SAUDI STOCK MARKET INDICATING GROWTH PROSPECTS

'The Saudi stock market grew by a record 28 percent in the first quarter of 2005, posting a massive increase of 103 percent."

.By AYESHA IZAZ SHEIKH
Updated Sep 17, 2005

Marked by strong economy, high oil prices, high liquidity, initial public offerings (IPOs) and privatization, the Saudi stock market is growing rapidly as never before. So far this year, the Tadawul All-Share Index (TASI) has gained over 40 percent. Market capitalization was worth over $435 billion at the end of April, this has made it the largest market in the Middle East. According to the Saudi Information Resource, it represents 47 percent of the total capitalization of Arab stock markets and 53 percent of Gulf Cooperation Council stock markets. This has made Saudi equity market rank 16th out of the 50 largest equity markets in the world in terms of capitalization and 12th in terms of the value traded.

Last year the country experienced its best economic growth performance in history. Expansionary fiscal policy along with high liquidity is underpinning all economic agents' confidence across the country. The growth of non-oil private sector which comprises two fifths of GDP has indicated positive growth. For example, there has been a dramatic increase in profitability of petrochemicals and independent water projects. This has helped in producing jobs and as a result this sector has grown by 5.7 percent.

Kingdom's accession to the World Trade Organization (WTO) will make the economy healthier. The increased competition will force the industries to adopt more efficient methods and thus reduce costs. Privatization will be accelerated and the country would attract foreign investment. This will add more vigor to the growing economy. The kingdom is making efforts to become more integrated in the global market by taking structural reforms that aim at modernization and market liberalization. For example it has been recently announced that in the 8th Five Year Plan for 2005-2009, the Saudi government is planning to implement regulations that would broaden women's participation in economic activities. The plan also aims at encouraging women in private businesses and facilitating them in getting loans.

Moreover, the country's exports are doing extremely well as the oil prices are shooting. Oil revenue comprises 80 percent of the total exports. For 2005, a balanced budget based on conservative oil price US $25 per barrel is SR280 billion for both expenditure and revenue. However, the revenues are likely to exceed the above figure as the oil prices are likely to average more than US $25/barrel. The price volatility in oil like any commodity is based on supply and demand. The fear of supply disruption is causing fluctuations in the prices of oil. Unrest in Iraq and attacks on western interests have created uncertainty and therefore have caused price volatility. For the Kingdom, high oil prices have been a fuel for the economy and have left the government with abundant income as $1 increase per barrel of oil leads to $10 billion increase in annual income. Due to this the government has been easily able to spend on public. The fiscal and monetary policies have exerted multiplier effects on the real economy. The robust domestic demand and industrial expansion are reflected in healthy corporate profits led by petrochemicals Saudi Arabian Basic Industries Corporation (SABIC) and Saudi Telecoms.

Strong economy along with lower interest rates has increased liquidity in the economy. With ongoing privatization and IPOs has led to the growth in the equity market. Infant industries and lack of timely information was a hindrance to the people to put funds in the stock market. However, people's confidence in the equity market has been established with the performance of the industries and availability of timely information. Tadawul operates with up to the minute price, volume, and company information. The Tadawul is one of the first markets in the world to set up a full electronic clearing and settlement system. The result of boosted confidence of the people who were looking for investment opportunities was that they found the Saudi stock market a good place to invest.

The Saudi government's policies of liberating the market and widening the labor force are good initials to set the economy on the right path. Saudi stock market is reflecting and indicating that the country is on the track of high growth and prosperity.