Gulf cooperation council stock markets since September 11.

Hakim, Sam R.

Despite many economic and social features that bind their economies, the Middle Eastern countries are remarkably diverse. Their economic heterogeneity is a reflection of unequal natural-resource endowments, with a few economies in the region subject to enormous swings in growth resulting from commodity price shocks. In some countries, regional conflicts and instability pose significant challenges and exert tremendous pressure on the population and its welfare. In others, differing economic trends reflect the very divergent paths countries in the region have taken towards economic liberalization and integration. Other signs of disparity are evident in economic freedom, political rights and civil liberties. (2)

During the past five years, the rapid rise in oil prices has fundamentally changed the economies of countries in the Middle East. At the end of June 2007, oil prices continued to climb due to international tensions over Iran's nuclear program, instability in Iraq, and other geopolitical concerns amid a tight market with limited excess oil-production capacity. In December 2007, the price for crude oil broke through the psychological barrier of $100 per barrel, marking the third consecutive year that the average price for oil exceeded its previous all-time high.

In Saudi Arabia, the economic boom is in its fourth consecutive year, with 2006 registering record oil revenues, and record trade and budget surpluses in an environment marked by moderate but rising inflation. The economic cycle appears to be in its early stages. With the term structure of future oil prices relatively flat through 2015, Saudi oil revenues will continue to grow for many more years. Coupled with a government fiscal position that can support growth, and mega-projects just getting underway, there are clear signs that Saudi Arabia is at the beginning of an economic boom not seen since their golden age of the early 1980s. Table 1 provides the main economic indicators between 1999-2004.

Against this backdrop, the two most important themes for the region's financial markets are (1) the impact of the war on terror and (2) rising oil-export revenues and their impact on the local stock markets.

CAPITAL MOVEMENTS SINCE 9/11

Private capital inflows to the Middle East region remain very subdued compared with the strong capital inflows occurring worldwide. Middle East portfolio-equity flows were visibly affected by events following September 11, turning down markedly over 2001-02 before posting a moderate recovery in 2003. Net portfolio-equity flows for developing economies in the Middle East shifted from an average inflow of $365 million over 1998-2000 to an average net outflow of $175 million over 2001-02, recovering to net inflows again of about $100 million in 2003. As a share of total portfolio equity flows to developing countries, the proportion captured by Middle Eastern countries was significantly reduced, averaging about 0.4 percent of world equity flows in 2003, compared with 3.4 percent over 1998-2000.

Net foreign direct investment (FDI) inflows, in comparison, have remained largely stable, reflecting the longer-term nature of the investments. Although the share of world FDI toward developing economies captured by the Middle East region has weakened compared with its performance during the early 1990s, the region has exhibited a slight improvement in recent years. In 2003, the Middle East region captured approximately 3.1 percent of all FDI directed to developing countries, up from less than 2 percent over 1998-99.

REGIONAL IMPACT OF 9/11

Since September 11, an important development in the Middle East region has been the increased strengthening of intraregional ties, seen in financial flows and tourism, and, to a lesser extent, intraregional trade flows. Investment flows originating in the Middle East largely backed out of U.S. assets over 2001-03, in part as managers of burgeoning international reserve positions for the key Middle East oil exporters sought returns in alternative markets and currencies.

The largest overall shift in financial flows was the apparent withdrawal by the region's major oil exporters from investment in U.S. assets between 2001 and 2003 (Table 2). Prior to 2001, the Middle East oil exporters were investing between $18 billion and $25 billion per year in a mix of U.S. government securities (treasuries and agency bonds) and U.S. corporate securities (bonds and equities), while channeling substantial funds through the U.S. commercial banking system, as well as U.S. commercial concerns. However, 2001 saw a net withdrawal of some $4.3 billion in commercial and banking flows, followed in 2002 and 2003 by substantial sales of U.S. long-term securities. By 2004, the proportion of deposits held in dollars declined to 61.5 percent, from 75 percent in the third quarter of 2001. (3)

While some of these assets may have been shifted to other parts of the world, the Middle East region also appears to be a strong net beneficiary, experiencing a sharp rise in real estate and equity prices. In 2004, the stock markets in the Middle East began a long ascent, with strongest performance in Egypt and Saudi Arabia. Steeply rising markets have presented a lucrative opportunity for Gulf investors to diversify portfolios closer to home, creating a virtuous circle and fueling much of the stock-market rise. Gulf investment in the Jordanian stock market, for example, now accounts for over 20 percent of the traded volume. Gulf investors also have been active in the Cairo Stock Exchange, where the devaluation of the pound has made Egyptian stocks cheaper to acquire. Table 3 indicates GCC economic prowess in 2006.

