so that it does not surpass the foreign exchange reserves. SAMA’s foreign exchange mechanisms functions within the scope and range of the regime. Saudi Arabia’s relatively strong and established banking sector and its position as a net creditor supports forward intervention so that SAMA’s pending contracts would settle when contracting parties rendered payment in riyals in exchange for dollars (Behravesh 2008, 292).
Research Methodology and Design
This research paper is exploratory in nature and as such is entirely reliant upon a qualitative approach to the research. This will involve a study of the current global financial crisis which is for the most part derived from internet resources. The crisis is fairly recent with very few hard print resources. The most recent information is available online and will be used for the purpose of providing the most recent information on the world financial crisis. In order to fully access the manner in which Saudi banks have responded to and been impacted by the global financial crisis this research collected information from textbooks, journals and government and institutional reports both in hard print and internet form. Again the most recent information is only available online and this includes information provided by the World Bank, the International Monetary Fund, the Saudi Chamber of Council and the Saudi Ministry of Foreign Affairs. Ramady’s article Evolving Banking Regulation and Supervision: A Case Study of the Saudi Arabian Agency (SAMA) will be used to evaluate Saudi Arabia’s banking policies and practices. This study is limited in that the current global financial crisis is relatively new and information in hard print is difficult to come by. Recent information will have to be gathered primarily from internet sources.
The banking industry in Saudi Arabia has demonstrated resilience in its ability to respond to and absorb the brunt of the global economic crisis (Pathak 2009). The rating agency Moody’s Investors Service attributes the success of Saudi’s banking sector to the Saudi government’s commitment to supporting the local economy with the implementation of an expansionary budget and infrastructure development. Moreover, the government has in recent years invested revenue derived from the oil industry rather than engage in government expenditures (Pathak 2009).
The Oxford Business Group (2009) reports that ever since the onset of the global economic crisis Saudi banks immediately responded by ensuring that their banks remained liquid (64). However, lending has been restrained so that it is primarily confined to the strongest clientele. This approach is gaining in substance since, in November 2008 the private sector debts to the banking sector was at US$198.4b and dropped by February 2009 to US$195.2b (Oxford Business Group 2009, 64). This is a remarkable feat in light of the fact that the solvency of many banks worldwide, including banks in the US have continued to be an issue as we enter 2010 (International Monetary Fund 2009, xii-xiv).
The researcher will examine the status of the banking sector in Saudi Arabia by looking at its history, its development and current approach to banking in light of the global economic crisis. For comparative purposes the researcher will also examine the status of the banking sector in comparative jurisdictions in the Middle East, Europe and the US. It will be argued that despite its relatively new banking sector, Saudi Arabia’s approach to lending and saving has been largely successful allowing it to successfully absorb the economic crisis while others are struggling to keep their banking sectors solvent. This paper will expose the differences in approaches and explain why the Saudi approach is more successful.
Research questions:
What are the Saudi Government’s fiscal policies in the context of its banking sector?
How have those policies influenced the Saudi banking sector’s policies and practices?
Have those policies been successful in light of the global economic crisis?
What lessons can we learn from the policies adopted by the Saudi government and its banking sector?
Statement of the Problem:
Top economists warned in 2008 that the financial crisis would only worsen if banking systems did not revamp their policies and practices (Three Top Economists Agree 2009 Worst/2009). The current crisis is responsible for business failures, falling consumer wealth, government debts and a downturn in commercial activities (Baily and Elliot 2009, 2). The impact on financial markets was devastating and continues to remain problematic. The International Monetary Fund reports that US and European banks absorbed losses in excess of US1 trillion in respect of bad loans and poor security from about January 2007 to September 2009. The International Monetary Fund estimates that these loses will continue to climb throughout 2010 (FACTBOX-U.S., European Bank Writedowns, Credit Losses, 2009).
The financial crisis which started in the US quickly infected global markets and the produced a global economic shock with a number of failed banks, stock indexes declines and reductions in equities and commodities (Evans-Pritchard 2007). Central banks from around the world took emergency action calculated to inject up to US$180 billion of liquidity in an attempt to temper the spreading economic crisis (Atkins and Cohen 2008). By the end of October 2008 there was a currency crisis which resulted in investors repatriating capital and transferring them into stronger currencies including the dollar, the Swiss franc and the Japanese yen. As a result a number of transition and developing economies were forced to seek support from the International Monetary Fund (Fackler 2008).
The global economic crisis has suffered a gloomy forecast. There are increasing fears that if liquidity remains in crisis, a protracted recession is unavoidable (Goodman 2008, A1). The impact on global economies has been dramatic. With a recession in the US where a number of economies depend on US consumerism, annual GDPs dropped. The drop in Germany was by 14.4 %, 15.2 % in Japan, 7.4% in the UK, 18% in Latvia 21.5% in Mexico and 9.8% in Europe (Baily and Elliot 2009, 6).
Reports coming out of the Arab world in the Middle East are discouraging. In March 2009, it was reported that the Arab world absorbed losses in excess of US$3 trillion as a result of the global economic crisis (Peskin 2009). The United Nations predicted a decline in foreign investment in the economies of the Middle East as a result of a decline in demands for oil (Peskin 2009A). In June of last year the World Bank forecasted that the year would be particularly difficult for Arab States (Peskin 2009B) In September of last year Arab banks lost approximately US$4 billion during the current global financial crisis (Peskin 2009C).
