Financial Crisis Impact on Saudi Market

Paper Info
Page count 30
Word count 10784
Read time 38 min
Subject Economics
Type Essay
Language 🇺🇸 US

Abstract

The financial crisis caused by the subprime house mortgage loans and several other financial and economic causes has had a severe negative impact on almost all the economies of the world. Banking and financial services were the worst hit sectors among other sectors affected by the financial crisis. The current research was undertaken to examine the impact of the financial crisis on the Saudi Arabian economy. To assess the impact of the financial crisis on different sectors of the Saudi economy, an analysis of the financial performance of Saudi Chemical Company operating in the industrial investment sector and Saudi Basic Industries Corporation operating in the petrochemical sector was undertaken. The risk-return analysis of the stocks of the two companies was done. The findings of the study reveal that while the global financial crisis affected the sales growth and profitability of the petrochemical sector, the crisis has not affected the sales and profits of Saudi Chemical Company. The study found that both the companies have a beta value of less than one implying that the stock prices did not move along with the movement in the Saudi Stock Exchange index. The study found a correlation between the stock returns of both stocks to a limited extent.

Introduction

The world economy was subjected to major upheaval since September 2008. The crisis began as an aftermath of the subprime housing market in the United States, which took global proportions and spread through all the rest of the economies of the world. It is the opinion of many economists that the 2008 financial crisis has the most serious implications as that of the Great Depression of the 1930s. The impact is serious on the real economy with widespread unemployment conditions prevailing throughout the globe. As against the projected Gross Domestic Product (GDP) growth rate of 6.4% before the crisis, World Bank has revised the growth rate 4.5% after the crisis. While the United States and many of the Western economies were heading towards a recession, the crisis affected many of the emerging economies including Saudi Arabia. This study examines the impact of the financial crisis on the Saudi Arabian economy and its financial and capital markets.

Overview of the 2008 Global Financial Crisis

The corporations with their proposed expansions in different nations needed funds to supplement their extended activities. Internally generated funds were not sufficient for the firms to finance all of its proposed expenditures. This has made the corporations introduce newer types of securities against which they could generate the necessary funds. The financial globalization caused by the economic globalization resulted in increased cross-border investments and increased standards of living among the people of host countries. With the availability of more investible funds, people started looking out for new avenues of investments. This has made them be acquainted with the new and innovative financial service products and services with the objective of earning higher rates of returns for their investments. Investments in housing properties were the best option at one point of time and when the trend reversed, the reversal led to serious financial difficulties, not only for the individuals but also for the entire financial system affecting the world economy greatly.

Banks and financial institutions on their part wanted to earn more by adopting different novel ways of financing. Securitization is one of the business models adopted by the banks, which is one of the major causes for the global financial crisis of 2008. The subprime crisis, which led to the financial crisis, was the result of the actions of the banks in using financial instruments such as securitization, where banks could pool their various loans into sellable assets. In this way, the banks could offload their risky loans onto others.

“Some banks did not need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities. Some banks did not need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities. High street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling and trading risk, got into home loans, mortgages, etc without the right controls and management” (Shah)

Many banks were made to take huge risks as they were exposed to different problems of the financial market. When people started realizing the problems, confidence on the financial system fell quickly. Lending was slowed down and investment banks were left with riskiest loans, which other investors did not prefer. Values of assets came down drastically and lenders wanted their monies back. However, many of the investment banks had no cash reserves to back up. There were no other sources of raising funds and this led to the collapse of banks and financial institutions.

The global financial crisis, which was in the brewing for some time started showing its impact on the global financial markets from the middle of 2007 and into 2008. There were falling stock prices in almost all stock markets of the world and collapse of large financial institutions and banks. Governments of even wealthiest nations were made to come up with rescue packages for bailing out their respective financial systems. “A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world” (Shah). This ripple effect added to deficiencies in the world financial markets. “Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail” (Shah).

