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Saudi Arabia's Leading G20 Role For The Global Economy Becomes A Model.

Saudi Arabia represents the oil sector at the Group of 20 (G20) of world powers now working on a healthy global economic recovery. The Riyadh-based International Energy Forum (IEF), Paris-based IEA and Vienna-based OPEC are working on proposals to report on factors which cause world oil price volatility and ways to help stabilise the market. The task was requested by G20's Nov. 11-12 summit meeting in Seoul, with an intermediate study to be submitted by February 2011 and a final report to be out by April - in time for the next G20 summit in France. The three agencies are to help improve data collected by the Riyadh-based Joint Oil Data Initiative (JODI).

The role of Saudi Arabia as a seminal balancer in the international oil market was noted at the Seoul summit. Saudi Arabia is the only oil producer holding 70% of the world's spare supply capacity. Nearly 4.5m b/d are kept as spare crude oil to meet future demand at a considerable cost to Riyadh. Increasing its crude oil production capacity to 12.5m b/d at a cost of $63bn is no small amount. In one field alone, Khurais, Saudi Aramco met the pledge it made at the height of the oil price spike in July 2008 to add 1.2m b/d of capacity.

Nevertheless, as Saudi Arabia has made reassuring steps to address the supply of crude oil, the world should not discount the importance of demand security and price volatility. The resource curse view should be revised: abundant resources are a blessing, but the instability of their prices is the curse.

The pace of the global recovery, commodity volatility, currency fluctuations and beggar thy neighbour thoughts have been of concern for all the G20 powers, especially to Saudi Arabia. The global financial crisis impacted Saudi Arabia but it weathered the effects of the tsunami in a formidable way.

At the eye of the storm in 2009, as global output receded, Saudi Arabia was one of the few G20 powers to record positive real GDP growth (0.6%). Policy reaction was immediate as Saudi Arabia embarked on counter-cyclical measures through the largest investment stimulus package, as a percentage of GDP, by 5.4% in 2009 and 4.6%, respectively. Having learned from the past, Saudi Arabia's banking system weathered the crisis in a remarkable manner, in many ways adopting liquidity and capital adequacy measures (18% as at 2009), non-performing loans at 3.3% which remains among the lowest in the world.

What Saudi Arabia required for many years of its banks is now being discussed as part of Basel-III. And at the core of the financial crisis was the exuberant and leveraged role of financial institutions.

Never in the history of the Saudi banking system has there ever been a bank failure. Prudence, adequate regulation and management of public finances have provided Saudi Arabia with the right tools, guided by an important principle: save in the good days and spend a portion in the bad ones. The balance between spending and saving after nearly two decades of fiscal hardship as oil revenues fell to historical lows and consequent budget deficits and high government debt became the norm.

In the late 1990s Saudi Arabia's government to GDP debt surpassed 100% while budget deficits were a feature of the mid-1980s onwards. Today, Saudi Arabia government to GDP debt is close to 13% without incurring any external government debt, on the back of very low external household and corporate debt levels. In fact, Saudi Arabia did not experience systemic excesses during the pre-crisis phase, no real estate bubble and businesses avoided the regional trappings of the "mine is bigger" syndrome.

Current account surpluses of oil producers including Saudi Arabia is the effect, not the cause, of oil price fluctuations, and their sizeable propensity to import, hence recycle excess capital. Surplus capital of Saudi Arabia is either re-injected in the local economy or held as part of the country's foreign stabilidation assets. The foreign assets amassed (more than 100% of GDP) have been deployed to support

not just the counter-cyclical policies and its physical capital but to keep on investing in the future of Saudi Arabia which is the human capital.

More than 25% of the kingdom's budget goes towards all levels of education as Saudi Arabia has embarked on a transformation of its human capital by investing among the 34% of the population who are below the age of 14 years of age. (Saudi Arabia is a very young country - 78 years old - and within a span of two decades transformed itself from being majority illiterate to majority literate while today 55% of all graduates of tertiary institutions are women.

Saudi Arabia will continue to play a systemic role in an ever-changing multi-polar world where the G20 is at its core. Riyadh has always maintained moderation when it comes to oil prices in order to support consumers and producers, but above all not to hurt global economic recovery efforts.

Cognizant of the challenges which lie ahead and its global position, Saudi Arabia aspires to switch from being a net exporter of petroleum to a net exporter of energy, partly generated from renewable sources. It aspires over the next two decades to become a leader in renewable technologies. The kingdom's leadership will continue to demonstrate growing readiness to engage in the new multi-polar environment.
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Publication:APS Review Oil Market Trends
Geographic Code:4EUFR
Date:Nov 22, 2010
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