Salih AlwabilDirector - Investment Management Dept. Saudi Arabian Monetary Agency (SAMA)

Implications of US Monetary Policy Normalization for EMEs with Emphasis on MENA Region

FRBNY Central Banking Seminar 2015(October 7, 2015)

• An Economic Overview of MENA Region

• Impact of the Taper Tantrum on Emerging Markets & MENA Region

• Saudi Arabia Economic & Monetary Policy Background

• Implications of Fed Normalization on Saudi Arabia

• Concluding Remarks

Outline

07-Oct -20152

Breakdown of MENA GDP by Country

Nominal GDP - 2014

Source: IMF Regional Economic Outlook, May 2015

07- Oct -20153

Economic Overview of MENA Region

MENA GDP is Denominated by Oil Exporters

Jordan

1.1%

Lebanon

1.5%

Mauritania

0.1%Morocco 3.4%

Djibouti 0.0%

Sudan 2.1%

Egypt 8.7%

Algeria 7.0%

Libya 1.5%

Iran 12.3%

Iraq, 7.1%

Bahrain 1.0%

Kuwait 5.5%

Oman 2.5%

Qatar 6.5%

United Arab Emirates, 12.8%

Saudi Arabia 23.8%

Syria

0.0% Tunisia 1.5%

Yemen 1.4%

201420132012

2.47.0-2.06.7

2.310.71.5

10.3

4.913.44.3

10.0

MENAReal GDP (annual growth)Current Account BalanceGovernment Fiscal BalanceInflation, p.a. (annual growth)

2.410.00.35.8

2.114.75.0

10.4

5.718.28.1

10.4

MENA Oil ExportersReal GDP (annual growth)Current Account BalanceGovernment Fiscal BalanceInflation, p.a. (annual growth)

3.616.54.62.6

3.620.612.12.8

5.424.415.12.4

Gulf Cooperation CouncilReal GDP (annual growth)Current Account BalanceGovernment Fiscal BalanceInflation, p.a. (annual growth)

2.5-5.5-9.810.0

2.7-7.2

-10.510.1

1.9-8.4-8.68.6

MENA Oil ImportersReal GDP (annual growth)Current Account BalanceGovernment Fiscal BalanceInflation, p.a. (annual growth)

MENA Region: Selected Economic Indicators

(Percent of GDP, unless otherwise indicated)

Source: IMF Regional Economic Outlook, May 2015

07- Oct -20154

Economic Overview of MENA Region

Half of MENA Currencies are Pegged

Source: IMF Annual Report on Exchange Arrangements and Exchange Restrictions 2014

07- Oct -20155

Conventional Peg, 9

Stabilized arrangement, 4

Crawling-like arrangement, 1

Currency Board, 1

Free Floating, 1

Other managed arrangements, 5

Exchange Rate Arrangements of MENA Countries, 2014

Economic Overview of MENA Region

750

800

850

900

950

1,000

1,050

1,100

65

70

75

80

85

90

95

100

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15

JP Morgan EM Currency Index (LHS) MSCI EM Equity Index (RHS)

Taper Tantrum

EM Equities and Currencies Performance

07- Oct -20156

Impact of Taper Tantrum on Emerging Markets (May 2013)

Source: Bloomberg

Significant Impact

200

250

300

350

400

450

Jan-2013 Sep-2013 May-2014 Jan-2015 Sep-2015

JP Morgan EMBI Global Index Spread

JP Morgan EMBI Global Index Spread

Taper Tantrum

07- Oct -20157

Impact of Taper Tantrum on Emerging Markets (May 2013)

EM Credit Spread Widened

Source: Bloomberg

Change from Peak to Trough, EM Asset Classes (%)

FX *BondsEquities

-1.5-10.8-15.7Taper tantrum

-5.2-26.6-66.1Financial crisis

-5.512.9-53.1Dot-com crisis

-18.8-22.8-53.9Asian Crisis

Source: Institute of International Finance, September 2015

07- Oct -20158

Impact of Taper Tantrum on Emerging Markets (May 2013)