This inward focus of the region has been echoed in the tourism sector, where--along with the increased hesitancy of foreigners to travel to the Middle East--there has been a similar reluctance of citizens from the Middle East to travel abroad. Driven in part by a backlash to the imposition of restrictions in the United States and parts of Europe on the travel of Muslims (stemming from the aftereffects of September 11), intra-Arab tourism expanded vigorously, with arrivals from within the region rising from 22.4 percent of total tourists in 1999 to 40.8 percent in 2002. This has greatly buffered the sharp declines in tourists from Europe--by nearly 10 percentage points, from 38 percent of total tourists into the region in 1999 to 29 percent in 2002--and from the United States--from a far lower initial share of 3.7 percent of total tourists in 1999 to 2.5 percent in 2002.

SAUDI & GCC STOCK MARKETS

With a market capitalization of more than $700 billion, the Saudi bourse already ranks as the largest in the Middle East, representing more than 50 percent of the total capitalization of Arab stock exchanges. While there are fewer than 80 companies listed on the exchange, experts believe it has the potential to eventually exceed South Korea's and approach India's. Other GCC stock exchanges suffer from the absence of a solid track record, and there is limited historical data from which to analyze their remarkable growth. We prefer to focus primarily on the Saudi stock market, which dwarfs the capitalization of all other GCC markets combined.

After treading water for the first three years of this decade, the Saudi stock market has taken off vigorously. Bolstered by a surging economy, initial public offerings, new listings and a fast-developing capital market, the stock-market index has been growing at an unprecedented rate. In 2005, the Tadawul All-Share Index more than doubled from 8,206 points in 2004 to 16,712. In February 2006, the market hit an all-time high of 20,634, representing a year-on-year growth of 230 percent amid calls for greater discipline and a more proactive role by market regulators. Since then, the market has been on a downward spiral. While the correction was initially seen as a welcome relief from a buying frenzy, the severity of the adjustment had caught many experts by surprise. Even with a 64 percent adjustment from its peak, the Saudi stock market is still relatively expensive. In July 2007, based on the data provided by the American Financial Association (AFA), the estimated price-to-earnings (P/E) ratio--a measure of the price investors pay for the profits earned by the listed companies--was 18.3, while those of other GCC stock markets were around 12.8. Even though a comparison with the more mature U.S. market is not appropriate, it is noteworthy that the same metric for the S&P 500 is around 21. (5)

In several respects, the Saudi bourse has been the leader among the GCC stock markets, where momentum has gathered pace due to crude-oil export revenues. Table 4 compares the Saudi stock exchange's P/E ratio with the ratios in neighboring markets. At its peak, the Saudi market was estimated at 68, a considerably higher number. By means of comparison only, the all-time high of the overvalued Japanese stock market in the late 1980s was around 45. Looking at Saudi Arabia's neighbors, Table 4 reveals the severity of the Saudi stock-market correction. All neighboring markets have been devalued from their peak P/Es. In Kuwait, Oman and Bahrain, the correction has been very mild, and their indexes have since recovered and reached new all-time highs, while in the Abu Dhabi and Dubai markets, the adjustment has been quite severe, and their indexes continue to languish.

THE IPO MARKET

The Saudi government's fiscal policy has provided strong support for the stock-market rally by expanding its privatization program and stepping up the number of companies seeking to raise financing through the capital market. The government has skillfully used the initial public offering (IPO) market as a tool for distributing wealth to the Saudi population, and at the same time privatized inefficient public companies that would have otherwise been a burden on its budget.

One fundamental characteristic of the IPO market has been its ability to generate wealth for millions of Saudi shareowners. (6) To be sure, most IPOs have been oversubscribed some 10 or 12 times. At the end of June 2006, every IPO since 2003 had remained profitable--some extremely profitable--compared to its offering price. The IPO effects have been pervasive. According to Saudi Arabia's finance minister, more than a third of the country's population of 17 million subscribed to a petrochemical company (Yansab) offering. (7) Moreover, most shares have doubled or tripled in value. That is not to say, however, that this market has been without risk. While all IPOs have been profitmakers relative to their initial prices, the Saudi American Bank (SAMBA) calculates that hundreds of thousands of active traders have lost considerable money from their entry point into the market due to the downturn since February 2006. (8) Table 5 presents the performance of the main IPOs on the stock market, with Saudi Telecom, the genesis of the country's offerings, dating to 2003. Since the first launch, the IPO market has quickly absorbed about a dozen offerings. Four additional companies have recently come to the market (including IPCHEM, a petrochemical company; Emaar, a real-estate development company; and Al-Hokair, a large retail distribution firm).