Causes of 2008 Global Financial Crisis

There were several factors responsible for the onset of the financial crisis during 2007-2008. In general the macroeconomic policies implemented in the United States and the rest of the industrially advanced nations, were the main contributing factor for the crisis. Fiscal policy followed in the United States was the cause of reduction in the savings. The government has also maintained an easy monetary policy extensively. In addition, a combination of different regulations of Japan resulted in distortion of the world economic situation. Easy monetary policies followed by many other countries including the Asian countries contributed their part to the global meltdown. “The impressive accumulation of foreign exchange reserves by many countries also distorted the international adjustment process, including but not limited to taking some of the pressure off of the macroeconomic policies of the United States and other countries” (Truman). With the result, a housing boom was in offing not only in the United States but also in many other countries. The effect of housing boom was accentuated with increased credit boom, which in turn resulted in steep increase in the stock prices and other undesirable financial practices, ultimately leading to the financial Tsunami. The role of inadequate financial sector supervision and regulation has also to be taken in to consideration for the financial Tsunami. Thus, the causes of the recent financial crisis include the boom and bust in the housing market, speculation in real estate, high-risk loans and lending practices of banks and investment banks, securitization, inaccurate credit rating by the credit rating agencies and government and central bank policies, which failed to predict and control the financial crisis.

Irrespective of the causes there are some distinguishing features of the crises that need consideration to discuss the effects and challenges the financial tsunami has created to affect the global economy.

First, the proximate origin of the crisis was the United States largely and the actions of the financial institutions functioned in the country were the main reason for the emergence of the crisis. “Second, if the largest economy in the world, whose currency and institutions are at the core of the global financial system, stops functioning, the fact that the resulting crisis becomes global should not be surprising. Third, it is not unusual for a crisis to begin in the financial sector, spread to the real economy, cycle back to further weaken the financial sector, and thereby further weaken the real economy” (Truman).

One of the consequences of the crisis is that it the decline was felt in all economies equally. The decline in growth rate is identical for advanced economies, emerging and developing economies and the countries in Western Hemisphere. The expected fall in growth for the years 2008-2010 on an average is 11 percent for the advanced economies and 12.8 percent for other economies (Truman, 2009). Another lesson learnt from the crisis, which is broader in scope is that the globalization of trade, financial globalization and globalization in exchange of labor has united the countries largely than it was in the earlier century. “The consequence is that in today’s world any crisis that affects a major country or group of countries in the global economy or financial system will have some, largely adverse, effects on all other countries” (Truman).

Major Sectors affected by the Global Financial Crisis

The world economic crisis and the resultant unemployment rate have had a detrimental effect on the economic growth of many of the world economies. The financial and banking sector was the worst hit by the recent global financial crisis. The construction sector had a severe impact of the financial crisis globally. Especially in the United States and many of the European countries, reversal of housing boom and inability of the public to meet their commitments on repayment of housing loans has not only affected the banking and financial services, but also the construction sector heavily as there was abundance of house supplies. The associated sectors like steel, cement and shipping faced the brunt of the global financial crisis. Low demand in United States and China and all the Asian countries gave a severe jolt to the oil sector and as a result, the petrochemical companies all over the globe suffered. Decline in oil prices added further difficulty to oil sector. In any economic crisis, automobile industry will be the main sufferer and in the financial crisis of 2008 hit the automobile manufacturers.

Impact of Global Financial Crisis on Saudi Arabia

The financial crisis and the economic recession that followed had significant implications on the economy and markets of Saudi Arabia. Economic growth was slow and there were consequent delays in the completion of different government and private sector projects. The budget fell into deficit. The economic recession also gave rise to some long-term policy issues concerning the participation of the state in the banking sector. The government had to do major modifications to its policies relating to financial regulations and introduction of a mortgage market. There were some advantages resulting from the financial crisis in the form of reduction in the commodity prices and project costs. The economic reforms that were undertaken by the Saudi Arabian government and investment boom of last few years enabled the Kingdom to weather the negative impact of economic and financial conditions. Except for some minor changes in the financial strength of different sectors, the underlying economic fundamentals remained strong. The economic crisis contributed to the worsening financial conditions resulting in sharp rise in the bank interest rates. There were three main factors, which led to the increase in the bank interest rates and subsequent tightening of the financial market in the Kingdom. They are (i) Saudi Arabian Monetary Agency (SAMA) applied a clampdown on credit growth to contain the inflation, by altering the reserve requirements of commercial banks, (ii) the foreign funds that were invested in the financial markets of Saudi Arabia decided to exit the regional banking system in anticipation of adjustments in the exchange rates and (iii) some of the banks raised large amounts of local currency to purchase assets underlying financial instruments that were in the banks’ possession and affected by the financial crisis.

