Magazine article Global Finance

Weak Stock Market, Strong Economy

Magazine article Global Finance

Weak Stock Market, Strong Economy

Article excerpt

2006 was a painful year for investors in the Saudi stock market. After several years of extraordinary growth, the benchmark Tadawul index fell by 52%. From its late-February peak, around $500 billion has been lost from market capitalization, equivalent to over one-and-a-half times the size of the economy.

A collapse of such proportions would generally cause major economic problems. In Saudi Arabia this is clearly not the case. Economic growth for last year was 4.2%. The nonoil private sector expanded by 6.3%, close to a 10-year high. So, why didn't the stock market decline hurt the economy?

There are several factors that I feel can explain the economy's resilience to the stock market:

* The government and strategic investors absorbed a significant proportion of recent losses. At Samba, we estimate that these two groups account for around twothirds of market capitalization. Both parties are generally very long-term investors and the government's losses were offset by rising oil revenues.

* Many Saudi individuals that entered the stock market did so via highly profitable IPOs. For all but the most recent of these, prices have risen substantially. Even with the market currently near a twoyear low, most IPOs are well above their offer price.

* The economic fundamentals that are supporting the current boom (high oil prices, rising investment and government spending) remain in place.

Commercial banks have also played their part through cautious lending policies related to the stock market. As a result, defaults on bank loans have been negligible. …

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