It is clear that the Saudi government remains keen on exploiting the popularity of the IPO market to finance its ambitious infrastructure projects. Large IPOs recently launched or anticipated by the market in the near future include:

* Emaar, the Economic City: a $27 billion joint venture between Emaar Properties of the United Arab Emirates and Saudi investors that also won a contract to build the King Abdullah Economic City (the largest private-sector initiative in the kingdom, launched in August 2006 and heavily oversubscribed).

* Two new oil-export refineries at a total cost of $12 billion: one a joint venture between Aramco and the French oil giant Total; the other a joint venture between Aramco and Conoco-Phillips.

* Several financial-services organizations set up as joint ventures that have taken advantage of a new insurance legislation (these joint ventures are expected to tender at least 30 percent of their equity in IPOs).

THE SAUDI STOCK MARKET

Turning back to the Saudi stock-market zigzag in 2006, as individual stocks hit price-change limits, trading invariably dwindled, resulting in much-reduced share volumes and triggering further market declines: As Table 6 indicates, in the first quarter of 2006, the value of shares traded fell by 26.2 percent (from 1,805,729 to 1,332,752 million riyals) compared to a rise of 21.7 percent in the preceding quarter. (9)

The collapse of the stock market continued into the second half of 2006 and the first half of 2007. The index managed to stabilize at the end of 2007, but remained locked into a range between 7,000 and 12,000. Prices of some speculative smaller companies continued to fluctuate wildly, and weak investor sentiment saw the index register new 12-month lows and drift lower. By the first half of 2007, the index had fallen by 64 percent from the high of 20,634 reached on February 20, 2006. Market capitalization fell by an astounding $500 billion from its peak of $834 billion.

Surprisingly, the collapse in share prices did not have a conspicuous impact on real economic activity. The lack of a spillover on the non-financial sector has been noticeable; most listed companies have continued to record reasonably healthy earnings. This was also evident in other GCC stock markets. As a result of the fall in share prices, the market's P/E ratio declined to a low of 15 from its high of 68 at the market's peak in 2006 and is now approximately 22. As indicated earlier, at this level, the Saudi market still looks vulnerable given that it is slightly more expensive than other markets in the region and emerging markets in general. Negative sentiment no longer dominates, and share prices have stabilized. An analysis of the price correction in 2006 reveals that the sectors that performed the worst were those most heavily influenced by speculators. Speculators tend to focus on stocks with small market capitalizations and a large proportion of shares actively traded (free-floating) rather than held by strategic investors. In contrast, strategic investors are in for the long haul and are thus unfazed by short-term market aberrations.

To assess which sectors are most affected by speculation, we compared the value of shares traded in each sector against that sector's market capitalization. Table 7 shows that services and agriculture were the sectors most affected because the proportional value of trading in these sectors far exceeded their shares of total market capitalization. They were also two of the three worst-performing sectors. In contrast, the industrial sector looks out of place, given that the value of shares traded was not much greater than its capitalization. This can be explained by the performance of SABIC, which accounts for around two-thirds of the sector's capitalization but only 6 percent of the volume traded.

Running the same calculation for the final quarter of 2006 shows that speculation appears to have intensified, not declined. In the fourth quarter, the agriculture and services sectors accounted for 53 percent of the total value of shares traded, but just 6 percent of market capitalization, compared to 36 percent and 6 percent, respectively, over the first half of 2006.

Concerns about market vulnerability and languishing prices since March 2006 have prompted authorities to introduce remedial initiatives. At the forefront are attempts to address the lack of market depth and the increase in price volatility. To be sure, throughout 2006, the sharp decline in daily trading coincided with a surge in volatility. The combination of thin trading and sharp swings is worrisome because of its potential to move markets to unrealistic levels and trigger further sell-offs. As a result, in March 2006, market regulators implemented two measures aimed at injecting liquidity and promoting growth:

* The daily price change limit was widened from 5 percent to 10 percent.

* The market for direct investment in individual company shares was opened to foreigners resident in Saudi Arabia. Prior to this development, no foreigners or resident aliens could invest in the market directly and had to invest through mutual funds, which charged loading fees sometimes as high as 3 percent.

Table 8 evaluates the impact of these initiatives on the market. In terms of the overall degree of market risk, the post-March 2006 stock-market volatility is a whopping 56 percent over a 12-month window (March 2006-February 2007). However, the market volatility for the prior period (March 2005-February 2006) is only 22 percent, indicating that the risk in this market has actually tripled since March 2006. It is difficult to determine the true cause of the sharp increase in risk.

What is clear, however, is that the government's attempt to (1) open the market to foreign investors and (2) widen the allowed daily variability in a stock's share price have failed to attain their intended objective, at least within the desired time frames. After hitting a trough of 6,947 on January 30, 2007, the index market continued to languish in most of 2007 before stabilizing at the end of that year. The sharp swings have become even more pronounced.

