Economic Indicators, Financial System, And Investment In Saudi Arabia

Economic indicators of Saudi Arabia

1. Information about the following economic indicators – GDP, inflation, employment data, and housing loan approvals.  Decide what stage of the business cycle you think the country is in and explain 3 reasons why.

2. Provide an overview of the financial system in your country

3. A small corner store has decided to renovate and needs to borrow $20,000 to proceed with the renovations.  Provide a calculation of how the business owner can repay the loan.  Include in your response, assumptions of length of the loan and the interest rate.

4. A bank needs to borrow $8,000,000 for a period of 48 hours to cover a short-term funding requirement.  Assume an interest rate and just calculate the amount of interest that the bank would need to pay on a simple interest basis.

5. The government needs to fund a budget deficit.  No calculations required, please specify the product.

6. A 22 year-old, graduate engineer has $10,000 to invest and wants to keep adding $500 per month to the investment on a regular basis for the long term but is not happy to take much investment risk.  Include an assumed rate of return, select a specified duration of investment, and predict how much the engineer could have saved by that specified time in the future.

7. A portfolio manager is concerned that equities are not going to perform as well as they have in the past but does not want to sell the portfolio due to cost reasons.  No calculations required but please specify the three types of products, which could be used, and how they are traded.

8. Distinguish between market risk and specific risk and provide an example of each from your country.

The Saudi Arabia’s economy is entirely based on oil and has powerful control by the government on the main activities and operations of the economy. The economy of Saudi Arabia is considered as the biggest in the world of Arab (Saudi Arabia Bank Lending Growth, 2018). In the index of 2018, the economic freedom score of Saudi Arabia is at 59.6, positioning the economy at the 28^th freest. GDP of Saudi Arabia is $646 billion as per statistics of 2018.

The inflation rate of Saudi Arabia fell at 2.8% on the basis of year-on-year during March 2018 from 2.9% in February (Saudi Arabia Inflation Rate. 2018). Subsequent to the launching of a 5% value-added tax, the inflation stands at 3% in January 2018, the most since September 2016.

Business cycle stage of Saudi Arabia

The employment rate in Saudi Arabia rose to 11641.40 Thousand during 2016 from 11067.67 Thousand during 2015. While the number of unemployed persons in Saudi Arabia rose to 6% in the 4th quarter from 5.80% as of 2017 in the 3rd quarter as of 2017 (Saudi Arabia Unemployment Rate, 2018). The unemployment rate in the country is averaged at 5.58% from 1999 to 2017, positioning itself on a high level at 6.30% in the 4th quarter of 2006, and recorded as low at 4.35 in 1999 4th quarter.

In Saudi Arabia, the worth of loans fell by 0.50% as on March 2018, above the similar month in past year (Saudi Arabia, 2018). The expansion of loan in Saudi Arabia is reported as 13.90% from 2001 to 2018, positioning itself as high with 46.99% as on October 2004 with the low record of -1.40% in June 2017.

A business cycle is referred to a fluctuation cycle in the GDP through its actual growth rate of long-term. It depicts the growth and reduction in activities of the economy experienced by an economy over the period of time. Completion of a business cycle is done when it has been passed through a particular boom and a particular reduction in a sequence. The length of the business cycle is the overall duration of time to finish the sequence (NCB-Saudi-Economic-Perspectives-2016-2017.pdf, 2017). The present cycle from 2009 could be considered as one other period of reformation for the economy of Saudi Arabia, which was also evidenced the relating international monetary and credit crash. In the preceding year, a reasonable cycle was on hold, based on the non-oil activities of the economy that developed.  Further, this deceleration was accelerated by lesser revenues on oil dripping down in the economy, particularly as the government was forced to decrease consumption to offset budget deficit( Goodwin and et al., 2015). However, the actual growth of GDP was at 3.4%, supported by the oil industry, which made expansion by a considerable 3.1%. On a nominal basis, the major reduction in the Arabian light typical spot price to effect in a substantial contraction in nominal GDP.

The currency of Saudi Arabia is Saudi riyal, the currency is abbreviated as ?.? or SR.

