## _wp1359

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### I. INTRODUCTION — event chronology, macro outcomes, and main observations
- Policy rate moves:
  - U.S. Federal Reserve: lowered policy rate from 5.25 percent on September 18, 2007 by 50 basis points; federal funds target reduced to one percent by end-October 2008.
  - Saudi Arabian Monetary Agency (SAMA): cut policy rate from 5 percent in October 2007 to 2 percent in mid-2008.
- Macro outcomes (mid-2007 to mid-2008):
  - Annual credit growth: rose from 6 percent in early 2007 to over 30 percent in July 2008.
  - Crude oil prices: rose from over $65 per barrel in mid-2007 to about $130 per barrel by summer 2008.
  - Domestic inflation: reached double digit levels by mid-2008.
- Three main observations:
  - Co-movements of Saudi and U.S. business cycles changed: supply-driven oil shocks caused divergence in the 1980s; demand-driven oil shocks in the 2000s produced convergence.
  - Pass-through from global oil prices to fiscal spending has fallen over the past three decades, possibly reducing output volatility.
  - Financial deepening and greater access to financial services increased the relevance of monetary policy for non-oil activity and the importance of U.S. interest rate policy.
- Policy implication summary:
  - With a fixed exchange rate and financial deepening, synchronization of domestic and U.S. business cycles will increasingly matter for monetary policy stabilization.
  - Growing external links with developing Asia reduce the relative importance of external links with the United States.
  - Recommendation: strengthen fiscal management and refine macro-prudential instruments to influence monetary conditions independently of interest rate policy.

### II. EXTERNAL LINKAGES — structure, trade, labor, capital, and regional evolution
- Oil and exports:
  - Oil products averaged over 83 percent of annual export revenues for the past three decades; oil exports accounted for over 80 percent of export receipts.
  - Saudi Arabia accounts for approximately 19 percent of the world’s proven oil reserves and 12 percent of global production.
- Non-oil exports and imports:
  - Over two-thirds of non-oil export revenues are generated by the downstream petrochemical industry.
  - Total imports of goods and services reached an all-time high of 93 percent of non-oil GDP in 2008.
  - Share of capital goods in imports fell over time; imports of consumption goods and services rose.
- Labor and remittances:
  - Foreign workers make up about one-third of the Saudi population and are primarily employed in the private service sector.
  - Outward remittances in 2010 amounted to about $26 billion or 6 percent of GDP.
- Capital flows and reserves:
  - Foreign liabilities of commercial banks: about 10 percent of total banking sector liabilities, equivalent to 7 percent of GDP.
  - Cross-border nonbank liabilities: 8 percent of GDP (BIS data).
  - FDI inflows: rose from 0.4 percent of GDP in 2003 to 10 percent in 2009.
  - Foreign assets of commercial banks: 14 percent of their assets and 12 percent of GDP.
  - SAMA international reserves: recorded at over half a trillion dollars (more than 100 percent of GDP).
- Regional linkage evolution:
  - Export destination shifts (1970s → 2000s): Asia rose from 30 percent to over 55 percent; Europe fell from 44 percent to 15 percent.
  - Imports from developing Asian economies: rose from 3 percent in the 1970s to 16 percent in the 2000s.
  - Foreign labor composition: share of Arabs in foreign population fell from 91 percent in 1975 to 33 percent in 2004.
  - FDI by origin (2005–2009): United States and United Arab Emirates accounted for most inflows; Japan and China also significant.

