Kingdom of Saudi Arabia Saudi Arabian Monetary Agency

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1 Kingdom of Saudi Arabia Saudi Arabian Monetary Agency Forty Fifth Annual Report The Latest Economic Developments 1430H (2009G) Research and Statistics Department

2 SAUDI ARABIAN MONETARY AGENCY (SAMA) BOARD OF DIRECTORS 1. H.E. the Governor, Dr. Muhammad Bin Sulaiman Al-Jasser Chairman 2. H.E. the Vice Governor, Vice Chairman 3. H.E. Mr. Abdulaziz Bin Zaid Al-Quraishi 4. H.E. Mr. Muhammad Obaid Bin Sa eed Bin Zagar 5. H.E. Mr. Abdulaziz Bin Muhammad Al-Athel Saudi Arabian Monetary Agency 45th Annual Report

3 FOREWORD It gives me pleasure to present, in the name of the Board of Directors, the Forty-Fifth Annual Report of the Saudi Arabian Monetary Agency which reviews latest developments witnessed by the Saudi economy during fiscal year 1428/29H (2008) and during the first quarter of fiscal year 1430/31H (2009). The Report covers various areas of the domestic economy, including monetary and banking developments, capital market, prices, public finance, national accounts, foreign trade and balance of payments in addition to other productive and services sectors such as oil, industry, electricity, agriculture, water, transport, telecommunications and others. The Report also provides a summary of latest global economic and financial developments as a background to the developments in the Saudi economy. The Report mainly relies on official data which SAMA obtains from various Government ministries and departments and public sector enterprises, in addition to the host of the data compiled by SAMA itself. I would like to thank all ministries, departments and entities, whose names are indicated in all tables of the Report, for their cooperation in making available valuable information for the preparation of this Report. The Report gives full description of SAMA's functions such as conducting monetary policy and supervising commercial banks and cooperative insurance activity. The Report also includes the Auditors Report of SAMA's Final Accounts for the fiscal year ending on the 30th of June 2008, and SAMA s initial balance sheet for the fiscal year ending on the 30th of June Finally, I wish to thank all SAMA's staff for the efforts they made for the preparation of this Report. Dr. Muhammad Bin Sulaiman Al-Jasser Governor and Chairman of the Board Sha ban 1430H July 2009G Saudi Arabian Monetary Agency 45th Annual Report

4 For correspondence and inquiries: Postal address: Saudi Arabian Monetary Agency Research and Statistics Department P.O Box 2992, Riyadh Kingdom of Saudi Arabia Telephone: (966) Facsimile: (966) For the latest monetary and banking statistics published by the Saudi Arabian Monetary Agency, please visit SAMA s website given below: Saudi Arabian Monetary Agency 45th Annual Report

5 SAMA HEAD QUARTERS AND BRANCHES: Head Office Riyadh Branches Makkah Al-Madinah Riyadh Jeddah Dammam Ta if Buraydah Jazan Tabuk Abha Saudi Arabian Monetary Agency 45th Annual Report

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7 CONTENTS Page World Economy. 8 Saudi Economy.. 28 Monetary Developments Banking Sector Supervision and Control of Commercial Banks and Insurance Activity Capital Market 93 Prices and Costs of Living. 117 Public Finance 127 National Accounts and Sectoral Developments. 137 External Sector Petroleum and Mineral Resources Commerce and Industry Tourism Sector Water and Electricity Agriculture and Animal Husbandry Transport and Communications. 208 Education, Health and Social Services 225 Population and Labour Force. 236 Appendix of Statistical Tables Saudi Arabian Monetary Agency 45th Annual Report

8 WORLD ECONOMY World Economic Situation The growth rate of the world economy declined from 5.2 percent in 2007 to 3.2 percent in 2008 due to the global financial crisis. The world economy is expected to record a negative growth rate of 1.3 percent in In spite of the decline in the world growth rate due to the global financial crisis, various world economies especially low-income economies underwent inflationary pressures caused by increased prices of food and energy. Inflation rates in emerging and developing economies rose from 6.4 percent in 2007 to 9.3 percent in The growth rate of the international trade volume declined from 7.2 percent in 2007 to 3.3 percent in 2008 due to the financial crisis. Economic Growth Affected by the global financial crisis, the growth rate of the world economy (in real terms), went down to 3.2 percent during 2008, registering the lowest growth rate during the last five years. The growth rate in advanced economies declined from 2.7 percent in 2007 to 0.9 percent in 2008 (Table 1.1). Country-wise details indicate that the growth rate in the U.S.A. decreased from 2.0 percent in 2007 to 1.1 percent in 2008 and in the Euro area from 2.7 percent to 0.9 percent. The growth rates in Germany and France declined from 2.5 percent and 2.1 percent in 2007 to 1.3 percent and 0.7 percent respectively in However, Italy registered a negative growth rate of 1.0 percent in 2008 against a positive growth rate of 1.6 percent in Japan also registered a negative growth rate of 0.6 percent in 2008 against a positive growth rate of 2.4 percent in In the U.K., the growth rate declined from 3.0 percent in 2007 to 0.7 percent in The growth rate in the new industrial Asian economies declined from 5.7 percent to 1.5 percent. The growth rate in emerging and developing economies went down from 8.3 percent in 2007 to 6.1 percent in In Asian developing countries, the growth rate went down from 10.6 percent to 7.7 percent. The growth rate in China decreased from 13.0 percent to 9.0 percent and the growth rate in India declined from 9.3 percent to 7.3 percent. In the Middle East countries, the growth rate declined from 6.3 percent to 5.9 percent. In African countries, the growth rate decreased from 6.2 percent in 2007 to 5.2 percent Table 1.1: WORLD REAL GDP GROWTH RATES (In percent) The World Advanced economies Major advanced economies USA Euro Area Japan Germany France Italy U.K. Canada Other advanced economies European Union New industrial Asian economies Emerging markets and developing countries Africa Asian developing countries China India Middle East Middle & Eastern European Countries Western Hemisphere Brazil Commonwealth of Independent States Russia 4.7 Source: IMF, World Economic Outlook, April, Projections World Economy 8 Saudi Arabian Monetary Agency 45th Annual Report

