JEDDAH, 2 December 2002 — The foreign exchange and derivatives market is universally regarded as the most liquid market in the world, whereby a person, in his own capacity or on behalf of an entity, can transact in any major currency at any point in time during the day or night. The products transacted in the foreign exchange market comprise of spot dealings, outright forward, and foreign exchange swaps contracts including interest rates swap. The derivatives market segment comprises of Over-the-Counter (OTC) foreign exchange options, currency swaps, forward- rate-agreements (FRAs), exchange-traded foreign exchange futures and options as well as interest rate derivatives. In order to track developments in the global foreign exchange and derivatives market, the Bank of International Settlements (BIS) conducts triennial survey of central banks of major financially important countries. The geographical coverage of the three-year survey has been progressively expanded from 21 countries in 1989 to 26 countries in 1992 and 1995, then 43 countries in 1998 and further to 48 central banks in the most recent survey of April 2001. Saudi Arabia started participating in the triennial survey of foreign exchange and derivatives market activity since April 1998. Drawing on the BIS most recent triennial survey of April 2001, the global market size and the share of Saudi Arabia was reviewed for different product instruments and currencies.

Global foreign exchange and OTC derivatives market turnover

Global daily average turnover in traditional foreign exchange markets declined by 19 percent to $1,200 billion in April 2001, down from $1,490 billion in April 1998. The introduction of the euro appears to have reduced the turnover, mainly due to the elimination of intra-EMS (European Monetary System) trading. In addition, global average daily turnover in OTC derivatives markets (adjusted for double counting in local and cross-border transactions) increased by 10 percent to $1,387 billion in April 2001, up from $1,263 billion in April 1998. Thus, the combined global daily average turnover in foreign exchange and OTC derivatives markets declined by 6 percent to $2,587 billion in April 2001, down from $2,753 billion in 1998. Regarding the transactions in currency-pair, dollar/euro was by far the most traded currency-pair in April 2001 and captured 30 percent of global turnover, followed by dollar/ yen with 20 percent and dollar/sterling with 11 percent. Trading in emerging market currencies captured 5 percent of the global total in April 2001, compared with 3 percent over the same period of 1998. The remaining 34 percent of the global total was captured by other currency pairs.

Saudi foreign exchange and derivatives market turnover

The combined foreign exchange and derivative market turnover reported as by SAMA for the ten commercial banks in Saudi Arabia amounted to $55.46 billion in April 2001, giving a daily average turnover of $2.5 billion. Assuming a similar monthly volume for the rest of the months in that year, annualized total amount of transaction is estimated at $666 billion. This represents nearly 0.1 percent of the combined global total in the same period. The traditional foreign exchange market, which comprises of spots, outright forwards, and foreign exchange swaps, constituted the bulk at 91.6 percent ($50.81 billion) of the combined turnover in Saudi Arabia in April 2001, followed by the derivatives markets turnover of 8.4 percent ($4.67 billion) which includes currency options, interest rate swaps, interest rate options and forward rate agreements (FRAs). This represented nearly 0.2 percent of the global daily average turnover in the traditional foreign exchange markets across 48 countries in the world in April 2001. Within the Saudi foreign exchange market segment, spot dealings constituted around 58 percent ($29.5 billion) of the Kingdom’s total $50.81 billion in April 2001, followed by foreign exchange swaps 31.7 percent ($16.1 billion) and outright forward contracts 10.3 percent ($5.2 billion).

Saudi foreign exchange market turnover by counterparty

SAMA also reported to BIS trading between the three broadly defined counter-parties that include reporting dealers, other financial institutions, and non-financial customers, while the three products comprise of spots, outright forward and foreign exchange swaps. Within total foreign exchange turnover of $51 billion in Saudi Arabia, trading between reporting dealers constituted by far the largest amount of $36.6 billion or a daily average $1.66 billion and accounted for nearly 72.1 percent of the country total foreign exchange turnover in April 2001. This represented nearly 0.24 percent of the global daily average, suggesting that spot foreign exchange market in Saudi Arabia is more active and also relatively more developed. On a global level, however, trading between reporting dealers declined sharply, from a daily average equivalent of $908 billion in 1998 to $689 billion equivalent in April 2001, as the shrinkage was seen due to the growing role of electronic brokerages in the spot inter-bank market.

In the Saudi foreign exchange market, transaction between banks and non-financial customers totaled $7.94 billion or a daily average of $361 million, representing nearly 15.6 percent of the country’s total foreign exchange market in April 2001. In the global marketplace, daily average transactions between banks and the non-financial customers declined from $242 billion in April 1998 to $156 billion in April 2001. The fall was seen due to the business concentration in the corporate sector through the centralization of corporate treasury functions and the resultant increase in intra-company netting of foreign exchange flows. Transactions between banks and other financial institutions represented nearly 12.3 percent of the country’s total foreign exchange turnover with value equivalent to $6.25 billion in April 2001, suggesting a daily average of $284 million and representing nearly 0.09 percent of the global total in the same period. Again, spot foreign exchange trading was the single largest activity among the reporting dealers. In the global marketplace, however, transactions between banks and other financial institutions rose from the daily average of $279 billion in April 1998 to $329 billion in April 2001. The higher trading volumes seem to have reflected the increasing role of asset managers.

Saudi foreign exchange market turnover by currency pair

In the Saudi foreign exchange marketplace, transactions in Saudi riyals against US dollar was by far the most traded currency pair totaling $28.2 billion for the month of April 2001, giving a daily average of $1,281 million in the same period. It was followed by $/Euro with 17.8 percent of the country’s total or an equivalent of $9.04 billion during the same period, while the currency pair $/Yen came as the third largest transacted pair in the Kingdom. However, US dollar has remained the dominant currency pair in the Saudi foreign exchange market in April 2001.

Saudi derivatives market turnover by counterparty

Total turnover in the Kingdom’s derivatives market was equivalent to $4.66 billion, or a daily average equivalent of $212 million in April 2001. Interest rates swaps with reporting dealers constituted by far the largest component totaling $3.0 billion and representing nearly 64.5 percent of the country’s total in April 2001. Currency options bought and currency options sold accounted for 13.8 percent and 13.3 percent, respectively, during April 2001. The market turnover for forward rate agreements (FRAs) totaled $393 million and represented 8.4 percent of the segment’s total in April 2001.

Outlook and conclusion

Saudi foreign exchange and derivatives market is still in the process of development. Given the size of economy and the stage of the its openness, yearly combined turnover in the market is estimated to have reached around 3.5 times nominal GDP, compared to nearly 15 times of GDP in the United Sates in 2001. The combined turnover in Saudi Arabia could have been significantly more if direct transactions of domestic companies with international financial institutions were also accounted for. This, however, cannot be estimated due to the lack of data. The outlook for foreign exchange and derivatives market in Saudi Arabia appears positive in view of the Kingdom’s possible accession to WTO, opening up of the economy to foreign investors, particularly in the gas sector, as well as the process of privatization and liberalization of the Saudi economy going forward.

(Dr. Said A. Al-Shaikh is chief economist at National Commercial Bank, Jeddah)