### III. POLICY OBJECTIVES — development strategy, monetary/exchange, fiscal, and oil policies
- Development strategy and public sector:
  - Government-sponsored five-year development plans underpin economic policy since the 1970s.
  - Public sector spending: over 80 percent of non-oil GDP.
  - Specialized Credit Institutions (SCIs) provided medium- and long-term finance; Saudization of banking system largely completed by 1980 with foreign ownership limited to 40 percent.
- Monetary and exchange rate policy:
  - Riyal pegged to U.S. dollar at 3.75 Riyal per dollar since June 1986 (peg to SDR in 1975; switch to U.S. dollar peg in May 1981).
  - Open capital account and dollar-dominated exports imply domestic short-term interest rate closely follows U.S. policy rate.
- Fiscal policy and historical dynamics:
  - Fiscal policy is discretionary; government expenditures primarily financed with oil export receipts; non-oil tax revenues are a small fraction of total revenues.
  - Government aims to smooth spending countercyclically: drawdown reserves or issue debt when oil prices low; retire debt or build reserves when oil prices high.
  - Historical debt path: outstanding government debt reached over 100 percent of GDP by 1988; paid down to less than 10 percent of GDP by end of 2000s.
- Oil production and pricing behavior:
  - Early 1980s swing producer role led to production fall by over 60 percent between 1981 and 1985.
  - September 1985: Saudi Arabia stopped swing producer role, raised output, causing oil prices to fall by over 65 percent between October 1985 and July 1986.
  - By 2009, approximately two-thirds of Saudi oil exports were sold to the Far East.

