JEDDAH, 2 May — For more than 25 years, Brad Bourland has been looking at the Saudi economy since he first came to the Kingdom in 1976 for his first job out of college. As chief economist of the Saudi American Bank (SAMBA), his career has since evolved to become centered on analyzing the economies of the Middle East focusing on Saudi Arabia. During a short visit to Jeddah recently, Bourland spoke to Arab News, in a wide-ranging interview on future prospects for an oil-dependent Saudi economy, the slowdown in Western economies and its impact on the Kingdom, accession to WTO, privatization and Saudization.
Q: What do you find interesting about analyzing the Saudi economy, why have you chosen to do this for a living?
A: It is something I very much enjoy. Analyzing the Saudi economy is solving a puzzle, and I enjoy the challenge of a good puzzle. First there is not much data on the economy so you have to come at issues from indirect and creative directions. Second, the unique characteristics of Saudi Arabia are quite fascinating. For example, this is a country that has some six million expatriates and yet there is a growing unemployment problem among its nationals. It is a country that has a very strong free market attitude, yet the economy remains dominated by the government. It is a country that for centuries has been global in its views about business and open to the world, yet it is not a member of the World Trade Organization. It is a country with substantial private wealth, yet there is a need for foreign investment to grow the economy. And on and on. These contradictions make Saudi Arabia fascinating for an economist. One last point, for the biggest economy in the Middle East there really are very few economists here to analyze it. In the eleven banks in the Kingdom we have only three chief economists based in Saudi Arabia who write on the economy. If you compare that with, say, Lebanon, a country that has an economy one tenth or less the size of Saudi Arabia yet has 75 banks, you find economists tripping all over each other there, so I feel quite fortunate that I can make a significant contribution and have an impact.
Q: Do you feel frustrated sometimes for the lack of information?
A: Yes and no. I enjoy the challenge of trying to find out what goes on. I enjoy looking at the data that is available and trying to understand what is fact, estimate and opinion. I try to look critically at the numbers and make sense of them. To be able to filter and add value as an analyst for SAMBA and its clients is my goal.
Q: Right now there is an economic slowdown in the US. What are the dimensions of that for the global economy and how does it affect us here in the Kingdom?
A: First let me talk about how it affects us in the Kingdom. There are three key implications for the Kingdom of the slowdown in the US: The impact on oil prices, on interest rates, and on the exchange rate, especially dollar against the euro and dollar against the yen. This is because the Saudi currency, the riyal, is pegged to the dollar and as the dollar goes against these other currencies so the riyal also goes against these other currencies. Regarding oil prices, the key is the extent to which the US slowdown affects Asia because most of the global growth in demand for oil comes from Asia and not from the US. The market consensus and my own view is that oil prices will stay firm and that OPEC, led by Saudi Arabia will successfully moderate production to keep prices within the target range they seek, around $25 per barrel. I think this is likely the case, however, we have to think about less likely, but possible scenarios. One of these is the possibility that the US slowdown is deeper than expected, longer than expected, has greater effects on Asia than expected and also brings slower growth in Europe than expected. All this could lead to softer demand for oil and to substantial drop in prices. This is something that we must be wary of and keep an eye on. But again, it is not the most likely scenario. Regarding interest rates, short-term rates are coming down in the US as the Fed attempts to stimulate growth, but longer term interest rates, over two years, are starting to rise as the market senses a recovery down the road. Since borrowing costs in Saudi Arabia are parallel to those in the US, these are important trends for companies and individuals to be aware of. Looking at the global situation in general, this is the first time in my memory that both the US and Japan, the world’s two largest economies which comprise about a third of the total global economy, are experiencing stagnation at the same time. That is bound to have an effect globally and it is a source for serious concern. Japan in particular has a history of seeking growth through exports, so it is hard to imagine Japan recovering before the US does. In the US this is the first recession of the “new economy.” So we don’t know all the dimensions of how it will play out. Modern economic theories trying to explain the phenomenon in the US of a very long expansion in the business cycle and the nature of the inevitable recession, conclude that recessions, when they come, will be particularly sharp but particularly short. Now, we already know the slowdown has been particularly sharp, we don’t know yet if it is short. The recent GDP data showing surprisingly strong 2 percent growth in the first three months of 2001 are encouraging.
Q: Saudi Arabia depends heavily on oil to run its economy. What if other producers, namely Iraq, came back to the OPEC quota and started pumping three million barrels a day into this market, will this affect prices and perhaps offset the Kingdom’s economic plans?
A: No, I don’t think it will have those implications. Iraq is of course a member of OPEC but it does not have a quota at present. It produces whatever it wants to produce and it can and does produce as much as three million barrels a day. It was producing around that level for several months last year, but its production has been erratic. It is a wild card on the oil market, but it has been for some time now and its impact I think is somewhat containable. Saudi Arabia has the production capacity to intervene in the market to stabilize prices when necessary.
Q: Some OPEC members are exceeding their quotas, doesn’t this confuse the market making it difficult to control?
