Term Paper on "Saudi Stock Market"

Term Paper 30 pages (8204 words) Sources: 20 Style: Harvard

[EXCERPT] . . . .

Saudi Arabian Stock Market

Measuring Consumer Confidence in the Saudi Stock Market?

The Saudi Arabian stock market is heavily dependent upon oil as a key to its survival. From 2001 to 2006 the Saudi stock market experiences incredible growth. In the last part of 2005 the price of oil outpaces the Stock Index. This caused a drastic drop in the Saudi stock market. There are many theories as to the reasons and effects of the fall. The survey indicated that the effects were not as wide as they were at one thought. The markets are driven by consumer confidence. A recent survey of Saudi students in attendance at American universities indicates that consumer confidence is high and indicates that the markets are likely to make a full recovery in the future.

Introduction

Chapter 1: Background and Hypotheses

Chapter 2: Literature Review

Chapter 3: Methodology

Results and Conclusions

Works Cited

Appendices

Introduction

The Saudi Arabian stock market has become the topic of the hour throughout Saudi Arabia and the rest of the world. The key reason for this interest is the roller coaster ride that is has witnessed in the past several years. The Saudi stock market has experienced phenomenal growth. The reasons for this growth include a new electronic system for stock trading, an increase in oil prices, and a return of outside foreign investment. These factors have been especially important at after the September 11, 2001 World Trade Tower bombings in the U.S.

The Saudi stock market index is called the Tadawul. It is the largest in the Middle East and ranks 13th in the world. It has an annual turnover of $15 billion, while the average of the biggest market in $60 billion (Simmons, 2005). This means that the Saudi market is a full 77% smaller than the largest market in the world. It is dwarfed in comparison. There are several reasons for this low trade volume. The first is that the government owns a large amount of shares of listed companies. The second is that large organizations own a large portion of the shares, such as Citibank and HSBC. With a majority of the shares owned by big investors and the government there are few left for open trading. The Saudi stock market has only 76 companies listed, compared to 350 companies on the largest market.

The success of the Saudi stock market is surprising due to its comparatively small size. Yet, it continued to experience growth at a disproportionate rate. However, in February of 2006 the market experienced a major correction, which resulted in a fall in the index from 20,0000 to 8,000 points. This collapse had a devastating effect on investors. Since that time the Saudi market has been met with caution from investors. Speculators differ as to the long-term effects of this collapse and the ability to recover. This purpose of this research will be to explore this collapse. It will explore the history of the Saudi Stock market. It will examine the market efficiency of the market through a literature review and will compare it to several other markets in the world.

The research will focus on examining the reasons and theories behind the growth and eventual collapse of the Saudi stock market. This research will be solution oriented and will seek to examine policies that may help to stabilize the market and prevent another collapse in the future. The approach to this research will be a two-phased approach. The first phase will be theoretical in nature and will focus on literature to form the basis of its conclusions. The second will involve a survey to determine the degree of investor confidence and the likelihood that investors will engage in trade in the Saudi Market in the future. It will examine the implication of investor confidence in the eventual recovery of the Saudi Stock market.

Chapter 1: Background and Hypotheses

Historical Background of the Saudi Stock Market

The Kingdom of Saudi Arabia is the largest country on the Arabian Peninsula. IT is bordered by Jordan on the northwest, Iraq on the North and Northeast, Kuwait, Qatar, Bahrain and the United Arab Emirates to the east. The country of Oman is on the southeast and Yemen to the south. It has port access via the Persian Gulf in the northeast and the Red Sea to the west. This position has several important impacts on the Saudi economy. It has many neighbors and a large territory. Its most important natural resource is oil. It is oil that creates a majority of Saudi wealth and prosperity.

The base of the Saudi economy is petroleum products. It is the world's leading producer and exporter of petroleum products. Oil account for more than 90% of Saudi exports and nearly 75% of government revenues. The Saudi economy depends on oil, and with virtually no other source of income, it is no surprise that oil prices practically dictate the wealth of the nation and the ability to the common citizen to support them. Oil is the life-blood of the Saudi economy and this is an extremely important fact to understand if one is to understand how the Saudi stock market operates.

The history of Saudi Arabia is one of bloody wars among warring families. The peninsula was fought over for thousands of years. Its primary occupant, and eventual ruling family was the Saud family (Al-Rasheed, 2002). The State of Saudi Arabia was founded by taking Abdul Aziz Al-Saud with the unification of Hejaz and Nejd in 1932 (Lacey, 1981). In March of 1938 oil was discovered on the peninsula and the wealth and prosperity of the nation state rose (Lacey, 1981). World War II increased the need for oil and the Saudi economy was off and running. Oil was the prima donna and American consumerism fueled the proverbial fossil fuel fire.

It is important to understand the significance of the ruling class, particularly the ruling family, in relation to the Saudi Stock Market. There is a considerable risk inherent with an economy that depends on a single sector for support and growth. When oil prices are good, the economy is good. However, when the price of a single commodity is bad, then there is no other market of product base to fall back on. In order to survive in a single product economy, the Saudi government had to make some important moves. If their economy was to depend on a single product, then they must work to build demand for that product in a diverse number of markets. Second, they must have complete control over the resource and availability of it in order to manipulate prices to some degree.

The Saudi government claims to have approximately 260.1 billion barrels of oil reserves, which amount to approximately 24% of the world's total petroleum reserves. This is according to 2003 estimates. According to the Saudi government these reserves continue to increase as new oil fields are discovered. It is not known if these figures are accurate because the Saudi government likes to keep the rest of the world guessing, another means of control. Saudi Arabia was a key component in the successful efforts of OPEC in raising oil prices in 1999 to the highest level since the Gulf War. They accomplished this by slowing production and creating a perceived shortage in world supply. This demonstrates the amount of control the Saudi government has in the ability to manipulate prices in order to create a sense of stability in their country.

The Saudi government realizes that an economy dependent upon a single commodity is risky. It is attempting to promote growth in the private sector by privatizing many components of the infrastructure such as electricity and telecommunications. The countries efforts have been complicated by shortages of water and rapid population growth (Simmons, 2003). In order to support the growing population the Saudi government realizes that it will have to increase self-sufficiency by increasing agricultural production or face potential food shortages in the future. This would force the Saudis to become more dependent on foreign imports to provide sustenance for the growing population. Increasing agricultural growth in face of a water shortage is a difficult task to say the least.

In the 1990s the Saudis experienced a significant drop in oil revenues. Per capita income fell from $25,000 to $8,000 in 2003 (Simmons, 2003). This was one of the worst declines in suffered by any nation stated in history. However, in 2003 the price of oil jumped to a record high of 40-50 dollars, triggering a spontaneous boom in the economy. As one can see, oil prices dictate the Saudi economy. The two correlate so closely that they can almost be considered synonymous. The wealth of the nation rises and falls with the price of oil. This would be an excellent system if the Saudis were the only factor in setting prices. However, this is not the case in any market and the Saudis are limited in the amount of revenue that… READ MORE

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