### IV. EMPIRICAL ANALYSES — business cycles, oil shocks, fiscal smoothing, financial deepening, and monetary transmission
- Framework:
  - Three dominant external factors considered: (i) global oil price, (ii) U.S. business cycle, (iii) developing Asia — affecting fiscal policy, confidence, equity prices, bank lending, trade, exchange rates, monetary policy, non-oil trade, and labor inflows.
- Business cycle correlations (1980–2010; HP-filtered detrended series):
  - 1980s: negative relationship between U.S. and Saudi economic fluctuations.
  - By mid-1990s: relationship reversed to positive.
  - Developing Asia’s real GDP became positively correlated with Saudi non-oil GDP at end of 1990s and through 2000s.
  - Oil prices positively correlated with Saudi non-oil GDP throughout the sample.
  - Volatility of Saudi non-oil GDP fell significantly in the 2000s compared to prior decades.
  - Conditional regressions:
    - Full sample: U.S. real GDP negatively and significantly related to Saudi non-oil GDP.
    - 1981–1995: U.S. GDP coefficient negative and significant.
    - 1996–2010: U.S. GDP coefficient positive and significant; developing Asia GDP positive and statistically significant; oil price not economically or statistically significant.
    - A Chow break-test rejects the null of no coefficient break in 1996.
- Oil shocks and business cycle dynamics:
  - Supply-driven episodes (Hamilton (2009) estimates):
    - November 1978–July 1979: Supply reduction 1.33 percent; Increase in price 38.7 percent.
    - October 1980–March 1981: Supply reduction 1.22 percent; Increase in price 25.8 percent.
    - August 1990–October 1990: Supply reduction 2.97 percent; Increase in price 71.6 percent.
  - Historical fiscal and output impacts:
    - 1978–81: Saudi oil export revenues rose from approximately $58 billion in 1978 to $111 billion in 1981 (over 90 percent); fiscal spending rose by 41 percent; non-oil growth increased from 6 percent in 1979 to 10 percent in 1981.
    - 1981–86: Saudi oil export revenues fell from $111 billion in 1981 to $11 billion in 1986 following production cuts; spending fell from $84 billion to $37 billion; non-oil GDP contracted by 1.2 percent in 1984 and by 5.7 percent in 1986.
  - Demand-driven dynamics (late 1990s–2000s):
    - China’s crude consumption rose from 3 mbd in mid-1990s to above 8 mbd in 2010.
    - Developing Asia accounted for over 43 percent of the global increase in crude oil consumption in 2004–08; North America and Europe combined for 21 percent.
    - Global oil production rose 1.8 percent from 2004 to 2008 (80.6 mbd to 82.0 mbd) while the global economy grew over 19 percent.
    - Result: oil price cycle became pro-cyclical; Saudi non-oil GDP co-moved positively with both U.S. and developing Asia GDP; annual non-oil growth stable at 4 to 5 percent in latter part of 2000s.
- Time-consistency, budget process, and fiscal smoothing (1996–2010 evidence):
  - Budgets approved using conservative projected oil prices to limit pressure to spend.
  - Empirical pattern: committed spending repeatedly lower than prior-year outcomes while additional spending predominates; increases in realized oil revenues relative to budget generally translate into extra spending.
  - Since 2004, government consistently generated large surpluses, limiting impact of extra oil revenues on additional spending.
  - Decadal statistics (volatilities and correlations):
    - Oil revenue growth volatility (std): 1980s 44.4; 1990s 21.1; 2000s 38.5.
    - Spending growth volatility (std): 1980s 19.8; 1990s 16.2; 2000s 6.4.
    - Correlation between oil revenue and spending growth: 1980s 0.9; 1990s 0.7; 2000s 0.2.
    - Non-oil growth volatility (std): 1980s 4.6; 1990s 1.6; 2000s 0.7.
  - Interpretation:
    - Spending volatility has fallen consistently; correlation between revenues and spending fell significantly in the 2000s.
    - Fiscal policy appears increasingly successful at smoothing spending, likely contributing to lower output volatility in the 2000s.
- Financial deepening and monetary transmission:
  - Financial sector indicators:
    - Equity market capitalization: rose from 36 percent of GDP in 1997 to 79 percent in 2010.
    - Bank credit to non-oil GDP: about 20 percent in earlier decades, rose to 40 percent by 2000, and to over 100 percent in 2008.
    - Credit by SCIs: fell from about 70 percent of non-oil GDP in 1987 to around 20 percent by end-2000s.
    - Between 2004 and 2009, number of borrowers and depositors (per 1000 adults) in commercial banks almost doubled.
    - Assets of the three largest banks (share of total assets): decreased 1999–2006, then rose to about 57 percent in 2009.
    - Net interest rate margin: generally fell over the past decade (except 2005–06).
  - Granger causality tests (annual detrended data, 1981–2010):
    - Does real credit Granger cause non-oil GDP?
      - 1981–2010: No (p-value 0.93)
      - 1981–1995: No (p-value 0.52)
      - 1996–2010: Yes (p-value 0.00)
    - Does non-oil GDP Granger cause real credit?
      - 1981–2010: No (p-value 0.79)
      - 1981–1995: No (p-value 0.39)
      - 1996–2010: Yes (p-value 0.05)
    - Interpretation: credit became more relevant for non-oil activity and vice versa in 1996–2010.
  - VAR results (real credit and real non-oil GDP; oil price exogenous):
    - Impulse responses:
      - Full sample (1981–2010): non-oil GDP response to real credit shock positive first two years but statistically insignificant.
      - 1996–2010: non-oil GDP response to credit shocks smaller in magnitude but more prolonged and statistically significant.
      - 1981–1995: real credit response to non-oil GDP shock stronger and more persistent.
    - Variance decomposition: for 5-year and 10-year horizons, real credit explains more of the variance of non-oil GDP in 1996–2010 than in 1981–1995.
  - High-frequency monthly VAR (1997:1–2008:9; subperiods 1997:6–2003:8 and 2003:9–2008:9):
    - Endogenous variables: credit growth (log-differenced), CPI (log-differenced).
    - Exogenous variables: three-month LIBOR (level), oil price, international food price index, NEER.
    - Selected coefficient findings (Table 5 excerpts):
      - Full sample (1997:5–2008:9): 3-Month LIBOR on Credit = -1.20 (std err 1.14); on CPI = 0.08 (std err 0.17) — not statistically significant.
      - 1997:6–2003:8: 3-Month LIBOR on Credit = 1.29 (std err 1.37); on CPI = -0.71* (std err 0.19) — LIBOR negatively and significantly related to inflation in this period.
      - 2003:9–2008:9: 3-Month LIBOR on Credit = -4.55* (std err 1.87); on CPI = 0.54 (std err 0.32) — LIBOR negatively and significantly impacts credit growth in this later period.
      - Oil price: positive and significant impact on credit growth in 2003:9–2008:9 (0.15* with std err 0.03).
      - International food price: positive and significant impact on inflation in 2003:9–2008:9 (0.04* with std err 0.01).
      - NEER: positively and significantly correlated with credit growth in 2003:9–2008:9 (0.49* with std err 0.22).
    - Interpretation: relevance of imported monetary policy (proxied by LIBOR) for credit grew in the 2000s; LIBOR’s negative impact on real credit growth emerges in 2003:9–2008:9.
    - Caveat: short sample periods may limit generality; global financial crisis excluded due to structural break.

