Much was spoken about on the sidelines of the G8 summit about the global economy, the fate of the US economy, the greenback and of the green shoots that are turning pale against the backdrop of the not-so-optimistic economic data earlier presented. Saudi Arabia’s commitment to global recovery is unquestionable despite the fact that the organizers of L’Aquila managed to exclude Saudi Arabia and others and instead opted to include Egypt and Libya. It is obvious also that the emerging economies of BRIC+S (Brazil, Russia, India, China and Saudi Arabia) have to be part and parcel of any global effort to help bring recovery to the global economic landscape. The global economy can’t afford to choose to exclude some countries for the sake of shortsighted political favoritism.
The visit of US Secretary of the Treasury Timothy Geithner comes at an opportune time following President Barack Obama’s visit in early June. In many ways, it is an important visit of reassurance to Saudi Arabia’s policymaking and business community alike. In so many ways, Saudi Arabia’s economy is impacted by what is happening in the US: The riyal is pegged to the dollar, the majority of Saudi Arabia’s foreign assets are placed in US government paper and the direction of the dollar impacts Saudi Arabia as around 70 percent of all imports are paid in dollars. Oil is the single most important revenue source (government and export revenues) for Saudi Arabia priced in dollars. Invariably the long-term direction of the dollar will impact Saudi Arabia. To the policymakers it could be a visit intended to convey the message of confidence that the administration is taking measures (mainly fiscal) to bring the US economy to some sort of recovery road. With it, comes the proverbial discussion on the dollar. After all, Saudi Arabia has been consistently adhering to a policy that has lent support over the past few months to the greenback as most of the holders of US government paper have brought doubt on its fate. Geithner could also try to convey a welcoming message about Saudi investments in the US, both at the private and state levels. The secretary of the Treasury would require some hard convincing as many Saudi businessmen (and of course others around the world) have seen their investments in the US dwindle fast through various Wall Street-based institutions. Confidence on the future of the US economy has been doubted by many Saudi businessmen. There are contrarian arguments aired about the need for businesses to diversify away from the cyclicality of the Saudi economy, hence the need to invest abroad. That is a noted argument. However, as there is a need for US businessmen and US policymakers to think of investing indigenously, so is the need for their Saudi counterparts to invest now more in Saudi Arabia than at any time in the history of the country. There will always be opportunities abroad no doubt but there are plenty within. Such calls could be branded as nationalistic but others could brand them as purely evoking the national interests of a country. As time passes, the Kingdom’s attempts to diversify will pick up and such will be the need to gear up domestic investments. And it is toward that goal that US businessmen have to assist Saudi Arabia. The stock of US foreign direct investment (FDI) in 2007 in Saudi Arabia was $5.3 billion (latest data), up from $4.7 billion in 2006 which is proximate to Saudi Arabia’s FDI to the US in 2001 amounting to $4.4 billion. Not to also ignore the historic enabling role Saudi Arabia has played over the years in helping to finance the US trade deficit and maintain US consumption patterns.
For sure, the debate about the path of the US economy, its global weight and the direction of the dollar will not abate. It is quite clear that the US administration’s fiscal stimulus was too small which has put a dent on its credibility. However, economic outcomes and debates will impact public perceptions in Saudi Arabia about the US economy.
Whatever happens to the US economy has a direct impact on Saudi Arabia’s economy whether it is liked by some or not. The great conundrum lies on the way the US economy evolves in the coming years and the management of the crisis but also in the way the world, including the BRIC+S, respond. The US through Geithner needs to level with Saudi Arabia just as the Obama administration needs to do the same within the US.
(John Sfakianakis is a Riyadh-based economist.)