9 in The growth rate in the Western Hemisphere went down from 5.7 percent to 4.2 percent and in Commonwealth of Independent States from 8.6 percent to 5.5 percent. The growth rate in the Middle and Eastern European countries decreased from 5.4 percent in 2007 to 2.9 percent in Preliminary projections for 2009 indicate that the world growth rate will be markedly affected by the global financial crisis. The world economy is expected to register a negative growth rate of 1.3 percent in Advanced economies are expected to register a negative growth rate of 3.8 percent in 2009 compared to a positive growth rate of 0.9 percent in The U.S.A. is expected to register a negative growth rate of 2.8 percent against a positive growth rate of 1.1 percent in 2008 and the Euro area is expected to register a negative growth rate of 4.2 percent against a positive growth rate of 0.9 percent. In Japan, the negative growth rate is expected to increase from 0.6 percent to 6.2 percent. The new Asian industrial economies are expected to register a negative growth rate of 5.6 percent against a positive growth rate of 1.5 percent in In developing and emerging economies, the growth rate is expected to decrease from 6.1 percent to 1.6 percent. Chart 1.1 shows the world real GDP growth rates during the period It shows that most groups of countries are expected to register negative growth rates in Inflation In advanced economies, inflation rates measured by change in consumer price indices increased from 2.2 percent in 2007 to 3.4 percent in The inflation rate in the Euro area went up from 2.1 percent to 3.3 percent and in the new Asian industrial economies from 2.2 percent in 2007 to 4.5 percent in In emerging and developing economies, the inflation rate increased from 6.4 percent to 9.3 percent. In the Asian developing countries, it went up from 5.4 percent in 2007 to 7.4 percent in 2008 and in the Commonwealth of Independent States (countries of former Soviet Union) from 9.7 percent to 15.6 percent (Table1.2). Preliminary projections for 2009 indicate that inflation rates are expected to go down in all regions of the world. In advanced economies, the inflation rate is expected to decrease from 3.4 percent in 2008 to a negative rate of 0.2 percent in In the Euro area, it is projected to go down from 3.3 percent to 0.4 percent and in the new Asian industrial economies from 4.5 percent to 0.4 percent. In emerging and developing economies, inflation rate is expected to decline from 9.3 percent in 2008 to 5.7 percent in It is expected to go down in the Asian developing countries from 7.4 percent to 2.8 percent and in the Commonwealth of Independent States from 15.6 percent in 2008 to 12.6 percent in Chart 1.2 shows inflation rates in selected groups of countries during the period In all groups of countries, Inflation rates went up in 2008 and they are projected to go down in Unemployment Unemployment rates in most economies of the world went up during In advanced economies, the unemployment rate rose from 5.4 percent in 2007 to 5.8 percent in In the U.S.A., the rate went up from 4.6 percent to 5.8 percent. In the Euro area, it increased from 7.5 percent to 7.6 percent. It went up in Italy from 6.1 percent to 6.8 percent, while it went down in Germany from 8.4 percent to 7.3 percent and in France from 8.3 percent to 7.8 percent. In Japan, the rate rose from 3.8 percent to 4.0 percent and in the U.K. from 5.4 percent to 5.5 percent. In Canada, the rate went up from 6.0 percent in 2007 to 6.2 percent in 2008 and in the new Asian industrial economies from 3.4 percent to 3.5 percent (Table 1.3) Percent Chart 1.1: World Real GDP Growth Rates Estimate Advanced Economies Newly Industrialized Asian Economies Emerging Market and Developing Countries Other Advanced Economies Eu ro Are a Commonwealth of Independent States World Economy 9 Saudi Arabian Monetary Agency 45th Annual Report

10 Economic Growth World Major advanced economies Euro area Other advanced economies New industrial Asian economies Emerging Markets and Developing Countries Commonwealth of Independent States CPI Major advanced economies Euro area New industrial Asian economies Emerging Markets and Developing Countries Developing Asian countries Commonwealth of Independent States Table 1.2: MAJOR DEVELOPMENTS IN THE WORLD ECONOMY (Percent) Projections U.S. Dollar deposits LIBOR (1) Japanese Yen deposits Euro deposits Unemployment rates Major advanced economies Euro area New industrial Asian economies Government fiscal deficit (2) Major advanced economies New industrial Asian economies Emerging Markets and Developing countries (weighted average) Growth rate of world trade (goods and services ) Exports Advanced economies Emerging Markets and Developing countries (weighed average ) New industrial Asian economies Imports Advanced economies Emerging Market and Developing countries New industrial Asian economies Current Account (3) Advanced economies USA Euro area Japan Germany France Italy U.K Canada New industrial Asian economies Foreign Exchange Reserves (Billion SDR) Industrial countries Developing countries Net Private Capital Flows to Emerging Economies (billion $) Average Prices of Oil (U.S$ per barrel) (4) Arabian Light (5) (1) Six-month rate for each USA and Japan and three-month rate for Euro Zone. (2) Ratio of deficit/surplus to GDP. (3) Ratio of surplus/deficit to GDP. (4) Percentage of annual change of simple average of spot prices of Brent, Dubai and West Texas Intermediate crude oil. (5) OPEC data. Source: IMF, World Economic Outlook, April, 2009 World Economy 10 Saudi Arabian Monetary Agency 45th Annual Report