### V. CONCLUSION — key developments and policy recommendations
- Two important developments:
  - Growing demand from developing Asia (e.g., China and India) has become increasingly important for oil market dynamics and Saudi oil export revenues.
  - Financial sector development in Saudi Arabia has strengthened the monetary transmission mechanism, increasing the influence of U.S. monetary policy on the Saudi non-oil sector under the dollar peg.
- Policy implications and recommendations:
  - Recognize potential tensions when global oil prices and the Asian business cycle move countercyclically with the U.S. business cycle.
  - Effectively use fiscal policy as a stabilizing tool (smoothing spending against oil revenue volatility).
  - Further refine macro-prudential instruments to influence monetary conditions independently of interest rate policy.
  - Note: fiscal policy has been increasingly successful in smoothing spending, possibly accounting for lower output volatility in the 2000s.

*Source: _wp1359 - 1. Main External Factors Influencing the Saudi Economy ......................................................12*

### 1. Main External Factors Influencing the Saudi Economy ......................................................12

### 1. Main External Factors Influencing the Saudi Economy ......................................................12

### Major themes covered
- Evolution of external linkages and their role in the Saudi economy.
- The importance of U.S. monetary policy and oil revenues for domestic outcomes.
- Business cycle correlations for Saudi Arabia over 1980–2010.
- Historical quantity and price changes in oil and external demand.
- The interaction between oil revenues and discretionary fiscal policy (1996–2010).
- Fiscal smoothing in response to volatile oil revenues.
- Financial deepening measures spanning 1969–2010.
- Empirical methods used: Granger causality tests for real credit and non-oil GDP, variance decomposition, and the impact of LIBOR on credit and inflation.
- Impulse response analysis from a real credit/non-oil GDP VAR.

### Key figures referenced
- Figure 1: Evolution of External Linkages.
- Figure 2: The Importance of U.S. Monetary Policy and Oil Revenues for Domestic.
- Figure 3: Business Cycle Correlations, 1980–2010.
- Figure 4: Oil prices and Crude Oil Consumption in China.
- Figure 5: Discretionary Fiscal Policy and Oil Revenues, 1996–2010.
- Figure 6: Smoothing Fiscal Spending against Volatile Oil Revenues.
- Figure 7: Measures of Financial Deepening, 1969–2010.
- Figure 8: Impulse Responses from the Real Credit/Non-Oil GDP VAR.

### Empirical and analytical components enumerated
- Quantity and Price Changes in past (section heading).
- Granger Causality Test for Real Credit and Non-Oil GDP (section heading).
- Variance Decomposition (section heading).
- The Impact of LIBOR on Credit and Inflation (section heading).

*Source: _wp1359 - 1. Main External Factors Influencing the Saudi Economy ......................................................12*

### References .............................................................................................................

### _wp1359 - References .............................................................................................................

