The Effect of the USA Economic Collapse on the Saudi Arabia Economy
The foundation of the Saudi Arabian national economy is the petroleum market. As early as 1986 Saudi Arabia (SA) linked its riyal to the US dollar (USD) (Sultan 2011, p. 237). The US economy as the leading economy in the world can have a deep impact on the Saudi economy which is a leading oil exporter in the world. The United States experienced a global financial crisis which caused a domino effect of economic problems throughout the world.
The crisis spread to the world’s economy; having a special effect on the Saudi Arabian economy. Affects on the Saudi banking sector and other sectors can be noted became obvious. The decline in the US dollar exchange rate against major currencies witnessed the steady decline of the riyal’s exchange versus the same currencies; as a result, inflationary pressures were created in SA.
There are many external monetary and fiscal factors that exert a profound impact on financial markets. The problem is to identify the actions that most impact the slowing of the devaluation; to stop inflation from rising. Change in oil prices, political instability and economic recession all play very important roles in every economy in the world. There are two schools of thought as to the strategy that is best to keep the Saudi Arabian stable. One school of thought argues that delinking the Saudi Arabian Riyal (SAR) from the USD would be the best strategy for a stable SA economy.
Purpose of the study
The purpose of this article is to study the impact of the US economy on the Saudi Arabian economy. Over the last few years, economic recession in the US has, undoubtedly, created a great ripple in the economy of Saudi Arabia. Because it is a leading oil exporting country in the world, the Saudi economy definitely depends on the economy of oil importers. The United States being one of the major importers of oil, affects the economy of all oil producing countries in general and Saudi Arabia in particular.
One of the economic indicators with a big effect on the Saudi Arabian economy is the decline of the USD. By identifying strategies to combat inflation the Saudi Arabian government will be able to use it to keep the economy stable more knowledgably and more efficiently. Because this is a much discussed problem a questionnaire has been developed to survey the opinion of professionals in the financial and economic sectors. The researchers expect to find that most of the professionals are in agreement with the Saudi Arabian government’s actions to contain inflation and still keep the SAR linked to the USD.
The study has been designed to learn the opinions of professionals in banking and financial institutions relating to inflation. They will be asked to give their opinion on the linking of the SAR to the USD. They will also be asked to give their opinion on the best strategy to combat inflation. In order to keep the participants and researchers separate and anonymous, a data gathering organization was hired to give the survey to the participants.
The biggest limitation was having no control over the eventual size of the sample group. Finally a small but very focused group of participants was used.
A lot of time was needed to compile the initial lists of participants, make telephone calls to bank managers to get permissions and organize the time for giving the questionnaire. Scheduling a time to have the questionnaires answered was a challenging problem. For these reasons FirstOrderResults.org was hired to gather the data.
Review of Literature
Effect on Saudi Arabian Economy from the
United States of America’s Economic Collapse
As early as 1986 Saudi Arabia (SA) linked its riyal to the US dollar (USD) (Sultan 2011, p. 237). Over the years other countries of the Gulf Cooperation Council (GCC) did the same but that did not work out well when the US economy collapsed. Smith (2007) reported that although the decline in the dollar value led to the highest crude oil prices ever, inflation in the Gulf countries, such as Saudi Arabia, led to the idea of perhaps breaking the Arabian currency ties with the US dollar (p. 30). The US dollar plays a significant role on oil price exchange in the world market; the GCC depend on oil as their main source of national income. There are many external monetary and fiscal factors that exert a profound impact on financial markets. It is of obvious interest to observe this crisis on the world’s economy especially on the Saudi Arabian economy so any affects on the Saudi banking sector and other sectors can be noted.
Saudi Arabian financial markets, oil prices and other economic variables reflected the collapse of the US dollar. Also a strong correlation between the dollar interest rate and the Saudi Arabian riyal (SAR) follow a fixed exchange rate in SA; thus, any fluctuation in the USD exchange rate against major currencies leads to high or low in the SAR price exchange depending on the direction (higher or lower) of these currencies.
The weakening of the dollar since 2006 against the Euro and other currencies is now affecting the country in many ways. One of the fallouts of the fixed exchange rate is the soaring inflation in the country. The depreciation of dollar relative to the Euro and other currencies means depreciation of the riyal to those currencies. (p. 37)
Therefore the decline in the US dollar exchange rate against major currencies witnessed the steady decline of the riyal’s exchange versus the same currencies; as a result, that created inflationary pressures in SA.
Before we begin to focus on the collision of this crisis on the Saudi economy, let’s take a look at the point of view that there is a negative impact to the Saudi banks. There is an argument that many of the SA banks will face a shortage of liquidity, making them unable to meet their obligations. For example there was a movement of money from SA bank deposit accounts to UAE banks in 2007 because of the UAE’s serious consideration of unlinking the dinar from the USD (Smith, 2007, para. 24). Dr. Zahid Khan, the chief economist of Riyad Bank, pointed out that the tie between increasing oil prices and the declining dollar creates too much liquidity, resulting in not enough goods to keep local economies healthy (Smith, 2007, para. 20).