11 Percent Chart 1.2: Percentage Change in Consumer Prices in Selected Groups of Countries Estimate Advanced Economies Newly Industrialized Asian Economies Emerging Market and Developing Countries Commonwealth of Independent States Eu ro Are a 2006 Advanced economies 5.8 Major advanced economies 5.8 United States 4.6 Euro area 8.4 Japan 4.1 Germany 9.8 France 9.2 Italy 6.8 U.K. 5.4 Canada 6.3 New Industrial Asian 3.7 Source: IMF, World Economic Outlook, April, Table 1.3: ADVANCED ECONOMIES: UNEMPLOYMENT RATES (Ratio to labor force) Projections Preliminary projections for 2009 indicate a sharp increase in unemployment rates in most economies of the world due to the global financial crisis. In advanced economies, the unemployment rate is expected to increase from 5.8 percent in 2008 to 8.1 percent in In U.S.A., the unemployment rate is expected to go up from 5.8 percent to 8.9 percent. In the Euro area, it is expected to increase from 7.6 percent to 10.1 percent. It is projected to go up in Germany from 7.3 percent to 9.0 percent, in France from 7.8 percent to 9.6 percent and in Italy from 6.8 percent to 8.9 percent. The rate is projected to increase in the U.K. and Canada from 5.5 percent and 6.2 percent to 7.4 percent and 8.4 percent respectively. In the new Asian industrial economies, the rate is expected to go up from 3.5 percent in 2008 to 4.9 percent in Chart 1.3 shows unemployment rates in selected groups of countries during the period It shows expected sharp increases in unemployment rates in all groups of countries in Fiscal Balances Fiscal balances in all regions of the world recorded a decline during 2008 due to the recessionary trends in most countries. Advanced countries recorded an increase in fiscal deficit to 3.5 percent of GDP in 2008 compared to 1.2 percent in The deficit in the U.S.A. went up from 2.9 percent in 2007 to 6.1 percent in In the Euro area, the deficit increased from 0.7 percent to 1.8 percent. The deficit in France and Italy increased from 2.7 percent and 1.5 percent in 2007 to 3.4 percent and 2.7 percent in In Japan, the deficit went up from 2.5 percent to 5.6 percent. The deficit in the U.K. increased from 2.6 percent to 5.4 percent while it decreased in Germany from 0.5 percent to 0.1 percent. The surplus in Canada declined from 1.4 World Economy 11 Saudi Arabian Monetary Agency 45th Annual Report

12 Percent 12 Chart 1.3: Unemployment Rates Estimate Eu ro Are a Major Advanced Economies Advanced Economies Newly Industrialized Asian Economies percent in 2007 to 0.4 percent in Other advanced economies recorded a deficit of 0.4 percent in their fiscal balances in 2008 against a surplus of 1.5 percent in The surplus in the new Asian industrial economies decreased from 3.4 percent to 0.8 percent. Emerging and developing economies recorded a deficit of 0.2 percent in their fiscal balances in 2008 against a surplus of 0.4 percent in the preceding year (Table 1.4). According to preliminary projections for 2009, fiscal balances in all of the regions of the world are expected to record sharper declines. The budgetary deficit in advanced economies is expected to go up from 3.5 percent in 2008 to 8.8 percent in In the U.S.A., the deficit is projected to increase from 6.1 percent to 13.6 percent. In the Euro area, the deficit is expected to go up from 1.8 percent to 5.4 percent. In Germany, the deficit is projected to increase from 0.1 percent to 4.7 percent. In France and Italy, it is expected to increase from 3.4 percent and 2.7 percent to 6.2 percent and 5.4 percent respectively. In Japan, the deficit is expected to increase from 5.6 percent in 2008 to 9.9 percent in In the U.K., it is expected to rise from 5.4 percent to 9.8 percent. The new Asian industrial economies are expected to record a deficit of 3.2 percent against a surplus of 0.8 percent. The deficit in the emerging and developing economies is expected to increase from 0.2 percent in 2008 to 4.4 percent in Monetary and Financial Developments Monetary authorities in most economies of the world adopted expansionary monetary and fiscal policies. Central banks reduced official interest rates in the light of the economic recession, the marked decline in lending and shortage of liquidity witnessed by the crisis in the world markets. Table 1.4: TRENDS OF GOVERNMENT FISCAL BALANCES* (Percent) Advanced economies Major advanced economies United States Euro area Japan Germany France Italy U.K. Canada Other advanced economies New industrial Asian economies Other Emerging Markets and Developing Projections Countries (Weighted average) *Ratio of surplus/deficit to GDP. Source: IMF, World Economic Outlook, April, 2009 World Economy 12 Saudi Arabian Monetary Agency 45th Annual Report