### I. INTRODUCTION
- Event chronology and policy responses:
  - U.S. Federal Reserve lowered policy rate from 5.25 percent on September 18, 2007 by 50 basis points; federal funds target reduced to one percent by end-October 2008.
  - Saudi Arabian Monetary Agency (SAMA) cut its policy rate from 5 percent in October 2007 to 2 percent in mid-2008.
- Macro outcomes in Saudi Arabia, mid-2007 to mid-2008:
  - Annual credit growth rose from 6 percent in early 2007 to over 30 percent in July 2008.
  - Crude oil prices rose from over $65 per barrel in mid-2007 to about $130 per barrel by summer 2008.
  - Domestic inflation reached double digit levels by mid-2008.
- Paper’s focus and main observations:
  - Three main observations:
    - Co-movements of Saudi and U.S. business cycles changed over three decades: supply-driven oil shocks caused divergence in the 1980s; demand-driven oil shocks in the 2000s produced convergence.
    - Pass-through from global oil prices to fiscal spending has fallen over the past three decades, possibly reducing output volatility.
    - Financial deepening and greater access to financial services increased the relevance of monetary policy for non-oil activity and the importance of U.S. interest rate policy.
  - Policy implication summary:
    - With a fixed exchange rate and financial deepening, synchronization of domestic and U.S. business cycles will increasingly matter for monetary policy stabilization.
    - Growing external links with developing Asia reduce the relative importance of external links with the United States.
    - To mitigate tensions, Saudi Arabia should strengthen fiscal management and refine macro-prudential instruments to influence monetary conditions independently of interest rate policy.

### II. EXTERNAL LINKAGES
- Structure and evolution:
  - Oil products averaged over 83 percent of annual export revenues for the past three decades; oil exports accounted for over 80 percent of export receipts.
  - Saudi Arabia accounts for approximately 19 percent of the world’s proven oil reserves and 12 percent of global production.
- Trade in goods and services:
  - Over two-thirds of non-oil export revenues are generated by the downstream petrochemical industry.
  - Total imports of goods and services reached an all-time high of 93 percent of non-oil GDP in 2008.
  - Share of capital goods in imports fell over time; imports of consumption goods and services rose.
- Labor flows:
  - Foreign workers make up about one-third of the Saudi population and are primarily employed in the private service sector.
  - Outward remittances in 2010 amounted to about $26 billion or 6 percent of GDP.
- Capital flows:
  - Foreign liabilities of commercial banks account for about 10 percent of total banking sector liabilities, equivalent to 7 percent of GDP.
  - Cross-border nonbank liabilities amount to 8 percent of GDP (BIS data).
  - FDI inflows rose from 0.4 percent of GDP in 2003 to 10 percent in 2009 following a new foreign investment law in 2000 and WTO accession in 2005.
  - Foreign assets of commercial banks amount to 14 percent of their assets and 12 percent of GDP.
  - SAMA manages international reserves recorded at over half a trillion dollars (more than 100 percent of GDP).
- Evolution of regional linkages:
  - Export shares of oil products by destination (1970s→2000s): Asia rose from 30 percent to over 55 percent; Europe fell from 44 percent to 15 percent.
  - Imports from developing Asian economies rose from 3 percent in the 1970s to 16 percent in the 2000s (share of Saudi imports).
  - Composition of foreign labor shifted from majority Arab in 1975 (share of Arabs in foreign population 91 percent) to majority South Asian by 2004 (share of Arabs 33 percent).
  - FDI by origin, 2005–2009: United States and United Arab Emirates accounted for most inflows; Japan and China also significant.

### III. POLICY OBJECTIVES
- Development strategy:
  - Government-sponsored five-year development plans underpin economic policy since the 1970s.
  - Public sector spending amounts to over 80 percent of non-oil GDP.
  - Specialized Credit Institutions (SCIs) established to extend medium- and long-term finance; conversion of foreign-owned banks to publicly traded joint-stock companies with foreign ownership limited to 40 percent (Saudization of banking system largely completed by 1980).
- Monetary and exchange rate policy:
  - Riyal pegged to U.S. dollar at 3.75 Riyal per dollar since June 1986 (peg to SDR in 1975; switch to U.S. dollar peg in May 1981).
  - Open capital account and dollar-dominated exports imply domestic short-term interest rate closely follows U.S. policy rate.
- Fiscal policy:
  - Fiscal policy is discretionary; government expenditures primarily financed with oil export receipts; non-oil tax revenues account for a small fraction of total revenues.
  - Government aims to smooth spending countercyclically: drawdown reserves or issue debt when oil prices low; retire debt or build reserves when oil prices high.
  - Historical fiscal dynamics:
    - By 1988, outstanding government debt had reached over 100 percent of GDP.
    - By end of 2000s, debt paid down to less than 10 percent of GDP.
- Oil production and pricing policies:
  - Saudi role as swing producer shifted over time:
    - Early 1980s: role as swing producer led to a production fall by over 60 percent between 1981 and 1985.
    - September 1985: Saudi Arabia stopped swing producer role, raised output, causing oil prices to fall by over 65 percent between October 1985 and July 1986.
  - By 2009, approximately two-thirds of Saudi oil exports were sold to the Far East.

