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Saudi’s insignificant economic reshuffle…or is it?

Saudi’s insignificant economic reshuffle…or is it?

Saudi Arabia’s slight reshuffle of the OPEC cabinet may not send shockwaves in the oil ministry but it is may accelerate reform and market liberalisation

December 14, 2011 4:27 by

The conservative Islamic kingdom embarked on a broad programme of economic reforms more than a decade ago, using deregulation to open the country to private and foreign investors and strengthen the financial sector. The effort aimed to reduce the country’s dependence on volatile oil revenues and create jobs in private companies.

But Saudi Arabia’s reforms have slowed in the past two years, and there has been little progress on two changes that have been expected for years: allowing foreigners to invest directly in the stock market, and passing a law to allow residential mortgages.

Another difficult issue is the low levels at which the government sets domestic energy prices. This encourages waste and reduces pressure on companies to upgrade their technology, while profligate domestic oil consumption threatens in the long term to reduce the country’s oil exports.

“There is a definite recognition in Saudi of the need to accelerate reform, and this may be part of that shift,” said Simon Williams, Middle East economist at HSBC in Dubai.

Opening the stock market to foreign investment, which the government has been considering for several years, could help to strengthen the industrial sector by increasing market discipline.

Saudi Arabia is also believed to want to reform its corporate bond market and encourage companies to issue more bonds, which would reduce their excessive reliance on bank loans — a reliance which can be awkward for the companies and risky for the banks.

A desire to speed up capital market reforms may be a reason for the appointment of Mubarak as the new governor of the Saudi Arabian Monetary Agency. While Jasser is a career bureaucrat who has risen through the civil service, Mubarak draws on a long career in the private sector and is familiar with financial markets from his stint at Morgan Stanley Saudi Arabia. He has also served as chairman of the Saudi stock exchange.

“One of the virtues of Fahd Mubarak is that he has direct market experience at a high level and with an international dimension, so he comes well qualified to the role of banking regulator,” said Kotilaine.

Kotilaine said that might give Mubarak a more market-oriented approach at a moment when Saudi Arabia’s banking system was emerging from its own financial crisis after several years of intensive risk management. Also, Saudi banks will in the next few years have to implement the new Basel III global banking standards, a tricky exercise that will require them to build liquidity buffers composed of a range of market instruments.

“Going forward one of the key challenges is making sure the financial sector plays a critical role in driving economic development, so adding the market dimensions will be very valuable,” Kotilaine said. (Editing by Andrew Torchia)

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1 Comment

  1. Blake Pettey on February 5, 2012 9:06 am

    Major thanks for the article.Really looking forward to read more. Really Great.


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