Prior to the financial crisis, private sector in the country made heavy investments (up to $ 600 billion) in different projects that were under way during the crisis. However, with the unwillingness of the local banks to lend, the cost of borrowing went up. In addition, there was a shortage of dollars and with reduced access to external funding; the private sector could not mobilize the necessary funds for the speedy completion of the projects. This greatly hampered the implementation of the project boom.

Another impact of global financial crisis was that the tougher local and global financial conditions have effectively frozen the debt financing markets. There have been no new major syndication loans or sukuk since the beginning of 2009. The economic crisis also affected the raising of finance through the equity market as this source of finance had lost its attractiveness. Since the intensification of the crisis, Saudi stock market just as the case with other global stock markets experienced a freefall in stock prices. Perhaps this was attractive for the investors. However, there was little incentive for the companies to raise capital using the market resources, as they were not able to raise as much funds as they could do under normal market conditions. The collapse in oil prices was one of the major implications of global financial crisis on the Saudi economy.

Sectoral Impact of Global Financial Crisis in the Saudi Arabian Economy

Global financial crisis was not affected Saudi Arabian economy materially affected because of “its sound economic conditions, prudent and conservative supervisory framework, countercyclical fiscal and banking system policies, and other macroeconomic reasons.” Even though other developed economies were severely hit by the crisis in 2008 and 2009, the Saudi Arabian economy has continued to show resilience and strong growth prospects. According to official figures, the Saudi Arabian economy registered a growth of 0.2% in real terms. The expansion in non-oil economy was to the extent of 3 percent in real terms and in nominal terms to the extent of 5.3 percent. However, these broad indications of economic growth do not reflect the severity of the economic downturn, which started affecting the economy from mid-2008.

Nominal Nonoil GDP by Sector

With the seizing up of wholesale banking markets and plummeting oil prices, there was retrenchment in domestic banks accompanied by falling consumption and investment. Almost all nonoil sectors felt the impact. The above graph indicates the sector-wise impact of the world financial crisis during the year 2009.The following are the main nonoil sectors of the economy, which were affected by the financial crisis ranked in order of the impact.

  • Government services
  • Manufacturing (including oil refining and petrochemicals)
  • Finance, insurance, real estate, & business services
  • Trade and hospitality
  • Construction
  • Transport, storage & communications
  • Agriculture
  • Community and personal services
  • Public utilities

The peak-to-trough decline in the oil prices during 2008-2009 was most severe and this decline had a serious impact on the economy, as reflected by the performance of different sectors. However, the rebound of prices in 2009-10 has been vigorous because of the increased budget allocation for government expenditure in various sectors of the economy. The following chart shows the budget allocation for the different sectors.

Saudi Budget Appropriations

From the chart, it can be observed that the government planned increased spending on infrastructure development and in public administration representing wages and subsidies. However, the impact of this increased government spending on the economy was limited. With the increase in the confidence of the Saudi households, there was increased private consumption, which gave a decent fillip to trade. The following figure represents the position of point of sale transactions and private sector imports.

Private Consuption Indicators

The construction sector has not performed well in the aftermath of the financial crisis despite the enhanced budgetary allocation. This downtrend of the construction sector continued during 2010 also. The underperformance of the construction sector fits with its historical trend. While the performance of construction sector as shown by the stock market index (which includes pipe and cable manufacturers) is mixed because in these cases the domestic demand is the key factor. However, the non-listed contracting firms have performed well backed by the huge government spending on infrastructure.

The dislocations in the global financial markets did not affect the banking sector in Saudi Arabia. The sector remained largely undisturbed during 2009 with only modest declines in the earnings. In fact, the net income of banking sector declined during the first quarter of 2010, when the other sectors showed improvements in their net income position. The strong overseas investments resulted in a steady income for the banking sector during 2009, which could offset the lower yields from the domestic business.