Another major economic aspect of the stock-market's decline is how largely unaffected the economy has been by it and how largely detached the market is from the booming economy. Beginning in 2001, the stock market maintained a strong correlation between its index and oil prices (calculated on the basis of a percentage change in each).

Around August 2005, however, this relationship appeared to break down as oil prices rose to all-time highs while the market declined. The far right panel of Table 8 reports the correlation between the percentage changes of the prompt month of the NYMEX oil contract (West Texas Intermediate) and the TASI stock-market index. Prior to August 2005, the monthly correlation was 23 percent, but it became a negative 6 percent after August 2005. One explanation is that the market downturn, while sharp, remains a "correction" in a bull market that had run ahead of itself and suddenly become overpriced relative to its economic fundamentals. The stock market's slow recovery since its trough in January 2007 confirms this notion.

Table 9 depicts the relative performance of mutual funds on the Saudi stock market since 2007. These funds represent 29 of the 31 mutual funds that invest in the local stock market; all are denominated in Saudi riyals. The list includes all funds with the same investment objective (growth) and risk rating, with 16 sharia-compliant funds and 13 traditional mutual funds. During the first half of 2007, the sharia-compliant funds seem to have outperformed their traditional counterparts with an average rate of return of +l.2 percent vs. -4.5 percent. This trend is consistent with mutual-fund investing in the local Saudi market for the whole of 2006, where the sharia-compliant funds appear to have fared better than their traditional counterparts.

In theory, stock markets are leading indicators of the economy's performance. While it is impossible to make a direct forecast, this does not appear to be the case in Saudi Arabia. But, according to SAMBA, there are visible signs of(l) a relative slowdown in retail sales, (2) a decline in business spending, and (3) a drop in earnings in the banking sector. Somewhat worrisome is the sudden and sharp drop in bank lending--by 51 percent according to SAMBA--to the transport and communications sectors. (10)

While the corrective measures that the government has already implemented appear to have failed, several proposed structural improvements will go a long way toward calming the market and providing the support it needs to recover. The proposals center on five critical areas:

* Increase market depth: Currently only 81 companies are listed on the Saudi stock exchange, an unusually small number of listings given the market capitalization and daily turnover. As a result, share prices have skyrocketed and companies were almost forced to declare stock splits of 5:l. What is required is a more reasonable balance between the supply of stocks and the large amount of liquidity chasing this limited supply. The fact that IPOs continue to be heavily oversubscribed only underscores the limited number of shares available.

* The government-promoted trading volume and government pension funds are estimated to own one third of the market, while strategic investors make up another third. These two entities effectively limit trade and create an undesirable lack of liquidity on the exchange.

* Allow derivative products for the Saudi market: the market currently does not provide for trading in options, futures or short-selling. Such products would "complete" the market and provide better mechanisms to hedge risk. The lack of such financial instruments makes the market inefficient, the price of risk unnecessarily high, and diversification expensive.

* Attract institutional investors: There are no corporate pension funds or insurance companies, which are typical institutional investors in other markets, and the mutual fund industry in Saudi Arabia owns only about 3 percent of the market capitalization. Incentives to attract institutional investors are needed.

* Foster transparency: Equity research on individual Saudi stocks available to investors is fraught with conflicts of interest. While the brokerage market is expected to change over the next few years with the licensing of investment advisors, asset managers, and brokerage businesses outside the banking system, it is important that disclosure rules and transparency be strengthened.

CONCLUSION

In 2006, Saudi Arabia earned an astounding $203 billion in oil exports, an all-time record, up 25 percent from a record $162 billion in 2005. Even though the government is providing strong fiscal stimulus to the economy, oil revenues are not being spent as fast as they are being earned. Of the roughly $17 billion per month in oil export earnings, about $7 billion is accumulating as foreign assets at the central bank. With the average price of oil above $90, it is important to understand that the Saudi government's revenue projection can be met at $38 per barrel, provided that oil production remains constant at an average of 9.4 mb/d.

The Saudi stock market remains at an early stage in its evolution and faces a challenge in keeping up with the booming economy, rapidly growing corporate finance activity, privatizations, entry into the market by foreign and new domestic financial institutions, financial-sector restructuring, and the emergence of a Saudi "investor class" over the past few years,

In theory, stock markets tend to be leading indicators of the economy. For example, when the U.S. stock market went into sharp decline in 2000, it turned out to be a good economic leading indicator, as the economy indeed fell into recession by the end of 2000. In the case of Saudi Arabia, the recent market downturn does not appear to indicate an economic reversal. The stock market was ripe for a "healthy" and overdue correction that is detached from the rest of the economy. The stock-market decline has had some visible impact on the economy, although it has been more than offset by growth elsewhere. Despite these optimistic projections, it is important that market liquidity be increased and the number of listed companies expanded. Without these measures, sharp swings in the market are likely to persist and keep investors at bay. The IPO market has indeed been a success story. The boon from rising stock prices has been shared by a large proportion of the population. At the same time, it is enabling the government to privatize its public companies effectively and smoothly.