A: This is an important issue to watch now that quotas are being reduced. Last year quotas were increased, so OPEC discipline was well-maintained. If OPEC decides to reduce production further at its June meeting, then I think it will be time to start watching more carefully for overproduction. This raises the question of the quality of data. In fact there is data collected by the industry on how much oil is being produced by oil producers. What is much more difficult to measure is how much oil is being consumed. During the recent producer-consumer dialogue in Riyadh, Saudi Arabia called for greater transparency in the oil market. For OPEC to have a stabilizing effect on prices, then a clear picture of the supply-demand balance in the world oil market important.
Q: If the global slowdown is going to influence world currency prices, will the Kingdom be able to maintain the stability of the riyal?
A: Saudi Arabia has chosen a policy of fixing its exchange rate to the dollar at 3.75 riyals to the dollar, and it has been that way since 1986. What this effectively means is that the government has given a gift to the private sector because the government is assuming the foreign exchange risk and businessmen can operate with exchange rate certainty. To have that kind of policy and sustain it, the government must maintain substantial foreign assets, especially dollars, to support the pegged exchange rate. Saudi law in fact requires that for every riyal that is printed there be an equal amount of foreign exchange convertible to gold in assets held by the central bank, the Saudi Arabian Monetary Agency. So, there is 100 percent foreign exchange cover of the currency in circulation in the Kingdom. That gives the government strength to defend this peg and continue that for a long time.
Q: For how long do you think this policy can hold?
A: I think it is still hard and fast policy by the central bank and the leadership in general to maintain the peg to the dollar for a long time.
Q: World stock markets have been unstable for some time now, what effect will this have on the global economy?
A: I wouldn’t characterize it as unstable but as volatile. This is another important aspect of the slowdown in the US and how it affects Saudi Arabia. As you know, there is a lot of Saudi private wealth being invested in the US stock market and it has been popular for many Saudis to invest in technology. The NASDAQ is down 60 percent or more from its high and that has had an impact on many Saudi investors in the US market. I think one reason that we have seen good and stable growth in the Saudi stock market over last year is because Saudi investors who have experienced this painful volatility in the US feel safety in something that is easy to understand in their own home markets. They have brought money back to invest in Saudi shares. Now, what I think happens in the US is this: The NASDAQ, which was at a high of over 5000, is now around 2100. It will go back to 5000. I don’t know when, of course, but it will and when it is back to 5000 it will be a fundamentally different NASDAQ than the one of a year ago, which was driven by excessively valued speculative startup tech companies.
Q: Saudi Arabia has been seeking access to the WTO for years now. Are they moving too slowly, and how long do you think it will take them to join?
A: This is really the most common question I’m asked about the WTO - when will we be in? Unfortunately the process is one without a deadline, it consists of detailed negotiations with many trade partners, so it is simply impossible to predict. The Kingdom will gain membership when all of its trading partners have negotiated an agreement acceptable for all of them and to Saudi Arabia as well. I don’t know when the Kingdom will get in but I hope it is as soon as possible.
Q: Can Saudi products compete well?
A: Saudi products will compete fine. Already Saudi petrochemical products are competing well in the global market. SABIC is one of the world’s largest petrochemical producers and in industries like these Saudi Arabia has no difficulty competing. There are many other Saudi manufactured products that are exported to many countries of the world and compete well. Most importantly, Saudi companies will always be able to compete well in the Saudi marketplace, regardless of how open the competition.
Q: The government has embarked on a policy of privatization that some say is still moving slowly. Is this the case?
A: Doing it right is much more important than doing it fast. The important thing is that the Kingdom is committed to privatization, as one piece of a range of reforms to speed growth in the economy. I would like to see it move faster, but I don’t think speed is the critical issue. The economy will grow faster and be more efficient as the government sells assets to the private sector. Profit-motivated businesses simply run enterprises more efficiently than governments, creating more jobs and growth along the way, and this is recognized here. One thing Saudi Arabia is correctly cautious about is privatizing the wrong way. The Kingdom needn’t rush headlong into a fire-sale of government assets to raise cash, as happened in Russia. Saudi Arabia’s government does not have the crisis of an urgent requirement to raise money, so they can privatize more deliberately and make sure they do it right.
Q: Is the existing infrastructure base strong enough to sustain future economic growth, or does the Kingdom need to do more here?
A: First, let’s give credit to the incredible development of the infrastructure in Saudi Arabia. I think it is one of the wonders of the modern world how Saudi Arabia changed in terms of physical infrastructure from the 1970s up to now. But we do need more to keep up with the growing needs of the country. A large number of schools, new telecommunications, power, and water facilities are needed. We need to take it to the next higher level.
Q: How do you see progress in Saudization?
A: It is a complex problem and as I mentioned earlier, it is one of the contradictions of the Kingdom that I enjoy trying to understand - the dilemma of having some six million foreign workers yet growing unemployment among Saudi nationals. The concept of putting Saudis to work, which is what Saudization is in its broad sense, is something positive and of course it must be done.
