How bulletproof is the Saudi economy?

RIYADH, Saudi Arabia — The world’s largest oil exporter is navigating the global economic crisis better than most countries because of its large foreign reserves, totaling more than $500 billion, which are mainly in conservative, low-risk investments, such as U.S. bonds.

These reserves, officially reported at $523 billion in February, are likely to be tapped as the Saudi government launches its own “stimulus” spending in an effort to keep the country’s declining economic growth from falling into recession.

According to the kingdom’s largest-ever annual budget, unveiled earlier this year, the government will incur a deficit as it goes forward with large infrastructure projects over the next several years in order to keep the economy and private sector moving.

These deficits can be covered by Saudi Arabia’s foreign reserves, essentially cushioning an economy that is now suffering the effects of drastically reduced oil revenue, huge stock market losses, dwindling business confidence and a reluctance by local banks to extend credit.

“We have managed ... to spare the nation the worst of its repercussions and we are still monitoring the situation with caution and vigilance,” King Abdullah bin Abdul Aziz told the advisory Shura Council this week.

This safety net, however, will only be possible for a few years, economists said, and an extended global economic crisis, which has sent oil prices tumbling from a peak of $147 last July to about $50, could imperil the kingdom’s economy.

Moreover, some Saudis say they are deeply worried about the their country’s economic future, citing an alleged lack of transparency in the banking system, disorganized economic policy implementation, and a private sector that depends too much on government hand-outs.

The Saudi Arabian Monetary Agency (SAMA), which acts as the country’s central bank, “has not forced banks to be fully transparent ... which creates insecurity and uncertainty,” said Prince Fahad Saad Al Saud, a member of the royal family and a businessman in Riyadh.

Al Saud, who has written articles critical of SAMA for being too complacent, said in a recent interview that he believes the government is not disclosing enough information about the economy, which he sees as precarious.

“You need more information to diagnose and fix the problem,” he said. “What happens today is that everyone tells you everything is okay, that everything is dandy, but in fact it’s not.”
 Al Saud said he feared that “there will be lots of companies going under, the economy will shrink and go into recession, basically ... . It’s going to be the biggest economic crisis in this coming decade for Saudi Arabia.”

The prince, who has investments both at home and abroad, lamented that the Saudi stock market crashes of 2006 and 2008 had deprived the country’s middle class of much wealth, and that job creation remains slow.

Motashar Al Murshed, CEO of Al Inma Investment Bank in Riyadh, said he is concerned that, for political reasons, Saudi Arabia may not be able to tap its foreign reserves as needed if Washington requests that Riyadh forgo redeeming its U.S. treasury holdings until the United States is back on its economic feet.

“I’m worried we’ll be asked to renew these funds (when they reach their maturities), and that in the interest of the global economy, we’ll do that,” Al Murshed said in an interview.
Saudi Arabia is one of the larger holders of U.S. debt.

SAMA Governor Muhammad Al Jasser, who told an economic conference in Riyadh in January that there had been “a dismal failure of regulatory oversight” in the United States, this week expressed confidence in Washington’s efforts to revitalize its economy.

"We have confidence that the U.S. is throwing all available weapons at the financial situation to stabilize it," Al Jasser said at a conference in Bahrain.

He added that he has not yet seen anything to make him concerned about Saudi Arabia’s foreign assets, "but this is a crisis in motion."

Like Al Saud, the businessman, Al Murshed expressed concern about government assurances that all is well.

“I’m frightened because ... the people who manage the economy have raised our expectations so much by announcing this big budget (for 2009) and by repeating constantly that we have nothing to worry about in this global crisis,” he said.

He called it a form of denial when officials say the Saudi Arabia is “much better off than others,” because they are overlooking systemic problems and “focusing only on the surplus in U.S. treasury.”

The country’s rulers are “generous” in their budgetary allocations for services and projects, the banker added. But “handling these funds requires a very active and very efficient and focussed executive team.” And right now, “there are six to seven entities caring for the economy but they don’t coordinate with each other...What worries me is the inefficiency and lack of coordination.”

John Sfakianakis, chief economist at Riyadh’s Saudi British Bank (SABB), offered a brighter outlook, at least for the near term.

Despite dwindling business confidence and hiring freezes in many companies, he said, “anywhere I look, Saudi Arabia looks far better than any other place. We have a very healthy economy compared to the U.S.”

Saudi Arabia calculates its budget on an anticipated oil price of $37 a barrel, Sfakianakis said. So “even with oil at $40 ... Saudi Arabia will do quite well in 2009. Will they contract? Yes. Will they do better than 2008? No.”

The duration of country’s ability to maintain its cushioned-by-reserves status “will depend on the longevity of recession,” Sfakianakis added.

The economist said that Saudis display “immense distrust” in government assurances that the country is not heading towards recession. Though growth is likely to be slow for the next two to three years, he agrees with the government.

“There is no doubt that the economy is contracting — the government is the only one spending,” he said. “But recession? Probably not.”

Sfakianakis noted that the Saudi stock market’s losses of 2008 and into 2009 had hurt more than the middle class, gutting the riches of many top businessmen.

“It’s the big guys now,” he said. “They lost money and are losing money.”

Al Saud, the prince investor, added that the government continues to coddle the private sector, giving it too many free benefits.

“Today, the private sector has much bigger influence than before, but SAMA is still patronizing it, basically working with it like a godfather, rather than as a partner,” he said.

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