Finally, it is important to recognize that the current strong conditions--high oil revenues, stimulative fiscal policy, moderate inflation and surging investment in major projects--are likely to continue well beyond 2008. Looking ahead, the emerging challenges are likely to be associated with managing high growth--keeping inflation under control, maintaining a low imports-to-exports ratio, and ensuring that the government maintains efficiency in spending and investment in fixed assets.

(1) Email: Sam.Hakim@pepperdine.edu, Phone:+ 1(626)233-1009.

(2) As compiled by Freedom House since 1973, see www.freedomhouse.org.

(3) International Monetary Fund, "Saudi Arabia: Financial System Stability Assessment," Country Report No. 06/199, June 2006.

(4) The P/E (price-to-earnings) ratio of a stock (also called its "earnings multiple") is a measure of the price paid for a share relative to the income earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income.

(5) See http://finance.yahoo.com.

(6) Khalid R. Al-Rodhan, The Saudi and Gulf Stock Markets: Irrational Exuberance or Markets Efficiency?. Center for Strategic & International Studies, October 25, 2005; Brad Bourland, The Middle East Boom: How Big and How Long Will It Last? SAMBA, April 25, 2006.

(7) AME Info FN, February 18, 2006.

(8) Saudi Economy at Mid-Year 2006, Saudi American Bank (SAMBA), June 2006.

(9) In Table 6, the number of traded shares in 2006 actually shows a big increase between Q1 2006 and Q2 2006. This increase is specious; it doesn't reflect the share split of 1:5 during this period.

(10) Saudi Economy 2006 Performance, 2007 Forecast, SAMBA, February 2007.

Dr. Hakim is an adjunct professor of finance at Pepperdine University's Graziadio School of Business and Management. (1)

Table 1. Saudi Arabia: Selected Economic Indicators, 1999-2004

 1999 2000 2001

National income and prices
Nominal GDP (SR1 bn.) 603.6 706.7 686.3
Oil sector (% share) 33.5 41.5 37.6
Nonoil sector (% share) 66.5 58.5 62.4
Nominal GDP (% change) 6.2 17.1 -2.9
Oil sector 30.2 45.3 -11.6
Nonoil sector -2.5 3.3 3.9
Real GDP (% change) -0.7 4.9 0.5
Oil sector -7.6 6.9 -3.9
Nonoil sector 3.2 4.0 3.5
Crude production (mb/d) $7.56 $8.09 $7.89
Oil spot price (avg. per bbl) 17.45 26.81 23.06
CPI (avg. % change) -1.3 -0.6 -0.8
Central govt finances (% of GDP)
Revenue 24.4 36.5 33.2
 Oil sector 17.3 30.3 26.8
Expenditure 30.5 33.3 37.2
Balance -6.0 3.2 -3.9
Gross debt * 103.5 87.2 93.7
 Held by AGIs ** 79.9 67.0 68.7
Monetary survey (annual % change)
Net foreign assets -14.4 18.0 2.8
Net domestic credit 10.1 -1.7 10.9
Claims on government 74.8 -17.3 22.6
Claims on non-finan. pub. sect. -39.2 -13.3 -13.0
Claims on private sector 1.0 6.2 8.6
Broad money (M3) 6.8 4.5 5.0
External sector (US$ billions) ***
Merchandise exports, f.o.b. 50.6 77.4 67.9
 Oil sector 44.8 70.7 59.7
Merchandise imports, f.o.b. -25.7 -27.7 -28.6
Trade balance 24.9 49.7 39.3
Current account balance 0.4 14.3 9.4
Capital account balance -7.9 -4.6 -8.6
 Commercial banks 0.7 1.0 -0.8
 Oil sector -0.8 -1.9 0.0
Overall balance -7.5 9.7 0.8
SAMA gross foreign assets 39.4 49.0 48.5
 Liquid int'l reserves 17.2 19.8 17.8
AGI gross foreign assets 30.4 32.8 34.1
Total external debt ($ bn.) 30.4 29.7 26.6
 Short-term by residual maturity 15.4 15.4 16.4
Exchange rate (SRI per $) 3.745 3.745 3.745