The credit rating by standard and poor for Saudi Arabia is positioned as A- having a stable outlook. The credit rating by Moody for Saudi Arabia stands as A1 having a stable outlook. The credit rating by Fitch for Saudi Arabia was set as A+ having stable outlook(Al Mallakh and el Mallakh, 2015). It can be said that credit rating is measured by pension funds, self-governing wealth funds and investors in order to know Saudi Arabia’s creditworthiness thereby creating a large influence on the borrowing costs of the country.

Overview of the financial system in Saudi Arabia

The government debt of Saudi Arabia is recorded as equal to 13 .10% of the total GDP of the country as of 2016. In Saudi Arabia, the government debt to the gross domestic product was reported as 37.45% from 1999 to 2016, positioned at the high level of 103.50 in 1999 and reported as low of1.60% in 2014.

The total Gross Domestic Product in Saudi Arabia was valued at646.44B United States dollar in 2016 (Al-Janadi, Abdul Rahman and Alazzani, 2016).  The GDP is reported as increasing, as the economy of the country as well the customer spending and expenditure are improving.

The Stock Exchange of Saudi Arabia is Saudi Stock Exchange also known as Tadawul; its supervision is conducted by Capital Market Authority, the trading hours of stock exchange are 10:00AM to 3:00PM, from Sunday till Thursday (Alkhathlan, 2013). The product traded on Saudi Stock Exchange is Tadawul All Share Index.

However, the Saudi Stock Exchange  is new yet evolving, by considering this the country and stock exchange does not provide derivatives product.

The financial system of Kingdom is inclusive of Saudi Arabia Monetary Authority, it is the central bank of Saudi Arabia, licensing the stock market, retail banks, lending institutions and private programs based on investment (Samargandi, Fidrmuc and Ghosh, 2014). It is responsible for the supervision of banks, insurance companies, finance companies, credit information corporate and money chargers.

Ministry of Commerce and Investment is the regulator in Saudi Arabia, MCI is responsible for the regulation of trade and the development of same while enlarging the private sector by implementing and offering reliable laws and regimes inclusive of the Companies Law.

There are total 24 banks licensed under Saudi Arabia inclusive of 12 local banks and 12 foreign banks. The SAMA is the central bank of Kingdom, overseeing the commercial banks activities in Saudi Arabia (Rehman, Khan and Khokhar, 2015). There are mainly for kinds of banks in Saudi Arabia which are Commercial banks, Industrial banks, Agricultural banks and Real estate banks.

Figure 6: Flow of funds between surplus and deficit units

The capital market and money of Saudi Arabia is large and mature; the worth of Saudi Arabia’s market capitalization is approximately 451B U.S. dollars in 2017.

Since Tadawul is comparatively new and a growing stock exchange, so it has not yet provided derivative products and OTC derivates like future or options.

It is assumed that loan duration is of five years and interest rate will be 8%

Loan repayment calculation for a small business owner in Saudi Arabia

Amortization Table – Yearly

Interest to be paid bank:

$8,000,000*15%*2/365

=$666

The rate is considered higher as short-term loans are comparatively higher than long-term loans.

For funding of budget deficit, these can be placed on short-term funds in order t aid with short-term insufficiencies in short-term liquidity by making an issue of treasury bills.

By considering the cited scenario, the engineer is recommended to make an investment in Systematic Investment Plans where funds are invested and managed by experts in order to deliver high yields to the holders. By regular investment in 10 years, an individual can have$89,056.90 if the interest rate is 7%.

Types of product that can be used by portfolio manager are enumerated as below:

Bonds and debentures:  Apart from the FD of the company, bonds and debentures are other instruments based on fixed income which are issued by corporations (Mctyre and Curry, 2015). Consequent of an insufficient liquid secondary market and inadequate primary market making an investment in such instruments is highly slanted to the problems from financial institutions.

Money market funds: Money market funds are those funds which are the highly specialized type of mutual funds that make an investment in extreme temporary instruments based on fixed income (Schmidt, Timmermann and Wermers, 2016).  Not like most of the mutual funds, these funds are chiefly intended towards securing investors capital and for increasing returns.

Preferred shares: Preferred stocks are not engaged in trading nearly as common stock, having low risks as compared to common stock. It is a means by which shares can be owned in a company along with getting payments on the dividend.

There are two main elements of risk; systematic risk and unsystematic risk when integrated outcomes in total risk.  Unmanageable and external variables cause systematic risk which is not specified by sector or security affecting the market as a whole, thereby resulting in changing prices of securities. Changes in government policies result in systematic risk. Also natural calamities and economic changes can cause systematic risk (McNeil, Frey and Embrechts, 2015). Market risk cannot be alleviated by portfolio diversification, while the diversification results useful in preventing specified risk.

