Abstract
The random walk nature of oil prices became fully understood as oil prices stayed low. Deficit spending kept the economy going. Demographic pressures and diversion of oil to higher domestic use meant rising government debt. Banks and public funds reached their limit on holding government bonds and Saudi Arabian Monetary Agency (SAMA) became a major holder of public debt. The currency peg came under devaluation pressure during the 1997–1998 Asian financial crisis. Foreign exchange reserves managed by outside managers were helped by rising global equity prices. Lending by banks grew through unsecured loans to individuals, and the banks remained profitable. SAMA started supervising Sharia-compliant banks. Some SAMA functions went to the Capital Markets Authority. Repatriation of money after the 9/11 attacks led to a stock market boom.
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- 1.
Paul Cashin, John McDermott and Alasdair Scott. ‘Booms and Slumps in World Commodity Prices,’ International Monetary Fund Working Papers G99/8 (1999):11. They reached this conclusion after looking at 36 commodity price series for a 42-year period from 1957 to 1999. This is the key paper finding a random walk (no duration dependence) in the historical data series of most commodity markets. Random walk applies to other financial markets as well, such as stock and bond markets which have so far proved impossible to predict systematically. More recent work has not seriously dented the random walk conclusion about oil prices. See for instance Ron Alquist, Lutz Kilian and Robert Vigfusson. 2011. ‘Forecasting the Price of Oil,’ Federal Reserve System International Finance Discussion Papers Number 1022.
- 2.
Commodity Futures Trading Commission, ‘Interim Report on Crude Oil – July 22, 2008.’ Interagency Task Force on Commodities Markets, http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf (Accessed October 24, 2016). It does not appear that the Task Force submitted a further, final report.
- 3.
The main ones were the Public Pension Agency (PPA) and the General Organization for Social Insurance (GOSI).
- 4.
MeasuringWorth.com, Stock markets database, http://www.measuringworth.com/DJIA_SP_NASDAQ/ (Accessed October 25, 2016). Accurate data including dividends reinvested is not easily available. In practice SAMA’s managers in developed stock markets tended to under-perform the indices.
- 5.
Federal Reserve Bank of St. Louis, Economic Research, FRED database, https://research.stlouisfed.org/fred2/series/BAMLCC0A2AATRIV/ (Accessed October 24, 2016). This provides credit market returns on the Bank of America Merrill Lynch US Corporates AA Total Return Index. This gives an approximate return from the sort of bonds in which SAMA’s external fund managers in the United States would have been investing.
- 6.
International Monetary Fund, ‘Financial Sector Assessment Program (FSAP) 2006,’ http://www.imf.org/external/index.htm (Accessed October 24, 2016). This program involved officials from the Fund coming to Riyadh for several weeks and discussing with SAMA what they saw as the current issues in the banking system. The IMF published the reports with a delay (typically a year or so). The first report was published in June 2006 but the work was done in November 2004 and included banking data from 1999 and 2003.
- 7.
Return on equity was 9 percent in 1999 after the Asian crisis, and 23 percent in 2003.
- 8.
Foreign currency loans and deposits were each 18 percent of the total in 2003, having fallen from a 1999 level of 20 percent for deposits and 29 percent for loans.
- 9.
There was a 2004 estimate of gross external debt of $18 billion from the IMF’s regular Financial Stability Assessment Program (FSAP) visits, some of it owed by quasi-government organizations.
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Banafe, A., Macleod, R. (2017). Low Oil Prices, Rising Government Debt and External Crises, 1994–2004. In: The Saudi Arabian Monetary Agency, 1952-2016. Financial Institutions, Reforms, and Policies in Muslim Countries. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-55218-7_6
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