### IV. EMPIRICAL ANALYSES OF EXTERNAL LINKAGES AND POLICY CONSTRAINTS
- Framework: Three dominant external factors—(i) global oil price, (ii) U.S. business cycle, (iii) developing Asia—affect Saudi economy via fiscal policy, confidence, equity prices, bank lending, trade, exchange rates, monetary policy, non-oil trade, and labor inflows (Table 1 summary).
- Business cycle correlations (1980–2010; HP-filtered detrended series):
  - Observations:
    - Negative relationship between U.S. and Saudi economic fluctuations in the 1980s; reversed to positive relationship by mid-1990s.
    - Developing Asia’s real GDP became positively correlated with Saudi non-oil GDP at end of 1990s and through 2000s.
    - Oil prices positively correlated with Saudi non-oil GDP throughout the sample.
    - Volatility of Saudi non-oil GDP fell significantly in the 2000s compared to prior decades.
  - Conditional regression (Saudi de-trended non-oil GDP on U.S. real GDP, developing Asia real GDP, oil price):
    - Full sample results: U.S. real GDP negatively and significantly related to Saudi non-oil GDP.
    - Subsamples:
      - 1981–1995: U.S. GDP coefficient negative and significant.
      - 1996–2010: U.S. GDP coefficient positive and significant; developing Asia GDP positive and statistically significant; oil price not economically or statistically significant.
    - A Chow break-test rejects null of no coefficient break in 1996.
- Oil shocks and business cycle dynamics:
  - Supply-driven episodes (1978–1991) produced large supply shortfalls and price spikes (Hamilton (2009) estimates):
    - November 1978–July 1979: Supply reduction 1.33 percent; Increase in price 38.7 percent.
    - October 1980–March 1981: Supply reduction 1.22 percent; Increase in price 25.8 percent.
    - August 1990–October 1990: Supply reduction 2.97 percent; Increase in price 71.6 percent.
  - Economic impacts:
    - 1978–81 oil price rise increased Saudi oil export revenues from approximately $58 billion in 1978 to $111 billion in 1981 (over 90 percent).
    - Saudi fiscal spending rose by 41 percent over same period; non-oil growth increased from 6 percent in 1979 to 10 percent in 1981.
    - Saudi oil export revenues fell from $111 billion in 1981 to $11 billion in 1986 following production cuts; spending fell from $84 billion to $37 billion; non-oil GDP contracted by 1.2 percent in 1984 and by 5.7 percent in 1986.
  - Demand-driven dynamics (late 1990s–2000s):
    - Developing Asia’s share of global oil consumption rose; China’s crude consumption rose from 3 mbd in mid-1990s to above 8 mbd in 2010.
    - Developing Asia accounted for over 43 percent of the global increase in crude oil consumption in 2004–08; North America and Europe combined for 21 percent.
    - Global oil production rose only 1.8 percent from 2004 to 2008 (80.6 mbd to 82.0 mbd) while global economy grew over 19 percent.
    - Result: oil price cycle became pro-cyclical; Saudi non-oil GDP co-moved positively with both U.S. and developing Asia GDP; annual non-oil growth stable at 4 to 5 percent in latter part of 2000s.
- Time-consistency problem and counter-cyclical fiscal policy:
  - Budgetary process demonstrates commitment versus discretion:
    - Annual budgets approved with a conservative projected oil price to limit pressure to spend.
    - Empirical evidence (1996–2010): committed spending repeatedly lower than prior-year outcomes while additional spending predominates; increases in realized oil revenues relative to budget generally translate into extra spending.
    - Since 2004, government has been consistently generating large surpluses, limiting impact of extra oil revenues on additional spending.
  - Evolution of smoothing across decades (1980s, 1990s, 2000s):
    - Oil revenue growth volatility (std): 1980s 44.4; 1990s 21.1; 2000s 38.5.
    - Spending growth volatility (std): 1980s 19.8; 1990s 16.2; 2000s 6.4.
    - Correlation between oil revenue and spending growth: 1980s 0.9; 1990s 0.7; 2000s 0.2.