The systematic risk might result in a decline of investment value over time. It can be classified into three key categories; Interest risk, Inflation risk and Market risk.For example, a specific oil company possesses diversified risk, and it might grasp less or no oil in a specified year (Marshall, 2015). Further, an investor might leverage risk by making an investment in different multiple oil companies and also with those company who are not even engaged in the oil trade.

Investment prediction for a young graduate engineer in Saudi Arabia

On the other side, Unsystematic risk means the risk which has controllable and recognized variables, which are also industry or security-based. Specific risk impacts a minimum amount of assets. It is referred to risk, is highly specific to corporate and small companies groups. Further, unsystematic risk takes place because of the fluctuation in corporate security receives due to macro-economic variables emerging in the organization (Bihani and Khandelwal, 2017). The variable that results in these risks links to specified corporate security or industry, influencing a specified organization. The risk can be prevented by taking appropriate measures and actions.  It can be classified into two categories; business risk and financial risk. For example, oil price is the prime example for systematic risk in Saudi Arabia; it has a most affirmative effect and is priced higher in the return of six central Saudi equity sectors.

References

Al Mallakh, R. and el Mallakh, R., 2015. Saudi Arabia: Rush to Development (RLE Economy of Middle East): Profile of an Energy Economy and Investment (Vol. 28). Routledge.

Al-Janadi, Y., Abdul Rahman, R. and Alazzani, A., 2016. Does government ownership affect corporate governance and corporate disclosure? Evidence from Saudi Arabia. Managerial Auditing Journal, 31(8/9), pp.871-890.

Alkhathlan, K.A., 2013. Contribution of oil in economic growth of Saudi Arabia. Applied Economics Letters, 20(4), pp.343-348.

Bihani, N. and Khandelwal, S., 2017. Portfolio Risk Management using Capital Asset Pricing Model. International Journal of Engineering and Management Research (IJEMR), 7(4), pp.377-379.

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Marshall, C.M., 2015. Isolating the systematic and unsystematic components of a single stock’s (or portfolio’s) standard deviation. Applied Economics, 47(1), pp.1-11.

McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts, techniques and tools. Princeton university press.

Mctyre, T.L. and Curry, M.D., 2015. Bond Valuations and Investments Based on Bonds. In Harriett J. Walton Symposium on Undergraduate Mathematics Research (Vol. 13, pp. 24-27).

Ostry, J. and Kim, J., 2018. Boosting Fiscal Space. Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities, 18(04).

Rehman, M.Z., Khan, M.N. and Khokhar, I., 2015. Investigating liquidity-profitability relationship: Evidence from companies listed in Saudi stock exchange (Tadawul). Journal of Applied Finance and Banking, 5(3), p.159.

Samargandi, N., Fidrmuc, J. and Ghosh, S., 2014. Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia. Economic Modelling, 43, pp.267-278.

Schmidt, L., Timmermann, A. and Wermers, R., 2016. Runs on money market mutual funds. American Economic Review, 106(9), pp.2625-57.

Wilson, P.W. and Graham, D.F., 2016. Saudi Arabia: The Coming Storm: The Coming Storm. Routledge.

Online

NCB-Saudi-Economic-Perspectives-2016-2017.pdf. 2017. [PDF]. Available through <https://www.alahli.com/en-us/about-us/Documents/NCB-Saudi-Economic-Perspectives-2016-2017.pdf >. [Accessed on 12^th May 2018].

Saudi Arabia Bank Lending Growth. 2018. [Online]. Available through <https://tradingeconomics.com/saudi-arabia/loan-growth>. [Accessed on 12^th May 2018].

Saudi Arabia Inflation Rate. 2018. [Online]. Available through <https://tradingeconomics.com/saudi-arabia/inflation-cpi>. [Accessed on 12^th May 2018].

Saudi Arabia Unemployment Rate.2018. [Online]. Available through <https://tradingeconomics.com/saudi-arabia/unemployment-rate>. [Accessed on 12^th May 2018].

Saudi Arabia, 2018.Online]. Available through <https://www.heritage.org/index/country/saudiarabia>. [Accessed on 12^th May 2018].

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