 2002 2003 2004

National income and prices
Nominal GDP (SR1 bn.) 707.1 804.2 964.0
Oil sector (% share) 37.7 42.4 50.4
Nonoil sector (% share) 62.3 57.6 49.6
Nominal GDP (% change) 3.0 13.7 19.9
Oil sector 3.1 28.1 42.7
Nonoil sector 3.0 5.1 3.4
Real GDP (% change) 0.1 7.2 5.0
Oil sector -7.5 14.9 5.0
Nonoil sector 3.7 3.8 5.0
Crude production (mb/d) $7.60 $8.40 $8.90
Oil spot price (avg. per bbl) 23.40 27.00 36.70
CPI (avg. % change) -0.6 0.5 1.2
Central govt finances (% of GDP)
Revenue 30.1 34.5 38.1
 Oil sector 23.5 28.7 32.8
Expenditure 36.1 33.3 30.1
Balance -5.9 1.2 7.9
Gross debt * 96.9 82.1 60.0
 Held by AGIs ** 74.6 60.9 ...
Monetary survey (annual % change)
Net foreign assets -5.2 26.0 46.1
Net domestic credit 11.3 15.5 7.3
Claims on government 14.7 12.0 -41.2
Claims on non-finan. pub. sect. 10.6 116.1 3.4
Claims on private sector 10.0 11.0 27.4
Broad money (M3) 15.2 8.2 15.2
External sector (US$ billions) ***
Merchandise exports, f.o.b. 72.4 95.2 124.2
 Oil sector 63.7 84.1 111.3
Merchandise imports, f.o.b. 29.6 -33.9 -37.9
Trade balance 42.8 61.3 86.3
Current account balance 11.9 29.7 51.6
Capital account balance -18.4 -12.1 -31.4
 Commercial banks -3.4 3.1 -2.3
 Oil sector -0.6 -0.6 -1.0
Overall balance -6.5 17.6 20.2
SAMA gross foreign assets 42.0 59.8 77.5
 Liquid int'l reserves 20.8 22.9 22.7
AGI gross foreign assets 35.8 38.5 41.5
Total external debt ($ bn.) 22.2 21.4 18.2
 Short-term by residual maturity 15.9 20.2 14.7
Exchange rate (SRI per $) 3.745 3.745 3.745

Sources: Saudi Arabian Monetary Agency (SAMA); and IMF staff estimates
and projections, County Report No. 061199, June 2006

* Of which external component is de minimis.

** Pension Fund, General Organization for Social Insurance (GOSI), and
Saudi Fund for Development (SFD).

*** Non-financial public sector, commercial banks (including
nonresidents' deposits), and non-financial private sector.

Table 2. Transactions in U.S. Financial Assets
By Middle East Oil-Exporting Countries (1) US$ Millions 2000-2004

 2000 2001 2002

Total U.S. government securities (2) 3,959 2,016 -1,921
Treasury bonds and notes 3,482 865 -3,880
U.S. government agencies and GSEs 477 1,151 1,959
Total U.S. private securities 10,754 2,975 -1,005
U.S. corporate bonds 1,565 1,186 304
U.S. corporate equities 9,189 1,789 -1,309

Total long-term securities 14,713 4,991 -2,926
Commercial and banking flows (3)
Net position with U.S. nonbanks ($mn) 1,740 1,664 3,096
Claims reported by U.S. firms 1,104 985 897
Liabilities of U.S. firms 2,844 2,649 3,993

Net flows with U.S. non-banks (4) 833 -76 1,432
Change in claims by U.S. firms -544 -119 -88
Change in liabilities by U.S. firms 289 -195 1,344

Net position with U.S. banks ($mn) 14,312 10,112 8,406
Claims reported by U.S. banks 10,627 9,222 10,487
Liabilities of U.S. banks 24,939 19,334 18,893

Net flows in banking 7,249 -4,200 -1,706
Change in claims by U.S. banks -4,875 -1,405 1,265
Change in liabilities by U.S. banks 2,374 -5,605 -441

Net position with firms and banks 16,052 11,776 11,502
Net commercial and banking flows 8,082 -4,276 -274
Total flows in U.S. assets 22,795 715 -3,200

 Jan. - Sept.
 2003 2004

Total U.S. government securities (2) -5,283 13,912
Treasury bonds and notes -6,913 1,659
U.S. government agencies and GSEs 1,630 12,253
Total U.S. private securities 2,609 5,739
U.S. corporate bonds 2,106 228
U.S. corporate equities 503 5,511

Total long-term securities -2,674 19,651
Commercial and banking flows (3) June '04
Net position with U.S. nonbanks ($mn) 2,138 1,128
Claims reported by U.S. firms 1,046 1,207
Liabilities of U.S. firms 3,184 2,335

Net flows with U.S. non-banks (4) -958 -1,010
Change in claims by U.S. firms 149 161
Change in liabilities by U.S. firms -809 -849
 Sept. '04
Net position with U.S. banks ($mn) 15,712 20,774
Claims reported by U.S. banks 8,845 8,311
Liabilities of U.S. banks 24,557 29,055

Net flows in banking 7,306 5,032
Change in claims by U.S. banks -1,642 -534
Change in liabilities by U.S. banks 5,664 4,498

Net position with firms and banks 17,850 21,872
Net commercial and banking flows 6,348 4,022
Total flows in U.S. assets 3,674 23,673

(1) Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates.