The performance of other smaller sectors after the economic crisis can be seen from the following chart, complied based on the performance of listed companies operating in the sector. Transport sector could not pose any recovery, while agriculture, which includes food production, processing and retailing including restaurants, exhibited spectacular recovery in the post-crisis period. Telecom could also show strong recovery with fluctuation in the utility sector, which is represented by the performance of Saudi Electricity Company.

Net Profit Listed Companies

One of the sectors, which remained unaffected by the government spending, is the “petrochemicals”. The performance of this sector was observed to be most volatile. With the reduction in the global economic activity and deterioration in demand for industrial chemicals, the profits of the sector plunged in 2009. This pattern of performance of this sector has been the same in the earlier recessionary periods also. The downturn and subsequent rebound in energy prices had a direct and telling effect on the manufacturing sector. Because of the importance of the petrochemical sector in the Saudi Arabian economy, the study chose to analyze the movement of stock prices of a company operating in the petrochemical sector (Saudi Basic Industries Corporation (SABIC)). Since the performance of the petrochemical sector has a direct impact on the industrial investments, the study will compare the performance of the stock prices of a company operating in the industrial investment sector (Saudi Chemical Company). This analysis was undertaken to assess the impact of global financial crisis on these two sectors and the correlation in the stock price movements of these two companies during and after the crisis.

Industrial Investment Sector

The industrial investment represents private and public sector investments in industrial infrastructure and heavy projects in the Kingdom aimed to boost the economic expansion. “On the heels of the financial crisis, the Saudi economy decelerated quickly at the end of 2008 and throughout 2009 due to a combination of factors, including the drop in oil prices and global oil demand, and the cancellation or postponement of tens of billions of dollars in expansion projects (Saudi-US Relations Information Service). This section looks at the performance of Saudi Chemical Company, a company listed in Saudi Stock Exchange to examine the impact of global financial crisis on the sector.

Overview of the Industrial Investment Sector

Industrial investment sector includes companies engaged in the manufacturing other than petrochemical products, such as paper, chemical, packing material and pharmaceutical products. There were thirteen companies listed in Saudi Stock Exchange (TADAWUL). With increasing oil prices and escalated requirements of oil from Asia especially from China, the Saudi economy could regain the economic expansion. This has led to significant investments from private sector in the industrial investment sector focusing on development of large manufacturing facilities in different areas. The growth of industrial investment sector was motivated by escalated global oil prices prevailed and additional requirements of petrochemicals. Enhanced state stimulatory spending facilitated the growth of the sector during the post-crisis period. With the expected upturn in the construction activity in the year 2011, there were large investments in other industrial infrastructure development. In addition, the state infrastructure building also helped the spurt in the growth of the industrial investment sector. The manufacturing sector also made a good comeback after the financial crisis affected the sector. The revival of the manufacturing sector helped promoting the industrial investment sector greatly. The following sections present an analysis of the performance of Saudi Chemical Company listed in the Saudi Stock Exchange as a sample to study the performance of the industrial investment sector.

Profile of Saudi Chemical Company

Saudi Chemical Company is a joint stock company listed in Saudi Stock Exchange. The company’s primary activity is blasting services. The company sells explosives and detonators, which are used for both military and civil uses. “The Company’s products include Prilex, a blasting agent mainly used for fissured sedimentary rocks and underground applications; Kemulex, an emulsion explosive suitable for worksites with wet holes and underwater blasting; Sanel, a non-electric shock tube designed for bench and trench blasting; explosives packing; electric detonators; detonating cord, and blasting machines” (Corporate Information). The company has warehouse and manufacturing facilities spread throughout the Kingdom. The company has offices in “Al-khobar, Jeddah and Abha, as well as 28 houses at the Riyadh Housing Compound & Office.” Saudi International Trading Company is one of the subsidiaries of Saudi Chemical Company. Suez International Nitrate Company is another wholly owned subsidiary. The company owns 20% of the shares in Explo Track Co., United States (Corporate Information.com).

Financial Performance Evaluation – Analysis of Financial Ratios

The financial position of a company can be analyzed based on its profitability, liquidity, efficiency and capital structure. The attractiveness of investment in shares of a company can be assessed based on the investment valuation ratios. Ratio analysis is one of the effective methods to analyze the financial status of a company. The ratios calculated in respect of the Saudi Chemical Company lead to the following analysis of the financial status of the company.

