Saudi's oil funds cushion crisis

The Saudi central bank recently reassured the public that international government investments are sound.

Saudi Arabia's government could step in to buy collapsing stock on the local bourse and the central bank will keep banks liquid if necessary, but the global financial crisis should have a limited effect on the oil giant. Barring surprises such as the sudden bank collapses that hit other major economies, analysts predict Saudi Arabia's status as the world's largest oil exporter offers it at least short-term protection even though falling oil prices will cut its earnings. "They have a cushion because of the oil money in the treasury and if anyone's going to be in a safe position it's Saudi Arabia," one western diplomat said, reflecting the general view in the Riyadh diplomatic community. But the worldwide falls in stock markets have raised questions about financial transparency in the kingdom, which holds foreign securities worth hundreds of billions of dollars and declines to give details about its investments. Saudi Arabia's economic profile has witnessed a stunning turnaround in the last decade, while the government - dominated by the Saudi royal family - has retained a closed political culture that keeps the disenfranchised public in the dark. Back in 1998 when King Abdullah, as crown prince, told Saudis bluntly the oil boom was over and the country would have to tighten its belt, gross domestic product (GDP) was US$144 billion (Dh528.98bn) and oil was hovering around $10 a barrel. Last year, GDP was $446bn while oil rose to nearly $100 a barrel. This year's budget assumes a modest oil price of $50 a barrel. "Oil-producing countries have excellent financial cover so they are the least affected by the world crisis. The fear is that US and British oil firms could reduce energy investment in the Middle East," said analyst Aqeel al Inezi. Concern over the fate of Saudi-listed firms has led the country's media coverage. Outlets such as Al Arabiya television have had days of feverish coverage aiming to reassure a small elite of wealthy investors that the market will rise again. The stock market hit its lowest level in four years on Saturday, falling below 6,000 points. On Monday, it surged 7.5 per cent, in line with other Gulf bourses, to above 6,800. Investors have already gone through the psychological barrier of a bourse collapse after the market fell 50 per cent to about 10,000 in 2006. And the number of daily traders has shrunk considerably since then, as most ordinary Saudis, struggling to manage with high inflation, have kept away. Industrialist Abdul-Rahman al Zamil said the government could conceivably buy stock if the market collapses further. Many of the key stocks on the market are already majority-owned by a highly conservative government. On Sunday, the central bank, known as SAMA, cut its key benchmark lending rate for the first time in almost two years and lowered bank reserve requirements, saying inflationary pressures had eased. Price rises in recent months hit their highest levels in 30 years. SAMA has also sought to reassure the public that government investments abroad are safe and that liquidity in the wider economy will not dry up. Lack of transparency means the extent of Saudi Arabia's investment overseas remains unknown. Six major banks have denied they have any exposure to toxic US mortgages. Muhammad al Jasser, the deputy governor, said SAMA's investments abroad were "low-risk" but gave no more details. SAMA's August monthly report showed it had $285bn invested in foreign securities and $79bn in foreign bank deposits. Other government bodies had $63bn in foreign securities and $5bn deposits with foreign banks. Their total deposits in banks fell between July and August by the same amount that their foreign securities investments rose. Private Saudi investors often prefer anonymity, while their fortunes could have an economic impact at home. The Swiss bank UBS last year sold a stake to a Saudi investor, and listed Saudi companies have expanded globally. Saudi industrial giant Sabic acquired General Electric's plastics division for $11.6bn last year. Analysts say the Saudi reaction to the global financial crisis has highlighted problems of transparency in an economy that remains fundamentally strong. Abdulhamid al Amri, of the Saudi Economic Association, said official reassurances could have prevented the bourse losses. "Saudi stocks saw a correction that exceeds declines in markets directly hit by the crisis," he said. "The Capital Market Authority as a regulator is not committed to transparency." A former head of the regulatory body, Ibrahim al Nasseri, told a Saudi newspaper this week that listed firms do not abide by disclosure requirements and said that insider trading continues. * Reuters