(2) Positive sign connotes net foreign purchases or inflows to United
States; negative sign, sales or outflows from United States.

(3) Positions (stocks) of claims and liabilities reported by U.S.
nonbanking firms and commercial banks are stated at year end; the net
position of Middle East oil exporters with U.S. firms and banks is
calculated as U.S. liabilities less U.S. claims.

(4) Net flows represent the change in claims and liabilities reported
by U.S. entities; signs reflect the yearly change from the perspective
of Middle East investors (U.S. liabilities minus U.S. claims). Hence,
they are not equivalent to balance-of-payments accounting methods.

Source: IMF, 2006

Table 3. Per Capita GDP and Growth Rates in the GCC countries (2006)

 Saudi Arabia Qatar Oman

GDP per capita $13,600 $29,800 $14,400
Real growth rate 2.4% 7.1% 6.6%

 Bahrain Kuwait UAE

GDP per capita $25,800 $23,100 $49,700
Real growth rate 7.8% 12.6% 8.9%

Source: The Central Intelligence Agency Factbook, 2007

Table 4. Average Price-to-Earnings (P/E) Ratios (4) of
Stock Markets in GCC

 Saudi Arabia Dubai Oman

July 2007 18.3 14.5 8.5
At Market Peak 68.2 18.7 15.1

 Bahrain Kuwait Abu Dhabi

July 2007 10.2 16.2 14.6
At Market Peak 12.4 19.3 21.2

Source: Gulfbase, 2007

Table 5. IPOs on the Saudi Stock Market

Company Year Offering Offered Times Over-
 Price (riyal) Shares subscribed

Saudi Telecom Co. 2003 34 90,000,000 2.4
Sahara Petrochem 2004 10 6,000,000 125
Ettihad Ettisalat 2004 10 20,000,000 50
NCCI 2005 41 7,000,000 11
Bank Al-Bilad 2005 10 30,000,000 51
SADAFCO 2005 52 1,950,000 6
Al-Marai Dairy 2005 102.4 4,500,000 4
Yansab Petrochem 2006 10 39,750,000 2.8
Al Drees Petr. & Trans. 2006 37 1,200,000 12.9
Saudi Res. & Mktg. 2006 46 24,000,000 4
Saudi Paper Mfg. 2006 62 7,200,000 6

Company Price on Price on % Gain
 1st day 6/30/06 6/30/06

Saudi Telecom Co. 47.4 118.5 249
Sahara Petrochem 30 71 610
Ettihad Ettisalat 60 87 770
NCCI 74.4 173 322
Bank Al-Bilad 153 100.2 902
SADAFCO 101.2 77 48
Al-Marai Dairy 156.4 159 55
Yansab Petrochem 122.2 52.8 428
Al Drees Petr. & Trans. 69.4 173 368
Saudi Res. & Mktg. 95 78.5 71
Saudi Paper Mfg. 142.8 161.5 160

* All prices are split-adjusted

Source: SAMBA, 2006

Table 6. Saudi Stock Market Indicators

Period Shares Value Market Number Price
Index (2) Traded (1) (Million Value (2) (1985 =
 (Million) RLs) (Billion RLs) 1000)

2000 555 65,292 255 498,135 2,258
2001 692 83,602 275 605,035 2,430
2002 1,736 133,787 281 1,033,669 2,518
2003 5,566 596,510 590 3,763,403 4,438
2004 10,298 1,773,858 1,149 13,319,523 8,206
2005 12,281 4,138,695 2,438 46,607,951 16,713

2005
Q1 1,757 491,331 1,475 4,615,084 10,499
Q2 3,504 1,123,806 1,943 11,495,846 13,455
Q3 3,350 1,039,838 2,179 13,329,353 15,036
Q4 3,670 1,483,720 2,438 17,167,668 16,713

2006
Q1 3,246 1,805,729 2,536 20,578,859 17,060
Q2 18,844 1,332,752 1,969 28,356,337 13,145
Q3 18,960 1,405,275 1,716 27,794,301 11,410
Q4 13,388 718,095 1,226 19,366,423 7,933

2007
Q1 18,925 854,505 1,194 21,444,274 7,666
Q2 13,929 633,835 1,113 17,505,319 6,970
Q3 11,032 515,958 1,330 14,455,414 7,833

(1) At end of period.

(2) As of April 2006, each share was split into five.