Turnover and Profitability

Global financial crisis has not affected the turnover of the company. In general, the company has a satisfactory sales growth as shown by the sales figures for the four years from 2007 until 2010. The impact of global financial crisis, which was felt in other sectors, does not appear to affect Saudi Chemical Company. This is evident from the chart on the turnover of the company. There is no dip in the sales for the year 2009, which was the year immediately following the financial crisis. Strong presence and financial position of the company in Saudi market has helped the company to withstand the negative impact of the global financial crisis and even improve upon the sales during 2009.

Turnover of Saudi Chemical Company
Figure: Turnover of Saudi Chemical Company – 2007 – 2010

There is significant improvement in the net profit margin of the company as can be observed from the following profitability ratios. The company is able to show improvements in the operating profit over the period, coupled with the growth in sales turnover.

Profitability Ratios
2007 2008 2009 2010
Sales SAR Millions 1,230.1 1,537.2 1,643.3 1,687.3
Gross Profit 206.3 265.8 346.3 374.1
Gross Margin 16.77% 17.29% 21.07% 22.17%
Operating Profit 152.4 211.2 279.2 312.7
Operating Profit to Sales (%) 12.39% 13.74% 16.99% 18.53%
Net Income 111.8 200.5 301 303.2
Equity 897.9 1,099.1 1,242.6 1,352.8
Return on Equity 12.45% 18.24% 24.22% 22.41%
Total Assets 1,658.3 2,025.9 2,382.3 2,309.0
Return on Total Assets 6.74% 9.90% 12.63% 13.13%

With the increase in net profits, the return on equity shows an increasing trend. The company was able to increase the return on the total assets during 2009. This implies that the global financial crisis has not affected the profitability of Saudi Chemical Company. Increased government spending on infrastructure projects has helped the company to improve its turnover and profitability.

Liquidity

The company has shown its inability to improve its liquidity through its operations during 2009, which might be the result of the impact of global financial crisis. This is seen from the current ratio of the company, which has declined in 2009.

Liquidity Ratios
2007 2008 2009 2010
Current Assets 1054.0 1239.0 1716.3 1636.6
Current Liabilities 669.8 902.9 1,113.4 922.5
Current Ratio 1.57 1.37 1.54 1.77

However, the company has improved the current ratio to the original position as it was before the crisis. The ratio shows substantial improvement during 2010, which signifies that the global financial crisis has brought new opportunities for the company, which the company could cash in. This has increased the liquidity of the company in the post-crisis period.

Capital Structure or Gearing

The debt to equity ratio shows how well the capital of the company is distributed between owned funds and borrowed funds. Some of the organizations include both current and long-term liabilities to compare it against the proportion of equity in the total capital employed by the company. In the case of Saudi Chemical Company, because of the sound financial position of the company the current liabilities are not included in the calculation of gearing ratio. Further, the company has not long-term liabilities during the year 2008 to 2010. There was a long-term liability of SAR 69 million during 2007, which the company has settled in 2008 and the company has not contracted any long-term liability after 2007. This liability of SAR 69 million in 2007 accounted for 7.14% of the total capital of the company. This shows that the company could maintain strong financial position on its own means, which enabled the company to weather the negative impact of global financial crisis.

Investment Valuation Ratios

Investment valuation ratios enable the investors to estimate the attractiveness of a potential investment as to the worthiness of investing in the relevant stocks. The following investment valuation ratios pertain to Saudi Chemical Company.

Investment Valuation Ratios
2007 2008 2009 2010
Share price SAR 36.25 20.95 41.4 41.6
Earnings per share SAR 1.77 3.17 4.76 4.97
Price to Earnings Ratio 20.48 6.61 8.70 8.37
Dividend per share SAR 0.00 0.00 4.00 3.50
Dividend Yield 0.00% 0.00% 9.66% 8.41%
Book Value of Equity SAR m 897.9 1,099.1 1,242,6 1,352.8
No of Outstanding Equity Shares 63,240,000 63,240,000 63,240,000 63,240,000
Book Value per Common Equity share SAR 14.20 17.38 19.65 21.39

While the information like revenue, operating cash flow, and earnings before interest, tax and depreciation obtained from the financial statements of a company can overload the investors’ with information, the investment valuation ratios provide a simplified approach on the evaluation of different investment options comparing the ratios for different companies. Price earnings ratio, dividend yield, book value per share and price to book ratio are some of the important ‘per share’ investment valuation ratios that could provide vital information for the investor to decide on the potential investment options.