Significance of the Study
Although Saudi stocks fell in 2008 representing its lowest since 2004, the Saudi central bank vice governor, Mohammed Al-Jasser reported that bank bail outs in Saudi Arabia was not necessary. This was so because, unlike the remainder of the world, Saudi banks were not suffering from a liquidity shortage (Karam, 2008). The Council of Saudi Chambers (2009) reported that the International Monetary Fund determined that Saudi Arabia:
…would face the current global financial crises with strong economic fundamentals. The kingdom’s government has worked to strengthen its macro-economic and strengthen its financial sector and implementation of structural reforms to boost private sector-led growth, which culminated in the Kingdom’s efforts in promoting their economic occupation of the ranked first among Arab countries for four consecutive years and ranked sixteenth in the world…
The purpose of this study is therefore to investigate the fiscal policies in Saudi Arabia and how those policies have helped Saudi Arabia weather the global financial crisis with far less difficulties than the remainder of the world, particularly over countries within the Arab Middle East. The fact is, no country has been spared the effects of the global financial crisis. However, banks around the globe have been the subject of government bailouts, but Saudi banks have been able to remain liquid and have for the most part absorbed the global financial crisis. This study investigates how Saudi Arabia has been able to keep its banks liquid and has so far escaped having to issue bail-outs. It is the researchers goal to determined whether or not, Saudi Arabia’s fiscal policies might be a model for other emerging economies in terms of fiscal policies for the ability to absorb economic shocks.
Literature Review
Saudi Arabia is a resource-based growth economy primarily relying on oil revenues in respect of its fixed budget (Wilson 2005, 6). Oil revenues provide approximately three fourths of the Saudi government’s revenue (See Appendix 1 for a balance sheet of key financials for Saudi Arabian Oil Co.). The oil sector is accounts for approximately 35 per cent of Saudi Arabia’s GDP. The private sector accounts for the remaining 65 per cent. Since 1999 Saudi Arabia has witnessed a positive balance of payments current account (Sabri 2008, 144). In subsequent years, the current account balance of payments has enjoyed a surplus increase. Since 2003 and until the global financial crisis, the Saudi government’s commitment to sound fiscal policies together with improved oil revenues resulted in the country’s budget surplus. The Saudi government has taken a cautious approach to this surplus and has used it to draw down on its debts (Shtauber and Shapir 2006, 87).
Rising oil prices have been increasingly beneficial to Saudi Arabia’s economic development and have been managed with a great deal of success so that Saudi has emerged as the world’s largest oil producing country. Saudi Arabian oil exports escalated, showing an increase from US$45 billion in 1999 to US$115 billion by 2004. The increase in oil revenues is primarily responsible for Saudi Arabia’s positive balance of payments, the government’s surplus budget, its ability to successful draw down on the national debt, improving the GDP and investments in general(Shtauber and Shapir 2006, 87).
The country’s current account balance of payments in 2004 yielded a 73 percent increase over the year 2003 and reflected an increase of more than four times that of the year 2002. The private sector also saw growth with from 3.4 percent in 2003 to 5.7 percent in 2004. This growth was primarily accounted for by lower interest rates, liberalizing the telecommunications sector, strong stock market exchanges and as always an increase in oil revenues. The oil revenues were invested wisely in that the government was able to improve key infrastructure which improved investments (Shtauber and Shapir 2006, 87).
Saudi Arabia’s fixed exchange rate has been largely successful particularly because of its foreign currency payment and receipt trends together with the compulsory foreign exchange reserve backing at 100 percent. This backing functions to place a ceiling on the circulating currency so that it does not surpass the foreign exchange reserves. SAMA’s foreign exchange mechanisms functions within the scope and range of the regime. Saudi Arabia’s relatively strong and established banking sector and its position as a net creditor supports forward intervention so that SAMA’s pending contracts would settle when contracting parties rendered payment in riyals in exchange for dollars (Behravesh 2008, 292).
Research Methodology and Design
This research paper is exploratory in nature and as such is entirely reliant upon a qualitative approach to the research. This will involve a study of the current global financial crisis which is for the most part derived from internet resources. The crisis is fairly recent with very few hard print resources. The most recent information is available online and will be used for the purpose of providing the most recent information on the world financial crisis. In order to fully access the manner in which Saudi banks have responded to and been impacted by the global financial crisis this research collected information from textbooks, journals and government and institutional reports both in hard print and internet form. Again the most recent information is only available online and this includes information provided by the World Bank, the International Monetary Fund, the Saudi Chamber of Council and the Saudi Ministry of Foreign Affairs. Ramady’s article Evolving Banking Regulation and Supervision: A Case Study of the Saudi Arabian Agency (SAMA) will be used to evaluate Saudi Arabia’s banking policies and practices. This study is limited in that the current global financial crisis is relatively new and information in hard print is difficult to come by. Recent information will have to be gathered primarily from internet sources.
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