    - Non-oil growth volatility (std): 1980s 4.6; 1990s 1.6; 2000s 0.7.
    - Interpretation:
      - Positive relationship between oil revenue growth and spending growth persisted across decades.
      - Spending volatility has fallen consistently; correlation between revenues and spending fell significantly in the 2000s.
      - Fiscal policy appears increasingly successful at smoothing spending, likely contributing to lower output volatility in the 2000s.
- Financial deepening and monetary transmission:
  - Financial sector evolution:
    - Equity market capitalization rose from 36 percent of GDP in 1997 to 79 percent in 2010.
    - Bank credit to non-oil GDP: about 20 percent in earlier decades, rose to 40 percent by 2000, and to over 100 percent in 2008.
    - Credit by SCIs fell from about 70 percent of non-oil GDP in 1987 to around 20 percent by end-2000s.
    - Between 2004 and 2009, number of borrowers and depositors (per 1000 adults) in commercial banks almost doubled.
    - Assets of the three largest banks (share of total assets) decreased 1999–2006, then rose to about 57 percent in 2009.
    - Net interest rate margin generally fell over the past decade (except 2005–06).
  - Granger causality (annual detrended data, 1980–2010):
    - Does real credit Granger cause non-oil GDP?
      - 1981–2010: No (p-value 0.93)
      - 1981–1995: No (p-value 0.52)
      - 1996–2010: Yes (p-value 0.00)
    - Does non-oil GDP Granger cause real credit?
      - 1981–2010: No (p-value 0.79)
      - 1981–1995: No (p-value 0.39)
      - 1996–2010: Yes (p-value 0.05)
    - Interpretation: credit became more relevant for non-oil activity and vice versa in 1996–2010.
  - VAR analysis (real credit and real non-oil GDP; oil price exogenous):
    - Impulse responses:
      - Full sample (1981–2010): non-oil GDP response to real credit shock positive first two years but statistically insignificant.
      - Subsamples:
        - 1996–2010: non-oil GDP response to credit shocks smaller in magnitude but more prolonged and statistically significant.
        - 1981–1995: real credit response to non-oil GDP shock stronger and more persistent.
    - Variance decomposition (percentage of forecast variance of non-oil GDP explained by shocks to real credit):
      - Horizons and sample summaries (table reproduced as in source):
        - For 5-year and 10-year horizons, real credit explains more of variance of non-oil GDP in 1996–2010 than in 1981–1995.
  - High-frequency monthly VAR (1997:1–2008:9; subperiods 1997:6–2003:8 and 2003:9–2008:9):
    - Endogenous: credit growth (log-differenced), CPI (log-differenced).
    - Exogenous: three-month LIBOR (level), oil price, international food price index, NEER.
    - Key coefficient patterns (excerpts from Table 5):
      - Full sample (1997:5–2008:9): 3-Month LIBOR coefficient on Credit = -1.20 (std err 1.14); on CPI = 0.08 (std err 0.17); coefficients not statistically significant.
      - 1997:6–2003:8: 3-Month LIBOR on Credit = 1.29 (std err 1.37); on CPI = -0.71* (std err 0.19) — LIBOR negatively and significantly related to inflation in this period.
      - 2003:9–2008:9: 3-Month LIBOR on Credit = -4.55* (std err 1.87); on CPI = 0.54 (std err 0.32) — LIBOR negatively and significantly impacts credit growth in this later period.
      - Oil price: positive and significant impact on credit growth in 2003:9–2008:9 (0.15* with std err 0.03).
      - International food price: positive and significant impact on inflation in 2003:9–2008:9 (0.04* with std err 0.01).
      - NEER: positively and significantly correlated with credit growth in 2003:9–2008:9 (0.49* with std err 0.22).
    - Interpretation: relevance of imported monetary policy (as proxied by LIBOR) for credit grew in the 2000s; LIBOR’s negative impact on real credit growth emerges in 2003:9–2008:9.
    - Caveat: short sample periods may limit generality; global financial crisis excluded due to structural break.