Source: Tadawul--Capital Market Authority, Saudi Arabia, 2007

Table 7. Sectoral Performance of Saudi Arabia Stock Market
Index in 2006

 % Change % Value of % of Market Value of Shares
Sector Shares Traded Cap. Traded as % Cap.
 of Market

Services -68.2 29.0 5.6 5.2
Industrial -61.0 40.4 32.1 1.3
Agriculture -60.6 12.9 0.7 18.7
Electrical -55.4 3.9 4.4 0.9
Cement -46.1 3.9 4.8 0.8
Telecom -45.0 3.8 15.6 0.2
Banking -42.7 5.6 36.3 0.2
Insurance -25.2 0.6 0.4 1.4

Source: Al Dukheil 2007, Zahid, 2007, and SAMBA 2007

Table 8. Annual Volatility

 Oil (NYMEX Prompt Saudi Stock Correlation
 Month Future) Market Index

Jan. '00 - Jul. '05 38.2% 18.4% 23%
Aug. '05 - Jul. '07 28.4% 43.1% -3%

12 months pre-market peak
 (Mar. '05 - Feb. '06) 22%
12 months post-market peak
 (Mar. '06 - Feb. '07) 56%

Source: Bloomberg

Table 9. Relative Performance of Mutual Funds Growth

Fund Name Manager Type Objective

Al-Saudi Cos. Fund Arab National Traditional
Al-Saudi Equity Fund Arab National Traditional
Al Fareed Fund SAMBA Traditional
Al Musahem Fund SAMBA Traditional
Financial Insts. Fund Saudi British Traditional
Riyad Equity Fund 1 Riyad Bank Traditional
Riyad Equity Fund 3 Riyad Bank Traditional
Saudi Banks Eq. Fnd. Saudi Holland Traditional
Saudi Companies Equity Saudi Holland Traditional
Saudi Equity Fund Saudi Investment Traditional
Saudi Equity Fund Saudi British Traditional
Saudi Equity Trd. Fnd. Saudi British Traditional
Saudi Istithmar Fund Banque Saudi Fransi Traditional
Al-Al Naqaa Al Mubarak Arab National Sharia
Al Raed Fund SAMBA Sharia
Al Ahli Saudi Dynamic Tdg. Eq. Al Ahli Bank Sharia
Al Ahli Saudi Trdg. Eq. Al Ahli Bank Sharia
Al-Rajhi Local Shares Fnd. Al-Rajhi Sharia
Al-Saffa Saudi Egty. Trdg. Banque Saudi Fransi Sharia
Al-Taiyebat Saudi Eq. Bank Al-Jazira Sharia
Amanah Saudi Eq. Saudi British Sharia
Amanah Saudi Industrial Saudi British Sharia
Asayel Fund Bank Albilad Sharia
Bakheet Saudi Trdg Eq. Bakheet Invst. Grp. Sharia
Falcom Saudi Equity Falcom Financial Sharia
Jadwa Saudi Equity Jadwa Investment Sharia
Real State Fund SAMBA Sharia
Riyad Eq. Fund 2 Riyad Bank Sharia
Saudi Companies Fund Saudi Investment Sharia

Fund Name Price % Change
 Jan - July 2007

Al-Saudi Cos. Fund 53.2 -5.6
Al-Saudi Equity Fund 56.5 -10.8
Al Fareed Fund 13.8 -1.4
Al Musahem Fund 77.1 -3.7
Financial Insts. Fund 15.4 -14.9
Riyad Equity Fund 1 9.9 1.9
Riyad Equity Fund 3 47.6 -0.1
Saudi Banks Eq. Fnd. 317.1 -18.3
Saudi Companies Equity 47.4 -1.9
Saudi Equity Fund 130.3 -2.9
Saudi Equity Fund 82.9 -0.2
Saudi Equity Trd. Fnd. 61.6 2.4
Saudi Istithmar Fund 3852.4 -2.4
Al-Al Naqaa Al Mubarak 4.5 -16.6
Al Raed Fund 33.7 0.3
Al Ahli Saudi Dynamic Tdg. Eq. 1.2 0.9
Al Ahli Saudi Trdg. Eq. 5.8 -1.8
Al-Rajhi Local Shares Fnd. 244.9 10.7
Al-Saffa Saudi Egty. Trdg. 5.6 -0.5
Al-Taiyebat Saudi Eq. 230.4 -5.4
Amanah Saudi Eq. 16.3 0.8
Amanah Saudi Industrial 7.2 19.4
Asayel Fund 0.4 -10.8
Bakheet Saudi Trdg Eq. 1.0 1.4
Falcom Saudi Equity 1.0 0.5
Jadwa Saudi Equity 103.8 3.8
Real State Fund 11.9 19.4
Riyad Eq. Fund 2 5.5 1.9
Saudi Companies Fund 69.0 -4.6

Source: Tadawul Annual Reports 2004 and Tadawul Magazines
Quarterly Reports 2005