Gulf Times - 11/5/2006

Hopes of diversifying Saudi Arabia’s oil-based economy this week ran into the reality of this year’s stock market crash, raising questions about government policy.
Participants at a conference here, which ended yesterday, heard about plans to use booming oil revenues to turn the closed country - now a World Trade Organisation member - into an industrial power and exporter of petrochemicals.
“Saudi Arabia looks forward to a future based not on inherited wealth but knowledge, credibility and the assets of the people,” senior Oil Ministry official Prince Faisal bin Turki told a panel on energy and industrial expansion.
“Saudi Arabia is set to become a growing a diversified economy utilising this oil... We want to leverage these resources to create value for Saudi Arabia... The growth potential in Saudi Arabia is explosive.”
But elsewhere Saudis crowded into debates with officials of the Saudi Capital Markets Authority (CMA) to harangue them about the spectacular collapse of stock prices since late February and hear promises of a rosy future for Saudi equities.
The bourse has lost around half of its value since wealthy, sophisticated speculators pulled out en masse in February in response to regulator moves to impose order. Around 9mn people, or half the native population, had invested in equities.
Analysts say the desire in the country at large to find a scapegoat for the crash stems partly from a lack of understanding of market mechanisms. But many market watchers also wonder why moves to curb speculation and insider trading were not taken sooner.
The Saudi central bank governor Hamad al-Sayyari told the conference that the crash has not adversely affected banks or the financial system. However banks are known to have lent heavily for stock market investment and have liquidated some client portfolio accounts for failing to make margin calls.
Many ask why the CMA allowed the market to rise to inflated levels in the months preceding the fall, when many analysts were predicting a sharp correction.
“I call it a monumental destruction, before and after the crash,” Riyadh-based economist Zahid Khan said on the sidelines of the conference. “Everyone was focused on this one thing.”
With an estimated 500,000 ordinary Saudis having lost significant amounts of money, the government has been searching for ways to soothe popular anger over the fate of a market that the government encouraged Saudis to help spread oil wealth.
King Abdullah, said to be furious about the crash, last week cut domestic fuel prices by some 30% and this week pledged in an address to make the prosperity of ordinary Saudi citizens his top priority. No official heads have rolled.
Adnan Hassan, a senior advisor to the World Bank, said the fact that CMA officials were having to publicly take the blame for the crash was a major advance in Saudi political culture - which lacks representative government and bans public protest.
“There is an opening up happening. People are asking reasonable questions of the authorities and market heads,” he said. “A good stock market is not just profit, it’s long-term participation. We are witnesses to this conversion in Saudi society.”
Peter Mitchell, legal advisor to a Chinese law firm, said there were lessons for Saudi Arabia in the Asian stock market crash of the late 1990s.
“It has led to a change in standards of conduct and transparency in the Asia region,” he said.