What has been observed is a continuing high liquidity and high strength for Saudi banks. It has been proved that the Saudi banks have an abundance of liquidity and a great growth in money supply, which mainly consists of various types of deposits provided to the private sector as loans.
In 2009 the Saudi Arabian Monetary Agency (SAMA) acting as the Central Bank has “maintained an accommodative monetary policy injecting liquidity and reducing the cost of funds to corporate Saudi Arabia . . . by dropping benchmark interest rates from 1.5% to o.025%” (Review, 2009, p. 12). In this way the liquidity causing inflation has been invested into non-petroleum projects such as the construction of the new cities and an already completed new university.
Sultan (2011) has analyzed the phenomena of rising prices in Saudi Arabia using a bound test analyses to determine the three most important variables which impact inflation; and found that those are “world inflation, money supply and the nominal effective exchange rate of the riyal” (p. 243). This result indicates that the amount of foreign investment and the SAR exchange rate impact the inflation as well as liquidity (money supply).
A world recession has negative impact on oil producers so Saudi Arabia is be negatively impacted in the oil sector. An example of the rate of decline in OPEC oil production is that in “2009, the Kingdom’s (SA) crude oil (annual) production declined from 9.2 to 8.1 million barrels per day . . .while the average annual price of crude oil declined 39%” (Review, 2009, para. 1 & p. 12).
With few signs the US government will seek a broader international agreement to help stem the dollar’s decline, and with the US Federal Reserve expected to ease interest rates . . . the result in the GCC is a growing demand that their governments cut the links between their currencies and the greenback. (p. 32)
In conclusion, the effects of the US crisis on Saudi Arabia in different sectors such as the stock market, banking products, and foreign investment impact the SA economy. Foreign investors may rearrange their portfolios and invest more in their own countries. There could be a breakdown of the planned projections for the economy leading to a pause in growth of the real estate market. But because the petroleum industry is the main driver of the economy, I suggest new methods of keeping the economy stable can be developed, especially if keeping the SAR and the USD exchange rate linked is the goal of the government.
The researchers were instructed by the Riyadh Chamber of Commerce to report on opinions of financial and bank leaders on the inflationary problems Saudi Arabia has been experiencing. We hired FirstOrderResults.org to gathering the data because the sampling group was carefully focused and meetings were necessarily face-to-face. A third party to gather the data was very important in order to keep the anonymity of the participants.
The instructions to the research group were to randomly choose Saudi Arabian financial and bank leaders and professional economic advisors in Riyadh to answer the short questionnaire. The research survey was given at meetings in order to ensure a higher participation. The representative of the research organization was on hand to answer any questions.
Design of the Questionnaire
The questionnaire consists of six questions. The first two questions identify the participant by age and experience. The other questions are about the Saudi Arabian Riyal being linked to the USA Dollar and the problem with inflation.
The design is simple so that it can be answered very quickly. The questions give optimum information about the participant’s opinion about inflation correction strategies considering the short amount of time available.
FirstOrderResults.org was instructed to carry out a pilot study in Jeddah. The same instructions were given as to where and how to gain answers to the questionnaire as in Riyadh. The pilot study was important to understand if this strategy for gaining information was useful. In the end the strategy was approved. The questions are easy to answer, the problem is important to the people of SA and the professionals were happy to share their opinions. The pilot study included a control group in Riyadh. The control group was used as a comparative tool.
FirstOrderResults.org was instructed to follow-up with a personal phone call to each participant in the survey. The participants were thanked for answering the question on the survey. The participants were asked if they had any questions or would like to add any new thoughts to the survey.
Figure 1 shows the age distribution of the people that took part in the survey. This is a graph of the most unexpected finding of the survey. The professional sector in banking and financing is aging and more young people are needed in the sector.
The result of the survey showed that the professionals agreed with the government’s strategies used to fight inflation. The main strategy of manipulating liquidity to control inflation was what the participants felt was the best way. Riyal is invested into infrastructure and education in Saudi Arabia. Construction is seen as the best way to invest money back into the country of Saudi Arabia in order to combat inflation according to this survey.
The survey also pointed out that the professionals in the banking and financial institutions are aging. Internships and other ways need to be started to help get young people into the system.
In conclusion the linkage of the SAR to the USD seems satisfactory to most of the professionals. This probably is the case because the Saudi Arabian government has developed strategies to control inflation which are good for the people and the country of Saudi Arabia. The hypothesis that “most of the professionals are in agreement with the Saudi Arabian government’s actions to contain inflation and still keep the SAR linked to the USD” turned out to be correct.
The researchers recommend that the government keep its ‘finger on the pulse’ of the professional Saudi Arabian financiers and bankers. It is important to know the opinions of the people who are involved first hand with money exchange issues and inflationary issues. The government must be flexible to the changing investment climate and to the needs of the country.
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