A commission must immediately be established to look into reasons for 2006 collapse
By SAMI AL-NWAISIR - Arabnews - When the Saudi stock market collapsed on Feb. 25, 2006 and the Saudi market index (TASI) fell from 20635 to about 6400 points, the savings and investments of Saudi citizens were devastated.
As a result, the country lost two trillion Saudi Riyals ($533 billion) of its national wealth — a loss equal to more than the Kingdom’s gross annual national income. Yet, there has been no effort to investigate why this happened and how it can be prevented in the future. It is long overdue for a commission to be established to determine how this stock market debacle came about. It must be determined who caused this catastrophe, who profited by it, and who suffered the economic losses it spawned. A failure to answer these questions will only increase the likelihood that a similar collapse will occur in the years to come.
At the time of the collapse, more than 4 million Saudis were invested in the Saudi stock market. Some people were sent to jail, other needed psychiatric treatment, and many lost their jobs and became unemployed, even some of them becoming beggars, after essentially losing their entire life savings.
Yet inexplicably, the governmental authorities remained passive and stood by, watching this painful economic catastrophe without attempting to intervene and halt the collapse in an effort to save the country and its citizens from its destructive consequences. It is simply baffling as to why the Ministry of Finance (Fiscal Authority) and the Saudi Arabian Monetary Agency (SAMA) failed to act. Some Saudi irrationally invested all their savings and even sold and mortgaged their properties to invest in the market. This unfortunately included widows and retired people who could ill afford to lose everything they owned, all because they expected a significant return on their investments.
Strangely, the rise in the market didn’t occur suddenly but actually began in 2003 with the beginning of privatization of Saudi Telecommunication Company (STC) until year 2006. This massive increase in the value of investments by 700 percent to a market value of $800 billion — equal to 3.5 times the country’s nominal gross national income. At the same time, the number of investors expanded from 120,000 to approximately 4,000,000.
Although some commentators mark 2003 as the start of the Saudi stock market (because the Saudi Capital Market Authority (CMA) was founded in that year), actually the stock market operated before that time. With the foundation of the CMA, though, the new agency faced many huge challenges and large investments while it was still trying to find its way in terms of experience and structure.
Other important parties that played various roles in the stock market run-up and collapse include beneficiaries such as banks and some influential people. It remains to be seen how much they received in investment and brokerage fees and returns due to the market euphoria in the three years before the 2006 catastrophe. Just as a committee was formed after the Jeddah floods which caused the deaths of 120 people in addition to huge financial and property losses, a fact-finding commission is now necessary to determine the causes and effects of the Saudi stock market collapse. Although the Jeddah flood caused the loss of human life, the stock market failure affected the lives of 4 million people who suffered significant if not devastating financial losses. I am not suggesting that the two events are identical, but the major financial catastrophe which hit the Saudi stock market needs immediate investigation to make sure it never happens again. We must determine why the government chose not to intervene and reduce the huge losses experienced by Saudi citizens. As a result of the government’s “hands-off” approach, it can be argued that most investors have lost trust in the stock market that persists to this day.
Even the United States (the country most associated with free enterprise and capitalism) did not stand idly by while its stock market fell significantly in 2008. At that time, circumstances were so dire for the American and global banking systems that the United States Federal Reserve Board ignored free market principles and persuaded the US government to pass a huge $800 billion bailout to try and save the financial system. Although the US stock market only fell 4 percent, the American government acted to save undercapitalized financial institutions such as Citibank and ALIG. So, one may ask why no one in the Saudi government didn’t act to intervene as the Kingdom’s stock market declined more than 73 percent in value. Many other questions need to be answered as well. For example, who was responsible for opening the stock market totally to Saudi citizens? Why Saudis were encouraged to invest in a stock market that lacked the minimum basis of structure in security, trust, and other guarantees associated with the requirements of markets such as market makers?
How could the banks buy and sell without having the adequate operational systems and automation in place, such as the Portfolio Order Management System (POMS)? How were margin bank accounts allowed, and to what extent did the banks profit from those accounts? How did bank employees manage their clients’ accounts and make investments decisions without seeking their permission? How were investor complaints handled and by whom? What involvement did SAMA’s Bank Disputes Committee have in resolving these complaints? Most importantly, how did top banking leaders profit from the stock market collapse through financial entitlements and bonuses while their banks made record profits?
The Saudi stock market is suffering from a loss of confidence among investors which desperately needs to be restored. Only meaningful corrective actions after a thorough investigation will do this. Yet, stock market leaders remain mired in denial and resist efforts for reform, not realizing that they are themselves preventing a stock market recovery to the level that existed six years ago.
It is unreasonable that a country like the Kingdom of Saudi Arabia with a historic flourishing national budget of year 2011 showing a nominal GDP of SR2.163 billion, a growth rate of more than 6.8 percent, and one of the largest reserves in the world ($519 billion) cannot address the dismal condition of its stock market which is considered one of the leading economics indictors. The biggest economy in the Middle East, ranked 18th among the 53 emerging markets in the world, must not ignore this continuing situation. Our leaders must establish a commission immediately to investigate the 2006 stock market collapse and recommend necessary reforms to reassure Saudi investors and restore the stock market to robust condition. The time is now to address this issue. May our wise leaders see the good that will result if the Saudi stock market is thoroughly investigated and reformed.
— Dr. Sami Al-Nwaisir is a financial economist and chairman of the board of Al Sami Holding Group in Jeddah.