13 Interest Rates The prevailing LIBOR rate* for US$ denominated deposits declined from 5.3 percent in 2007 to 3.0 percent in 2008; and it is expected to continue to decline to 1.5 percent in The interest rate for Japanese Yen deposits increased from 0.9 percent to 1.0 percent; and it is expected to remain unchanged at 1.0 percent in The interest rate for Euro deposits increased from 4.3 percent in 2007 to 4.6 percent in 2008; and it is expected to decrease to 1.6 percent in Exchange Rates Exchange rates of major currencies, except the Japanese Yen, the Swiss Franc and the Singapore Dollar, continued to decline against the US dollar during The exchange rates of the Japanese Yen, the Swiss Franc and the Singapore Dollar increased against the US dollar by percent, 6.06 percent and by 0.70 percent respectively during the year. In contrast, the exchange rates of the South African Rand, the Pound Sterling and the South Korean Won declined against the US dollar by percent, percent and by percent respectively during the year. The stable situation of Japanese banks in terms of their strong financial positions and their lower losses due to the global financial crisis compared to American and European banks helped the exchange rate of the Japanese Yen to increase against most of major currencies. The exchange rate of the Japanese Yen against the US dollar increased by percent to Yen per dollar during the year, benefiting from extensive selling transactions by Japanese investors in the dollar-denominated hedge funds and repatriation of funds to the Japanese government bonds markets. The exchange rate of the Japanese Yen against the US dollar reached the level of Yen per Dollar in mid- December 2008, the highest since The Yen exchange rate was Yen 98.8 per US dollar at the beginning of May In Europe, the exchange rate of the Euro against US dollar decreased during 2008 recording its lowest level of $1.23 at the end of October This decline was a result of the losses incurred by European banks due to the financial crisis. In December 2008, the exchange rate of the Euro improved remarkedly because European investors closed their dollar-denominated positions and restored their local liquidity. At the end of 2008, the Euro exchange rate against US dollar was $1.39, declining by 4.24 percent compared to the end of At the beginning of May 2009, the Euro exchange rate against US dollar was $1.34. In the U.K., the Pound Sterling exchange rate against the US dollar declined by percent during 2008 to $1.46 at the end of the year, the lowest level since This was due to the aggravated crisis of the financial sector in the U.K. which prompted authorities to continue purchasing large banks, pumping more liquidity to historical levels. The Pound Sterling exchange rate amounted to $1.50 at the beginning of May Capital Markets Equity Markets During 2008, indexes of equity markets in the world declined especially during the fourth quarter of the year in which they recorded the largest part of their losses of the year. This was because most economies underwent a recession stage unparalleled for several decades. In the U.S.A., Dow Jones Index (DJIA) broke the level of 10,000 in the first week of the fourth quarter to reach 7850 in mid October This was because of the disruption of lending transactions for financing investment in shares along with the closure and selling of customers portfolios due to the fall of shares to low levels, which increased the pace of share selling during a short period. Dow Jones Index (DJIA) declined by 3874 or 31.0 percent to close at 8776 during 2008 compared to This decline was a result of deteriorated economic situations and the aggravation of the crisis in several sectors, such as industries of motors, banks and financial services and basic industries. Dow Jones Index (DJIA) amounted to 8427 at the beginning of May In Japan, NIKKEI index for Japanese shares recorded a decline of 42.1 percent during 2008 to 8860 at the end of the year. The NIKKEI index decreased at the end of October to lower than 7000, the lowest level since This sharp fall in the Japanese shares was due to the expectations of global economic recession along with a decline in the demand for Japanese exports especially after the increase in the Yen exchange rate against major currencies. The NIKKEI index amounted to 8977 at the beginning of May In Europe, Morgan Stanley (MSCI-EURO) index for European shares declined during 2008, losing 608 or 45.0 percent to 717 at the end of the year. This decline reflected the expectations of deteriorated economic situations and the shortage of liquidity which led the index to go down in November to 630, the lowest level during the year. The decline in the Euro exchange rates against the US dollar and the fall in interest rates did not help to restore the confidence in European shares. In the U.K., the FTSE-100 index for * Six-month rate for U.S.A. and three-month rate for Euro zone. World Economy 13 Saudi Arabian Monetary Agency 45th Annual Report

14 British shares declined during 2008 by 2033 or 31.3 percent to 4,434 at the end of the year. During the year, the index recoded its lowest level of 3665 in October. The aggravated financial crisis, deteriorated economic situations, lower purchase power and decreased industrial production had a marked effect on British shares during the year. The FTSE-100 index amounted to 4243 at the beginning of May Securities Markets The yield on all government bonds decreased during 2008 in the major four markets, namely U.S.A., Japan, Euro area and UK, reflecting the economic developments and reduced official interest rates. In the U.S.A., yield on treasury bonds reflected the concerns of investors and dealers about the aggravation of the crisis of the banking sector after the collapse of the Bank of Lehman Brothers. The yield on all government bonds declined during the fourth quarter of The yield on US bonds of 30- year maturity decreased by 164 basis points and that on US bonds of 10-year maturity also declined by 161 basis points. The yield on US bonds of 2-year maturity decreased by 120 basis points. In Japan, yield on all government bonds declined during the fourth quarter of The yield on bonds of 30- year maturity decreased by 55 basis points and that on bonds of 20-year maturity declined by 44 basis points. The yield on bonds of other maturities declined by 30 to 41 basis points. These declines in yield were attributable to the aggravated crisis of confidence among banks, the liquidity crisis and the expectations that the global crisis would affect the Japanese economy which would in turn affect its growth and inflation rates. In Euro area, return on bonds of all maturities went down during The return on bonds of one year maturity decreased by 198 basis points and the return on bonds of 3-year maturity also declined by 174 basis points. The return on bonds of 2-year maturity decreased by 172 basis points during the fourth quarter and by 221 basis points during the year. The decline in returns on government bonds was due to the flexible policy adopted by the European Central Bank, which reduced the official interest rate by 1.75 basis points from 4.25 percent to 2.50 percent during the fourth quarter after the decline in inflation rates to their lowest levels since more than six years. In the UK, returns on all government bonds declined during the fourth quarter of 2008 due to the decision of the Bank of England to reduce the official interest rate by 3.0 percent during the fourth quarter. The return on bonds of one year maturity decreased by 331 basis points and the return on bonds of 2-year maturity declined by 296 basis points during the fourth quarter and by 331 basis points during The return on bonds of 10-year maturity decreased by 143 basis points and the return on bonds of 30- year maturity declined by 80 basis points. These developments were due to continued deteriorated economic situations, continued depressed prices of domestic real estate and the aggravated crisis of banks which led the government to continue pumping liquidity and support to the banking sector. International Trade and Balances of Payments A. International Trade The global recession caused the growth rate of the volume of world trade to decrease from 7.2 percent in 2007 to 3.3 percent in The growth rate is expected to record a negative growth rate of 11.0 percent in The growth rate of exports of goods and services in major advanced economies decreased from 6.1 percent in 2007 to 1.8 percent in It is expected to go down and record a negative growth rate of 13.5 percent in In developing countries and other emerging economies, the rate declined from 9.5 percent to 6.0 percent and it is expected to record a negative growth rate of 6.4 percent in In new industrial Asian countries, the rate went down from 9.5 percent to 0.6 percent and it is projected to record a negative growth rate of 11.9 percent in The growth rate of import of goods and services in major advanced economies decreased from 4.7 percent in 2007 to 0.4 percent in It is expected to fall and record a negative growth rate of 12.1 percent in In developing countries and other emerging economies, the rate decreased from 14.0 percent to 10.9 percent and it is expected to go down and record a negative growth rate of 8.8 percent in In new industrial Asian countries, the rate declined from 8.7 percent in 2007 to 0.4 percent in It is expected to record a negative growth rate of 13.9 percent in B. Balance of Payments The deficit in the current account of the balance of payments of advanced economies, as a ratio of GDP, increased from 1.0 percent in 2007 to 1.1 percent in It is expected to decrease to 1.0 percent in In the U.S.A., the deficit went down from 5.3 percent in 2007 to 4.7 percent in 2008, and it is expected to continue to fall to 2.8 percent in The Euro area registered a deficit of 0.7 percent in 2008 against a surplus of 0.2 percent in the preceding year. The deficit is expected to increase to 1.1 percent in In Germany, the surplus decreased from 7.5 percent to 6.4 percent, and it is expected to continue to decrease to 2.3 percent in In France, the deficit went up from 1.0 percent in 2007 to 1.6 percent in World Economy 14 Saudi Arabian Monetary Agency 45th Annual Report