### V. CONCLUSION
- Two important developments emphasized:
  - Growing demand from developing Asia (e.g., China and India) has become increasingly important for oil market dynamics and Saudi oil export revenues.
  - Financial sector development in Saudi Arabia has strengthened the monetary transmission mechanism, increasing the influence of U.S. monetary policy on the Saudi non-oil sector under the dollar peg.
- Policy implications and recommendations:
  - Tension between policy objectives may arise when global oil prices and the Asian business cycle move countercyclically with the U.S. business cycle.
  - Importance of:
    - Effectively using fiscal policy as a stabilizing tool (smoothing spending against oil revenue volatility).
    - Further refining macro-prudential instruments to influence monetary conditions independently of interest rate policy.
  - Encouraging evidence: fiscal policy has been increasingly successful in smoothing spending, possibly accounting for lower output volatility in the 2000s.

*Source: _wp1359 - References, IMF PDF content provided.*

### References

### _wp1359 - References

### Monetary policy and financial institutions
- Al-Jasser, Mohammad, and Ahmed Banafe, 1999, “Monetary policy instruments and procedures in Saudi Arabia,” BIS Papers, No. 5 (Basel: Bank for International Settlements).
- Al-Jasser, Mohammad, and Ahmed Banafe, 2008, “Monetary policy instruments and procedures in Saudi Arabia,” BIS Papers, No. 44 (Basel: Bank for International Settlements).
- Saudi Arabian Monetary Agency. 2003, “A Case Study On Globalization and the Role of Institution Building in the Financial Sector in Saudi Arabia,” Prepared for the G20 Finance and Central Bank Deputies’ Meeting, May 26, 2004, Mexico City.
- Mishra, Prachi, Peter Montiel, and Antonio Spilimbergo, 2011, “How Effective Is Monetary Transmission in Developing Countries? A survey of the Empirical Evidence,” IMF Working Paper.
- Goodfriend, Marvin and Robert G. King, 2005, “The Incredible Volcker Disinflation,” Journal of Monetary Economics 52: 981–1015.

### Oil markets and macroeconomic effects
- Barsky, Robert B., and Lutz Kilian, 2004, “Oil and The Macroeconomy Since The 1970s,” Journal of Economic Perspectives, 18(4), 115–134.
- Hamilton, James D., 1983, “Oil and the Macroeconomy since World War II,” Journal of Political Economy, 91 (2): 228–48.
- Hamilton, James D., 2003, “What Is an Oil Shock?,” Journal of Econometrics, 113(2): 363–398.
- Hamilton, James. 2009, “Causes and Consequences of the Oil Shock 2007–08,” Brookings Papers on Economic Activity, Vol. 2009, pp.215–261 (Washington: Brookings Institution).
- OPEC Statute, 2008, http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OS.pdf

### Saudi Arabia: policy, economy, and investment
- Al-Naimi, Ali, 2001, “The Asian Outlook and Saudi Arabia’s Oil Policy,” World Petroleum Congress Shanghai, China September 19.
- Ramady, Mohammad A., 2010, The Saudi Arabian Economy: Policies, Achievements and Challenges, (New York, Springer International).
- Mohamedi, Fareed, 1992, Saudi Arabia: A Country Study. (Washington: GPO for the Library of Congress).
- SAGIA, 2010, Annual Report of FDI Saudi Arabia 2010, (Riyadh).

### Migration and labor
- Kapiszewski, Andrzej, 2006, “Arab Versus Asian Migrant Workers in the GCC Countries,” UN Expert Group Meeting Mar 15–17.

*Source: _wp1359 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1359.pdf_