RIYADH, 22 August 2005 — An observer missing from the economic scene for the last four weeks might be excused for thinking that nothing much new has happened in the global economy during his absence. Oil prices have set yet another string of record highs, the US Federal Reserve raised interest rates by yet another 25, matched by Saudi Arabian Monetary Agency (SAMA), and the Bank of England cut its rates as expected by 25 bps. The good news is that the global economy did not fall off the cliff despite terror attacks around the world and rising interest rates and oil prices. The bad news is that the global economy shows little signs of picking up speed despite the passage of two years after the last recession.
Our economic observer, however, cannot but notice the one new shine in the local economy. When he left the scene, the Saudi stock market (as well as a number of other Arab bourses) was in the midst of a deep and uncomfortable correction. After reaching a peak of 13,997 (intraday) on June 19, the Tadawul All Shares Index went on a dive and fell to a new intraday low of 11,561 on July 18 — a drop of 2,436 points in the space of one month. Most analysts attributed this drop to profit-taking during the second quarter earnings season. Nevertheless, it made everyone nervous because most observers remain unsure about the sustainability of the huge three-year bull run of the Saudi stock market as it races way ahead of any fundamentals. Our absent-from-the-scene observer will be very happy to note that since he left, the Saudi stock market has not only recouped the entire loss of the previous correction but surpassed that and went pass the 14,000-mark to reach new heights. He will be doubly happy because he had rightly forecast, before leaving, that as long as oil prices and Saudi oil production remain at current levels, any correction would be temporary.
On Friday, the Tadawul closed at 14,314. Interestingly, the Saudi stock market is taking on a life of its own, independent of the Kingdom’s oil revenues. In fact, it seems to be on the verge of becoming another driver of economic activity in the Kingdom. Up until recently, the Saudi economy has been primarily an “oil-driven economy”, both in the public and the private sector. With the huge wealth it is creating — over SR 2 trillion at last count — the Saudi stock market is bound to have an impact on domestic economic activity. Even if a small portion of this new wealth is used to buy domestic or imported products, or invested locally, it will have a significant knock on effect. The wealth can also be leveraged directly or indirectly to generate even further rounds of economic activity. The surprise in this “embarrassment of riches” is that domestic real investment in productive activity has kept little pace with the huge growth in oil liquidity and stock market wealth. Perversely, some companies seem to be even diverting their earnings away from real investment into stock trading. The challenge for the government is to ensure that this new found wealth is channeled into productive, instead of ethereal financial investment so that the economy can show real growth.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)