15 2008, and it is expected to fall to 0.4 percent in In Italy, the deficit also increased from 2.4 percent in 2007 to 3.2 percent in 2008, and it is expected to go down to 3.0 percent in In Japan, the surplus decreased from 4.8 percent to 3.2 percent, and it is expected to decline to 1.5 percent in In UK, the deficit went down from 2.9 percent in 2007 to 1.7 percent in 2008, and it is projected to go up to 2.0 percent in In Canada, the surplus went down from 0.9 percent to 0.6 percent, and the current account is expected to record a deficit of 0.9 percent in In the new industrial Asian economies, the surplus decreased from 5.7 percent in 2007 to 4.4 percent in 2008, and it is expected to increase to 6.3 percent in 2009 (Table 1.2). In Asian developing countries, the current account surplus as a ratio of GDP declined from 6.9 percent in 2007 to 5.8 percent in It is expected to increase to 6.4 percent in In the Middle East countries, the surplus went up from 18.2 percent to 18.8 percent, and the current account is expected to record a deficit of 0.6 percent in In Commonwealth of Independent States (of the former Soviet Union), the current account surplus increased from 4.2 percent to 5.0 percent, and it is expected to decrease to zero percent in In African countries, the surplus remained unchanged at 1.0 percent, and the current account is expected to record a deficit of 6.5 percent in In the Western Hemisphere countries, the current account recorded a deficit of 0.7 percent in 2008 against a surplus of 0.4 percent in 2007, and the deficit is expected to increase to 2.2 percent in In the Central and Eastern European countries, the current account deficit declined from 7.7 percent to 7.6 percent, and it is expected to go down to 4.1 percent in Capital Flows to Emerging and Developing Markets Net private capital flows to emerging and developing markets decreased to $109.3 billion during 2008 against $617.5 billion in Emerging and developing markets are expected to record net capital outflows of $190.3 billion in Region-wise data show that the Middle East countries recorded net capital outflows of $120.9 billion in 2008 against net capital inflows of $11.0 billion in The Middle east countries are expected to record net capital outflows of $29.5 billion in In Commonwealth of Independent States, net capital outflows amounted to $127.4 billion in 2008 against net capital inflows of $127.2 billion in the preceding year. Their capital outflows are expected to amount to $119.0 billion in Net private capital flows to Asian emerging countries declined from $164.8 billion in 2007 to $127.9 billion in The Asian emerging countries are expected to record net capital outflows of $46.9 billion in The net private capital flows to the Western Hemisphere countries also went down from $107.4 billion in 2007 to $58.5 billion, and they are expected to continue to go down to $13.3 billion in In African countries, net capital inflows decreased from $33.4 billion to $24.2 billion, and they are expected to go up to $30.2 billion in 2009 (Table 1.5). A breakdown of the components of the flows shows that net direct investment flows to emerging and developing markets increased from $359.0 billion in 2007 to $459.3 billion in 2008, and they are expected to decrease to $312.8 billion in Net portfolio investment outflows stood at $155.2 billion in 2008 against net inflows of $39.5 billion in Net portfolio investment outflows are expected to increase to $234.5 billion in Net outflows of other investments stood at $194.6 billion in 2008 against net inflows of $219.2 billion in Net outflows of other investments are expected to rise to $268.5 billion in World Oil Market According to the International Energy Agency (IEA), world demand for oil declined by 0.3 percent to 85.7 million b/d in 2008 against 86.0 million b/d in It is projected to decrease by 1.5 percent to 84.4 million b/d in Demand by OECD countries accounted for 55.4 percent of total world demand or 47.5 million b/d during World oil supply* rose by 1.1 percent to 86.5 million b/d during 2008 from 85.6 million b/d in Total supply from OPEC countries increased by 4.3 percent to 36.9 million b/d in 2008 against 35.4 million b/d in The supply from OECD countries declined by 2.6 percent to 19.4 million b/d. The supply from other oil producing countries increased by 0.4 percent to 28.5 million b/d during The remaining 2.2 million b/d represented net gains and losses of the refining process. Projections for 2009 indicate the supply from OECD countries will decline to 19.0 million b/d, while the supply from other oil producing countries is expected to rise to 28.7 million b/d. Latest available data of the IMF World Economic Outlook report (April 2009) indicate that the average oil price** rose by 36.4 percent in 2008, and it is expected to decrease by 46.4 percent to $52 per barrel in * Including condensates and natural gas liquids. ** Simple average of spot oil prices of North Sea (Brent) oil, Dubai oil and West Texas Intermediate. World Economy 15 Saudi Arabian Monetary Agency 45th Annual Report