The earnings per share have increased over the period from 2007 to 2010, which again is proving that the global financial crisis has not affected the financial position of the company adversely. However, in order to maintain the liquidity during the financial crisis, the directors have decided not to recommend any dividend during 2008, which was a wise move to face the financial crisis. However, the company has distributed significant dividends during 2009 and 2010, years after the crisis. Book value per equity share is also showing an increasing trend, which can be inferred to show a strong financial position of the company. Price to book is of no relevance as the company’s shares are undervalued grossly considering the total assets value of the company. This is evident from the lower P/E ratio.

Stock Performance Evaluation – Risk Return Analysis

Risk and return are central to the analysis of the performance of an individual stock or group of stocks in an investment portfolio. Generally, any investor would prefer to invest in those stocks, which are less risky. When an investor considers two stocks with the same expected return, he would prefer the one, which has lesser risk. Although, this may not be true in respect of all investors, it will hold well in respect of the investing community as a whole. Certain statistical measures like mean, standard deviation, variance and correlation coefficient are used in analyzing risk and return in the case of returns from investments in stocks. For instance, in the case of a stock which has uncertain cash flows and payoffs and where the returns are normally distributed, the mean value can be expected as the return from the stock. The standard deviation shall form the risk of holding the stock. Therefore, the investors would look for stocks with lowest standard distribution in their payouts, which shall mean that the stock is less risky. The investor can also follow the approach of choosing the stocks having the same risks and investing on the one which has the highest returns. In any case, the statistical analysis of the risks and returns associated with a stock is important for an investor.

The ultimate goal of in investor is to avoid investing in risky stocks and earn maximum returns from his investments there should be a way to measure the risk and returns, which are connected with the stocks. Variance or standard deviation of its returns measures the risk of stocks. When the investment is made in only one stock, the standard deviation or the variance is the proper way of measuring the risk of that stock. The returns from a stock may take the form of either a dividend or the appreciation in the market value of the stock, which the investor can realize by selling the stock, when he feels that the price of the stock has gone up to realize the expected rate of return. Here again there is the need to measure the expected return from the stock represented by dividend or increase in the value of the stock. There are several techniques to estimate the expected rate of return like the dividend discount model. For measuring, the expected return statistical methods are used.

Analysis of the Return and Risk of the Stock of Saudi Chemical Company

As a part of this study, this section presents a report on return and risk factors of the stocks of Saudi Chemical Company.

Return Statistics

The rate at which the funds of the investor have grown during the investment period determines the success of the investor. Since the company is formed in 1972 and the stocks are dealt in TADAWUL for several years, the return from the stock of Saudi Chemical Company (SCCO) cannot be calculated easily. Therefore, we adopted the measure of average or mean value as a manageable way of describing the historic returns from the stock of SCCO. We drew the information on the month end closing values of the stock from January 2007 until December 2010, which made up a four-year period. The incremental value during the next month is taken as the return for the previous month and the respective percentages of the previous month closing price was worked out as the historic return percentages of the stock. The arithmetic average of the distribution is calculated by adding up the all the return percentages and dividing by the total number (in this case by 47 as the total number of months we have taken for calculation). The mathematical formula for arriving at the arithmetic average can be used.

Formula

Where R1….RT are the returns from the stocks and T is the number of returns taken into account.

The analysis shows that the stock has provided a maximum return of 40.35 % and a minimum return of -46.90% over the three-year period. The mean or average return from the stock is 1.779%. The following table shows the calculation of mean value or average return.

According to the formula, the individual percentage returns are to be subtracted from the mean or average return and the result is to be squared. The squared number is to be divided by the total number of returns less one. The square root of variance represents SD. Standard deviation is a statistical measure, which indicates the degree to which an individual value in a probability distribution would deviate from the mean value of the total distribution (Ross, Westerfield and Jaffe).

