RIYADH: As the world’s leaders met in London to seek ideas and funds in order to prevent a systemic collapse of the global economy, many eyes have turned to Saudi Arabia as an obvious source of cash.
The Kingdom’s contribution to rescuing the global financial system has been far from negligible. It is investing more than $70 billion to bring its oil production capacity to 12.5 million barrels a day by the end of this year.
More than 40 percent of the new total capacity will remain unused so that global consumers can tap into it at a later stage. Saudi Arabia’s current control of production capacity makes Tehran and Moscow, to name but two, completely dependent on its adjustments.
Saudi Arabia has used its status as the world’s swing producer benignly. Its leaders have understood for decades that their interests are intertwined with the prosperity of the world economy and that excessive prices and the accompanying volatility are counter to the Kingdom’s long-term interests. Saudi Arabia has helped maintain moderation within OPEC (Organization of the Petroleum Exporting Countries), which has resulted in lower gasoline prices around the world. Lower pricing at petrol pumps is perhaps the most effective way in which the Kingdom can aid recovery. Compared to the record highs of last year, lower petrol prices are currently adding an extra $200 of per capita income on a monthly basis.
Also, by maintaining an oil-price floor at about $40 per barrel, Saudi Arabia is ensuring that the economies of the rest of the Gulf Cooperation Council run roughly balanced budgets and thereby act as engines for the global economy.
This year the Kingdom announced a sharply expansionary budget to maintain domestic demand. Its $400 billion worth of infrastructure projects earmarked for the next five years should also be viewed as a direct stimulus to the global economy. These long-term projects will help maintain an expatriate work force in Saudi Arabia rather than prompt the kind of exodus we are seeing in some other GCC states.
The nation’s defense procurement program also continues to provide jobs and revenues for many Western companies. At least $220 billion is likely to be recycled abroad in the form of imports, contracts or labor transfers. According to official data, over the past six years Saudi Arabia has imported more than $335 billion worth of goods. We estimate that since 2003, more than $100 billion has been officially and unofficially remitted by expatriate workers.
So what is Saudi Arabia’s position in the midst of the worst economic crisis since the Great Depression. First and foremost, the Kingdom will fight against protectionism and unilateralism. Having joined the World Trade Organization, Saudi officials understand that trade barriers need to be flattened so that the wheels of the world’s economy can keep turning. “We should not have policies of beggar thy neighbor,” as one minister said earlier.
The Kingdom wants better financial regulation and believes that progress in mitigating the excesses of the global financial system cannot be addressed without more oversight. But it does not want control to curb competition.
Saudi Arabia supports measures calling for stronger regulation of hedge funds and derivatives - although they recognize that these instruments cannot be driven out of existence. Saudi businesses have been hurt by their exposure to these vehicles and instruments. In contrast, we should view the conservative policies of the Saudi Arabian Monetary Agency in regulating local financial institutions as a policy to be emulated.
The Kingdom is of the view that the world cannot afford to choose the color of its recovery.
Finally, in representing the GCC states, Saudi Arabia will continue to defend the interests of sovereign wealth funds that have played a significant role in maintaining financial stability and confidence so far. Many SWFs from the GCC have invested in financial institutions whose shares have plummeted. To be sure, European countries and the US have moved on from the days of the DP World’s purchase of P&O but Saudi Arabia was right when it called on the West to be less obstinate with SWFs. Saudi Arabia has lent support to the US by steadfastly maintaining its substantial holdings of dollar assets.
The Kingdom, whose central bank is now one of the world’s largest holder of foreign assets, is keen to maintain access to global markets.
(John Sfakianakis is chief economist at SABB (Saudi British Bank). A version of this article was earlier published in the Financial Times.)