16 Total Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Changes in reserves** Africa Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Changes in reserves** Emerging Asia*** Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Changes in reserves** Middle East Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Changes in reserves** Western Hemisphere Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Changes in reserves** Common Wealth of Independent States Net private capital flows Net direct investments Net portfolio investment Other net investments Net official flows Table 1.5: CAPITAL FLOWS TO EMERGING AND DEVELOPING MARKETS* (In billions of US dollars) Changes in reserves** * Including Hong Kong, Korea, Singapore and Taiwan. ** Minus sign indicates an increase. *** Consist of Developing Asian Countries and New Industrial Asian Economies. Source: IMF, World Economic Outlook, April Projections World Economy 16 Saudi Arabian Monetary Agency 45th Annual Report

17 Economic Developments in GCC countries Economic growth rates (in real terms) in most GCC countries went up during In the Kingdom of Saudi Arabia, the growth rate rose from 3.3 percent in 2007 to 4.4 percent in It increased in Kuwait from 2.5 percent to 6.3 percent and in UAE from 6.3 percent to 7.4 percent. In Qatar, it rose from 15.3 percent in 2007 to 16.4 percent in In the Kingdom of Bahrain, however, the growth rate went down from 8.1 percent in 2007 to 6.1 percent in It also declined in the Sultanate of Oman from 6.4 percent in 2007 to 6.2 percent in 2008 (Table 1.6). Inflation rates in all GCC countries increased during In the Kingdom of Saudi Arabia, the inflation rate increased from 4.1 percent in 2007 to 9.9 percent in It also increased in Kuwait from 5.5 percent to 10.8 percent and in the Sultanate of Oman from 5.9 percent to 12.5 percent. In the Kingdom of Bahrain, it rose from 3.8 percent in 2007 to 7.0 percent in In Qatar, the rate increased from 13.8 percent to 15.1 percent In UAE, the inflation rate rose from 13.3 percent in 2007 to 14.0 percent in With regard to balance of payments, total exports (FOB) of the GCC countries rose by 26.9 percent from $558.2 billion in 2007 to $701.1 billion in In Saudi Arabia, exports (FOB) increased from $233.1 billion in 2007 to $313.3 billion in In the UAE, they went up from $180.9 billion to $199.6 billion. Exports also increased in Kuwait from $63.7 billion in 2007 to $88.8 billion in In Qatar, they rose from $42.0 billion to $53.2 billion. Also, in both the Sultanate of Oman and the Kingdom of Bahrain, they increased from $24.7 billion and $13.8 billion in 2007 to $33.3 billion and $16.9 billion respectively in Total imports (FOB) of GCC countries rose from $263.7 billion in 2007 to $320.3 billion in 2008, increasing by 18.9 percent. Imports (FOB) of Saudi Arabia went up from $81.5 billion in 2007 to $100.6 billion in In the UAE, they increased from $116.6 billion to $141.1 billion. In Kuwait, they rose from $20.6 billion to $26.1 billion. The imports (FOB) in Qatar went up from $19.8 billion in 2007 to $21.2 billion in In both the Sultanate of Oman and the Kingdom of Bahrain, they increased from $14.3 billion and $10.9 billion in 2007 to $16.7 billion and $14.6 billion respectively in Nominal GDP Real GDP growth percentage Interest Rates on USA (3- month libor) Inflation rate Money Supply* Imports (FOB) Exports (FOB) Current account Ratio of current account balance to GDP** Government balance (% of GDP)** Population (million) Table 1.6: MAJOR DEVELOPMENTS IN GCC ECONOMIES (Billion dollar) UAE Bahrain KSA Oman Qatar Kuwait * M2 in Oman represents broad money supply, while M3 represents broad money supply in the remaining GCC countries.qatar's data for 2008 represent the second quarter, while UAE's data for 2008 represent the third Quarter. ** Ratio of surplus/deficit to GDP (at current prices). Source: IMF, World Economic Outlook, April 2009; EIU Report, March Central Department of Statistics and Information, and SAMA World Economy 17 Saudi Arabian Monetary Agency 45th Annual Report

