Gone it seems, are the days when people met and talked about worldly matters and their families. Nowadays, in Saudi Arabia and the Gulf, talk is centered on the yo-yo fortunes of national stock markets as well as of colleagues, acquaintances and friends who had, it seems, acquired supernatural ability to outperform stock market indexes but now are rarely to be seen. It is a sad state of affairs, and a dangerous one to be in. People forget events over time, even if such events cause an enormous amount of economic and social misery. One such event was the disastrous chain of consequences that led to the massive collapse of the Kuwaiti official and unofficial stock markets, which became known as the “Souk Al-Manakh” collapse in the early 1980’s. The consequences lingered on for many years, with widespread bankruptcies, families in ruin, and a rise in the numbers of those afflicted by antisocial and other mental illnesses, as people who had been millionaires on paper, were suddenly left penniless and in debt. The whole Kuwaiti economy was at risk, with nearly 70 billion Kuwaiti dinars (SR910 billion) of outstanding postdated checks. This threatened viable and legitimate companies, as well as those that were established unofficially and whose shares were traded without any company track record or obvious profitability. The driving force was massive availability of liquidity and the seeming attraction of making an easy profit from share trading.
While the current Saudi Arabian share trading speculative mania has not reached the epic proportions of “Souk Al-Manakh”, there are some crucial differences as Saudi companies do exist and their operations are vetted by independent auditors and accountants before being listed. However, share price trends over the past two years have caused some problems for the longer term financial health of the nation. On the economic front, the desire to make a quick profit from share trading ensures that liquidity is powered into this sector and away from long-term infrastructure investment projects, which could absorb this liquidity. Here, returns are longer term, possibly riskier, but society as a whole will emerge with a more diversified, self-sustaining economic base that generates employment and income generation for years to come. It is estimated that Saudi Arabia will need about SR3,000 billion or nearly $800 billion, in project investments over the next 20 years in various economic sectors. The investment opportunity to absorb excess liquidity and build a sustainable, diversified economic base is there, but needs time to implement.
Society it seems, is in a hurry to make money and few operators in the current Saudi share trading mania participate on well tried investment evaluation basis that analyzes company profitability, price-earning ratios, economic fundamentals or other factors that could at least indicate the degree of risk that is being taken by investors. How can one explain the sheer speculative share purchase madness that gripped Saudi investors who participated in the Dana Gas IPO in Dubai? Financial institutions get lured into this short-term profit making trap, whereby they extend loans for share trading, make commissions on larger and larger volumes of trading, and feel reluctant to take on longer-term, riskier investment projects. Money it seems, grows on trees in fairy tales, as well as in bank IPO counters in Saudi and Gulf banks. But history is replete with examples of booms and collapses of stock markets going back over two hundred years, starting with the famous “South Sea Bubble” of 1720, to the October 1987 “ Black Monday “ global stock market crash. The only difference today is that stock market volumes and market capitalization is much larger, and falls of 5-10 percent in one day which could have caused massive panic in the past, have been treated with caution, but not much alarm, until now.
However, there are differences now and then. Firstly, the number of people participating in the stock markets has increased many folds, as participants feel that investment in this activity will generate extra income, quickly, painlessly and change their way of life. This is reminiscent of the real estate boom of the late 1970’s and early 1980’s in Saudi Arabia, when many people made money from real estate speculation. The results then, were that college students dropped out of the educational system, lured by quick profit, while their colleagues struggled to make their way in life after graduating. Social pressures mounted then, and now, for making quick profits. Educational output suffered as students opted for less rigorous academic subjects, as well as jobs that gave them the opportunity and flexibility to turn to part-time real estate speculation.
The same is happening now. Stories are common of employees becoming share-trading experts, ignoring their jobs, concentrating on market trends, or more appropriately, market rumors. Families in Saudi Arabia, if we are to believe anecdotal evidence, are now split apart, with wives and husbands arguing over which shares to sell or buy and how to distribute profits or losses. Young children are entering the share trading field and making fast money — who can blame them if they also drop out of the education system if they can make several million riyals before they are 19? Let us hope that some sanity prevails soon, and that investors realize the basic fundamentals of trading — any thing that goes up without an underlying business or financial rationale will always come down. At the same time, the current stock market correction should give us all time to set back and reflect on basic fundamentals. The Saudi economy is one of the strongest in the region. Oil prices are going to remain firm for many years. The massive infrastructure projects are gathering pace. The number of IPO’s are increasing. In the long term, the Saudi stock market will gradually rise to a more sustainable level to support the economic fundamentals of the economy. Until then, some investor grief and pain will be the price to pay for the social stock trading madness that has afflicted most Gulf societies.
(Dr. Mohamed A. Ramady is Visiting Associate Professor Finance and Economics at King Fahd University of Petroleum and Minerals.)