* FX is GDP-weighted average of 15EM Currencies vis-à-vis USD

Estimate of Taper Tantrum Impact on EM Asset Classes

07- Oct -20159

Taper Tantrum

Source: Bloomberg

Limited Impact

Impact of Taper Tantrum on MENA Financial Markets

MENA Stock Markets

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

SAUDI UAE KUWAIT QATAR BAHRAIN EGYPT MOROCCO

0.65

0.85

1.05

1.25

1.45

1.65

1.85

2.05

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10.00

10.50

EGYPTIAN POUND (LHS) MOROCCAN DIRHAM (LHS)UAE DIRHAM (LHS) JORDANIAN DINAR (RHS)TUNISIAN DINAR (RHS) Source: IMF

07- Oct -201510

Impact of Taper Tantrum on MENA Financial Markets

Relative Currencies

Source: Bloomberg

Limited Impact

Taper Tantrum

Taper Tantrum

Small Capital Inflows to MENA Region

07- Oct -201511

0

200

400

600

800

1,000

1,200

2009 2010 2011 2012 2013 2014

Private Capital Inflows

(US$ Billions)

MENA Latin America Emerging Europe Emerging Asia

Source: Institute of Internal Finance, October 2015

Impact of Taper Tantrum on MENA Financial Markets

Source: IMF, world Economic Outlook, April 2015

MENA Region Had Current Account Surpluses

07- Oct -201512

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014

Current Account Balances (% of GDP)

Emerging & Developing Economies Emerging & Developing Asia Emerging & Developing Europe Latin America and the Carabian MENA GCC

Impact of Taper Tantrum on MENA Financial Markets

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013

External Debt Stocks to Gross National Income (GNI), (%)

All developing countries Latin America and the Caribbean South Asia Middle East and North Africa

Source: World Bank

MENA Region Has Lower Levels of External Debt

07- Oct -201513

Impact of Taper Tantrum on MENA Financial Markets

Main Economic Indicators

2014201320122011

746744734670Nominal GDP, $ bio

3.502.705.409.96Real GDP, % change

2.683.522.873.72Inflation rate (CPI), %

-2.346.4613.5911.59Fiscal Balance, % GDP

1.582.153.055.40Debt to GDP %

10.3118.2022.4523.68Current Account Balance, % GDP

11.9012.1016.4011.00Banks Credit to Private Sector (growth

rate %)

Source: SAMA & Central Department of Statistics & Information

Moderate Growth & Benign Inflation

527

670 734 744 746

0%

2%

4%

6%

8%

10%

0

100

200

300

400

500

600

700

800

01-Jan-10 01-Jan-11 01-Jan-12 01-Jan-13 01-Jan-14

Nominal GDP (LHS) Chg Real GDP (RHS)

07- Oct -2015

Saudi Arabia : Main Economic Indicators

Nominal Gross Domestic Product

(USD Billions)

Source: SAMA

15

3.61

3.66

3.71

3.76

3.81

3.86

USD/SAR Spot Rate

Source: SAMA

07- Oct -201515

Saudi Arabia : Monetary Policy

Saudi Riyal is Pegged to USD

Source: SAMA

Closely Correlate with Fed Fund Rate

07- Oct -201516

Saudi Arabia: Repo and Revers Repo Rates

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Repo & Revers Repo Rates Vs. Fed Fund Rate

RR RRR F-FUND

-2

-1

0

1

2

3

4

5

6

7

8

3-M SIBOR & LIBOR

3M SIBOR 3M LIBOR 3M SPRAED

Correlates with LIBOR

Source: SAMA

07- Oct -201517

Saudi Arabia : Saudi Interbank Borrowing Rate ( SIBOR) For 3-months

Source: SAMA

Ample Liquidity

07- Oct -201518

Saudi Arabia: System Liquidity

-40,000

-35,000

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

Weekly Net Repo Transaction

(In Billion USD)

Net Repo Transaction

Well-Capitalized & Highly LiquidForeign Assets Exceed Foreign Liabilities

Saudi Banks Capital & Liquidity Ratios

20142013201220112010

17.917.918.217.617.6Capital Adequacy Ratio

22.321.623.723.724.8Liquid Assets to Total Assets

33.633.236.437.037.2Liquid Assets to Short-Term Liabilities

Ratio of Foreign Assets & Liabilities to Total Assets and Liabilities

07- Oct -201519

Saudi Arabia: Banks

13.6

5%

13.5

1%

12.2

7%

11.1

3%

11.8

0%

6.69

%

4.88

%

4.57

%

3.92

%

4.32

%

2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4

Foreign Assets Foreign LiabilitiesSource: SAMA Source: SAMA

Limited impact on MENA financial markets due to

• Small capital inflows• Sizable external balance surpluses• Low external debt levels

Impact for oil exporters is mitigated by

• Currency pegs supported by large FX reserves• Dominance of fiscal over monetary policy

Limited impact on Saudi Arabia

• Strong fundamentals • Resilient banks

07- Oct -201520

Concluding Remarks