18 The current account surplus registered an increase in most GCC countries during In Saudi Arabia, the current account surplus increased from $93.3 billion in 2007 to $134.0 billion in In Kuwait, the surplus rose from $47.5 billion to $59.5 billion. In Qatar, the surplus went up from $10.4 billion to $18.3 billion. The surplus in the Sultanate of Oman rose from $1.9 billion in 2007 to $4.8 billion in However, the surplus in the UAE went down from $36.4 billion to $28.7 billion. In the Kingdom of Bahrain, the current account surplus also declined from $2.9 billion in 2007 to $1.3 billion in Fiscal balances in GCC countries varied during The Kingdom of Saudi Arabia recorded a rise in fiscal surplus to 33.6 percent of GDP in 2008 against a surplus of 12.3 percent in The surplus in the Kingdom of Bahrain went up from 2.6 percent to 2.7 percent and in the Sultanate of Oman from 0.3 percent to 4.2 percent. In Kuwait, however, the fiscal surplus went down from 42.4 percent to 30.8 percent. The surplus also declined in UAE from 14.2 percent to 12.2 percent and in Qatar from 13.2 percent in 2007 to 9.6 percent in Regional and International Cooperation 1. The GCC Monetary Union The Supreme Council of the GCC countries held its 29 th session in Muscat, Oman, in December The Council considered the recommendation made by the Financial and Economic Cooperation Committee and the Committee of Governors of Monetary Agencies and Central Banks at their joint meeting in September 2008 for submitting the Charter of the Monetary Council to the Supreme Council for its approval. The Council also reviewed the Ministerial Council s recommendation in this regard in its preparation session in November The Supreme Council approved the Charter of the Monetary Council and called for speeding up its establishment to enable it perform its functions. The Supreme Council also decided to approve the agreement of the monetary union to be endorsed by member countries as soon as possible in preparation for the establishment of the monetary union to enable it perform its functions at the end of 2009 at the latest. The Supreme Council authorized the Ministerial Council to sign the agreement. During their 11th consultation meeting held in May 2009, the leaders and heads of the delegations of the GCC countries approved the selection of Riyadh as the Headquarter of the Gulf Monetary Council, which will be continued later to take necessary steps for establishing a gulf central bank. 2. Common Gulf Market After the approval at its 28 th session of the launching of the common market as from the first of January 2008, the GCC Supreme Council directed all competent authorities in member countries to complete the issuing of the necessary legislative instruments. The Council also entrusted the concerned ministerial committees with studying any difficulties or obstacles of implementation and setting the necessary mechanisms for solving them. The member countries issued during 2008 the instruments of implementing a number of the requirements of the Common Gulf Market approved by the Supreme Council. Several meetings of the committee of the common Gulf Market and the liaison officer were held to evaluate the progress of the establishment of the common Gulf Market. The committee emphasized the necessity of completing the issuing of legislative instruments in member countries to implement the Supreme Council s resolutions related to the market especially with regard to economic activities, retail and wholesale trade and work in the private and government sectors. The Financial and Economic Cooperation Committee approved The Common Gulf Market Document that states the rights and benefits which the market provides to the citizens of GCC countries. The obstacles and difficulties posed to implementation during 2008 were identified and appropriate solutions were proposed and submitted to the Supreme Council at its 29th session. The Council approved the proposed solutions and directed the competent authorities in member countries to implement them. 3. Free Trade Agreements of GCC Countries The GCC countries have been negotiating with countries and international groups to establish free trade zones. The following is a review of the existing status of these negotiations with a number of groups and countries: European Union: The GCC countries held a meeting with representatives of the French presidency of the European Union in Doha during November, The GCC countries reaffirmed that the obligations and formulas they gave represent their final stance on pending issues between the two sides. The negotiations between the two sides, however, did not make positive progress. The GCC s Secretariat General received a letter from the European Trade Commission stating its readiness to meet the officials concerned with negotiations. The GCC s Secretariat General expressed their welcome to this meeting with the objective of consultations. World Economy 18 Saudi Arabian Monetary Agency 45th Annual Report

19 Singapore: The GCC countries and Singapore put their final signature on the Free Trade Agreement in Doha on December 15, The Agreement was signed in accordance with the Supreme Council s resolution on December 26, 2008 which called for considering the Agreement initially signed by Qatar and Singapore with the objective of converting this Agreement to a collective Agreement between GCC countries and Singapore. EFTA Group: The GCC countries completed negotiations with EFTA Group and finally signed the Free Trade Agreement with it. This is the first Free Trade Agreement signed by GCC countries.. Countries with which GCC countries have ongoing negotiations The GCC countries started their negotiations to enter into free trade agreements with a number of countries, namely: China, Japan, Australia, New Zealand, Pakistan, India, South Korea, Turkey and group of Mercosur countries (Argentina, Brazil, Uruguay and Paraguay). 4. Arab Financial Institutions These institutions hold annual meetings, usually in spring, in which the performance of each institution and the issues on their agendas are reviewed. The following is a brief summary about those institutions: A) Arab Monetary Fund (AMF) Four loans were extended by the Fund during 2008 with a total value of $132 million against $98 million in Therefore, total loans extended to Arab countries since the Fund commenced its lending operations in 1978 up to 2008 increased to $5.1 billion. Total loans which the Fund is committed to provide stood at $1.3 billion at the end of 2008 compared to $1.1 billion at the end of the preceding year. The Fund s paid up capital stood at $2.8 billion at the end of Saudi Arabia s contribution amounted to $411 million or 14.9 percent of the total paid up capital. Total realized income of the Fund amounted to $139.4 million at the end of 2008 as compared to $168.3 million in The Fund s total spending stood at $20.5 million against $18.8 million. B) Arab Bank for Economic Development in Africa The Bank s capital stood at $2.2 billion at the end of 2008, which is the same as at the end of Saudi Arabia s contribution stood at $538 million or 24.5 percent. The Bank s total cumulative commitments of loans and technical aid amounted to $2.7 billion at the end of Total assets amounted to $3.3 billion in 2008 against $3.4 billion in Total liabilities declined from $155.3 million to $133.7 million. The Bank recorded a loss of $109.7 million in its total income against revenues of $174.9 million in the preceding year. Total expenditures stood at $16.2 million in 2008 against $15.6 million in the preceding year. The Bank s total financial commitments increased to $190 million in 2008 against $179.6 million in C) Arab Fund for Economic and Social Development In accordance with the resolution of the Fund s Council of Governors, the Fund s paid up capital was raised in 2008 to $7.3 billion by transferring a part of its additional reserves to the account of the paid up capital. Saudi Arabia s contribution stood at $1.7 billion or 24.0 percent. The total value of the loans extended by the Fund during 2008 stood at $1.3 billion, representing 16 loans. Total value of loans extended by the Fund since the commencement of its operations in 1974 up to the end of 2008 amounted to $22.4 billion, distributed into 536 loans. The Fund s total income stood at $21.9 million in 2008 against $425.7 million in the preceding year. Expenditures amounted to $24.4 million against $21.7 million in the preceding year. The Fund recorded a net loss of $3.3 million in 2008 against a net profit of $403.5 million in The Bank s total assets stood at $9.4 billion in 2008 against $9.5 billion in the preceding year. Total liabilities amounted to $276.7 million against $256.1 million. D) Arab Investment and Export Credit Guarantee Corporation The Corporation s paid up capital increased to $201.5 million against $196.0 million at the end of The increase represented 50.0 percent of the payment of the fifth installment for 2007 by the Arab Authority for Agricultural Investment and Development and the payment of the fifth and the last installment for 2007 by the Arab Bank for Economic Development in Africa (ABEDA) as well as the payment of the unpaid part of the share of Palestine. Saudi Arabia s contribution stood at $13.6 million or 6.74 percent of the corporation s paid up capital. The Corporation s total assets decreased to $349.3 million in 2008 against million in 2007.The Corporation s total liabilities amounted to $35.68 million against $35.75 million. The Corporation recorded a net loss of $45.6 million against a net profit of $15.2 million in the preceding year. World Economy 19 Saudi Arabian Monetary Agency 45th Annual Report

