The Saudi Arabian Monetary Agency, 1952-2016 (eBook)

Ahmed Banafe is a Senior Investment Advisor at SAMA, with a career spanning forty-four years. He is the author of Saudi Arabian Financial Markets (1993) and several Bank for International Settlements papers.Rory Macleod is Managing Director of Objective Analysis Ltd. He first served as an advisor in SAMA’s investment department from 1985 to 1989 and has since worked with SAMA in various roles.

The Saudi Arabian Monetary Agency, 1952–2016 4
Preface 7
Acknowledgments 9
Contents 10
List of Abbreviations 12
List of Figures 15
List of Tables 18
1 Background to Saudi Arabia’s Financial Challenges 19
1 Oil 19
2 Paradoxes of an Oil Economy 20
Diversification versus dependency 21
The 90 percent solution 22
The roulette wheel of oil 24
Shariah-compliant versus conventional banking 25
3 Managing the Foreign Reserves 26
4 Monetary and Banking Policy 27
5 A Note on Numbers 28
Notes 31
Sources 32
Part I History 33
2 Discovery of Oil and the Founding of the Saudi Arabian Monetary Agency, 1902–1952 34
1 King Abdul Aziz 34
2 Abdullah Al-Suleyman: The First Saudi Finance Minister 37
3 Arthur Young: The Plan for a Central Bank 41
Notes 48
Sources 48
3 Financial Development before the First Oil Crisis, 1953–1974 50
1 Date Palms and Sheep 50
2 Crisis: 1953–1957 52
3 Recovery: 1958–1962 54
4 Long Boom: 1963–1974 56
Notes 65
Sources 65
4 Petrodollar Recycling and Saudization of the Banking System, 1975–1982 66
1 The First Oil Boom 66
2 Working Out Petrodollar Recycling 68
3 The WB Team: 1975–1978 71
4 Currency Diversification and the Exchange Rate: 1975–1982 78
5 The Second Oil Boom: 1979–1982 80
6 Saudizing the Domestic Banks 86
7 Avoiding Mistakes 90
Notes 91
Sources 92
5 Declining Foreign Exchange Reserves and Iraq’s Invasion of Kuwait, 1983–1993 94
1 War for Oil 94
2 Economic and Fiscal Background: The 90 Percent Solution 96
3 Changing Personalities 101
4 Selling Assets: 1983–1990 103
5 Buying Equities: 1983–1990 108
6 Issuing Government Debt: 1984–1993 113
7 A Line in the Sand: 1990–1993 118
8 A Question of Trust 123
Notes 125
Sources 125
6 Low Oil Prices, Rising Government Debt and External Crises, 1994–2004 126
1 Betting on Red 126
2 Economic and Fiscal Background 128
3 Managing Government Debt 131
4 Looking after the Foreign Exchange Reserves 134
5 Challenges in the Banking System 139
6 The Stock Market Comes of Age 145
7 A Global Player 148
Notes 149
Sources 151
7 Impact of the Global Financial Crisis and Its Aftermath, 2005–2016 152
1 The Stock Market Crashes: 2006 152
2 Economic and Fiscal Background 154
3 Replacing Government Debt 156
4 The Battle for the Riyal: 2007–2008 158
5 SAMA and the Global Financial Crisis: 2005–2010 162
6 The Foreign Exchange Reserves: Coping with Falling Yields 173
7 Bringing Home Mortgages to Saudi Arabia 177
8 Changing of the Guard 179
Notes 180
Sources 181
Part II SAMA in the Modern World 183
8 The Future of Gulf Monetary Union 184
1 Attractions of a Common Currency 184
2 Groundwork for a Common Currency: 1975–98 185
3 Working Toward Monetary Union: 1999–2016 187
4 What Is Needed to Make a Common Currency Work? 193
5 Applying Common Currency Theory to the Euro and GMU 195
6 Practical Obstacles to GMU 198
7 Awaiting Economic Diversification 201
Notes 205
Sources 205
9 Foreign Exchange Reserves Management – SAMA’s Experience 207
1 SAMA and Sovereign Wealth Funds 207
2 Evolution From the 1960s to the Present 209
3 Structure of the Investment Deputyship 210
4 Investment Objectives, Philosophy and Process 211
5 SAMA Portfolio Characteristics 216
6 Performance Measurement and Risk Management 219
7 Some Current Issues 221
8 Norwegian Comparisons 223
Notes 224
Sources 225
10 Developing the Domestic Bond Markets 227
1 Building on Government Bonds 227
2 The Role of the Central Bank in Debt Markets 229
3 Structural Challenges in the Market for Corporate Debt 231
4 Developing a Secondary Bond Market: What Is Next? 234
5 How SAMA Prices Government Bonds 236
Sources 237
11 Currency Regime and Monetary Policy 238
1 The Currency Peg 238
2 Currency Implications of the Oil Economy 240
3 Managing the Riyal: 1952–2016 243
4 Operation of Monetary Policy 246
5 Choosing a Pegged Exchange Rate Regime 247
6 Alternative Currency Regimes to the Peg: Norway and Chile 251
7 A First Step Away From the Peg? 254
Notes 256
Sources 257
12 SAMA and the International Monetary System 258
1 Great Bitter Lake 258
2 The Twin Roles of the Dollar 259
3 Capital Flows and Petrodollar Recycling: 1974–88 262
4 A System Dominated by Bond Markets: 1989–2016 265
5 Possible Futures for the International Monetary System and Saudi Arabia’s Role 268
6 Going with the Flow 272
Notes 273
Sources 274
13 The Saudi Banking System 276
1 SAMA’s Authority and Its Limits 276
2 Evolution of the Saudi Banking System 277
3 The Banking System Today 280
4 The Future of Saudi Banking 285
5 Fundamentals of Banking Supervision 288
6 Macroprudential Policy 289
7 Shariah-Compliant Finance 294
8 Developing a System for Bank Failures 296
Notes 297
Sources 298
14 SAMA and the Future 299
1 Modernizing and Reorganizing 299
2 Tilting Toward Asia 303
3 The Challenge of Population 305
4 Should There Be a Fiscal Rule for Saudi Arabia? 307
5 The Watchwords of Pragmatism, Stability and Continuity 310
Notes 311
Sources 311
Appendix: Inside SAMA 312
Notes 319
Glossary 320
Index 328