20 E) Arab Authority for Agricultural Investment and Development The Authority s total assets stood at $738.5 million at the end of 2008 against $836.4 million at the end of Total liabilities stood at $206.9 million against $147.1 million in the preceding year. The decline in the market value of investment portfolios led to losses of $100.4 million in 2008 against profits of $68.6 million in the preceding year. Total expenditures stood at $29.0 million during the year against $26.1 million in the preceding year. The bank s subscribed capital amounted to $364.7 million at the end of Saudi Arabia s contribution stood at $81.8 million or 22.5 percent of the Authority s paid up capital. 5. The Islamic Development Bank The Bank s total assets rose from $10.6 billion in 2007 to $11.3 billion in Total liabilities stood at $2.8 billion in 2008 against $2.2 billion in the preceding year. Total revenues increased from $593.7 million in 2007 to $630.3 million in Total expenditures declined from $335.3 million to $330.4 million. Total net income rose by 16.1 percent to $299.9 million in 2008 against $258.4 million in Total loans amounted to $3.6 billion against $3.5 billion in the preceding year. Total loan repayments stood at $2.8 billion in 2008 against $2.7 billion in the preceding year. The Bank s subscribed capital amounted to $22.2 billion. Saudi Arabia s contribution stood at $550 million or 24.7 percent. 6. Greater Arab Free Trade Zone (GAFTZ) The GAFTZ seeks to reach a stage of Arab inter-trade of goods of Arab origin which is fully free from fees and tariff and non-tariff restrictions that hinder the free movement of goods between member countries in the zone. The number of member countries at GAFTZ amounted to 17 countries* at the end of October Of these, 14 countries completed the implementation stage in 2005 and three countries will complete the implementation stage in The member Arab countries at GAFTZ represent a consuming market with a population of more than million (88.0 percent of total population of Arab world). They also represent an economic power with a GDP of more than $1.3 trillion (90.6 percent of the GDP of the Arab world for 2007). As for free Arab inter-trade of services, negotiations between member countries at GAFTZ are still underway. Several rounds of negotiations were made on the tables of obligations provided by 11 countries, namely: Jordan, UAE, Bahrain, Tunisia, Saudi Arabia, Oman, Qatar, Kuwait, Lebanon, Egypt, Morocco. These obligations include offers by Arab countries to open their markets in the area of some activities in the services sector for exporters of other Arab countries. 7. International Monetary Fund (IMF) International Monetary and Financial Committee The International Monetary and Financial Committee held its nineteenth meeting in Washington, D.C. on April 25, The Committee discussed a number of issues. The most important of these are the following: a. The Committee restates its resolve to work collaboratively to restore international financial stability and global growth. It underlines the central role of the IMF and welcomes the actions taken to support countries in responding to the crisis. The Committee is committed to further strengthening the Fund s ability to assist in meeting members external needs. It welcomes the prompt response by Fund members in committing sizable support to the Fund s loanable resources, and encourages others to benefit thereof. b. The Committee is committed to taking additional actions needed to ensure economic recovery, and in particular to: Take further decisive and cooperative action necessary to ensure the soundness of systemically important institutions, and to restore the financial health of banks, domestic lending, and international capital flows; Deliver the scale of sustained fiscal effort necessary to restore growth; Maintain expansionary monetary policies where appropriate and for as long as needed, consistent with price stability, and Develop credible exit strategies from extensive government actions as the crisis subsides. c. The Committee stresses the importance of taking account by members of the effects of their economic, financial, and investment policies on others, and refraining from protectionism in any form. The IMFC calls for urgently concluding an ambitious and balanced Doha Development Round, which will help boost the recovery of the global economy, and emphasizes the importance of ensuring the availability of sufficient trade finance. * GAFTZ includes: Jordan, UAE, Bahrain, Tunisia, Saudi Arabia, Syria, Iraq, Oman, Qatar, Kuwait, Lebanon, Libya, Egypt and Morocco. There are three countries, namely, Palestine, Sudan and Yemen which have not met the accession requirements. World Economy 20 Saudi Arabian Monetary Agency 45th Annual Report

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