Table: Calculation of Mean Value

Month Return
% (R)
(R1– R) (R1– R)2 Month Return
% (R)
(R1– R) (R1– R)2
Jan-07 11.02% 9.24% 0.0085 Jan-09 -14.73% -16.51% 0.0272
Feb-07 -9.16% -10.94% 0.0120 Feb-09 -1.59% -3.37% 0.0011
Mar-07 4.20% 2.42% 0.0006 Mar-09 37.18% 35.40% 0.1253
Apr-07 1.61% -0.17% 0.0000 Apr-09 6.40% 4.62% 0.0021
May-07 -7.94% -9.72% 0.0094 May-09 -11.71% -13.49% 0.0182
Jun-07 12.07% 10.29% 0.0106 Jun-09 14.70% 12.92% 0.0167
Jul-07 2.31% 0.53% 0.0000 Jul-09 4.38% 2.60% 0.0007
Aug-07 -6.02% -7.79% 0.0061 Aug-09 -5.69% -7.47% 0.0056
Sep-07 1.60% -0.18% 0.0000 Sep-09 17.14% 15.36% 0.0236
Oct-07 5.51% 3.73% 0.0014 Oct-09 8.40% 6.62% 0.0044
Nov-07 8.21% 6.43% 0.0041 Nov-09 3.50% 1.72% 0.0003
Dec-07 -17.24% -19.02% 0.0362 Dec-09 -2.66% -4.44% 0.0020
Jan-08 0.83% -0.95% 0.0001 Jan-10 3.72% 1.94% 0.0004
Feb-08 -5.79% -7.56% 0.0057 Feb-10 2.63% 0.85% 0.0001
Mar-08 40.35% 38.57% 0.1488 Mar-10 6.76% 4.98% 0.0025
Apr-08 5.00% 3.22% 0.0010 Apr-10 -11.57% -13.35% 0.0178
May-08 10.12% 8.34% 0.0070 May-10 0.49% -1.29% 0.0002
Jun-08 8.65% 6.87% 0.0047 Jun-10 14.25% 12.47% 0.0156
Jul-08 -5.97% -7.75% 0.0060 Jul-10 -1.08% -2.85% 0.0008
Aug-08 -7.94% -9.72% 0.0094 Aug-10 4.13% 2.35% 0.0006
Sep-08 -46.90% -48.68% 0.2369 Sep-10 -12.32% -14.10% 0.0199
Oct-08 -22.08% -23.86% 0.0569 Oct-10 -5.00% -6.78% 0.0046
Nov-08 16.39% 14.61% 0.0213 Nov-10 4.26% 2.48% 0.0006
Dec-08 23.15% 21.37% 0.0457 Total 83.61 92.27

Variance is calculated by dividing the total of 53.69 by total number of months less one. Threrefore, variance = 92.27 ÷ (47 – 1) = 92.27 ÷ 46 = 2.01

Standard Deviation = √ Variance = √ 2.01 = 1.417

Thus, the degree of uncertainty faced by the investor is reflected by the wideness of the probability distribution of the stock returns. A distribution with a less value of standard deviation in relation to its expected return indicates that a less degree of dispersion. This will lead to higher confidence level of the investor. On the other hand, a distribution with a higher value of standard deviation relative to the expected value of the stock indicates a higher degree of uncertainty about the possible return from the stock. Standard deviation is the most popular statistical measure for assessing the risk relating to the returns from a specific stock. The interpretation of standard deviation will be clear with the knowledge of normal distribution.

Beta Analysis

While analyzing the stock returns two types of volatility can be noticed. First, is the volatility caused by the company-related factors, which is known as “unsystematic” risk. Second is the “systematic or market” risk, in which case the stock price of a particular stock will move based on the overall market movements. The beta value for Saudi Chemical Company is calculated as below:

Month
(1)
SCCO
Return
% (R)
(2)
(R1– R)
(3)
Tadawul
Return
% (X)
(4)
(X1– X)
(5)
(R1– R)*
(X1– X)
(6)
(X1– X)2
(7)
Jan-07 11.02% 9.24% -17.34% -17.08% -1.88% 2.92%
Feb-07 -9.16% -10.94% 6.61% 6.87% -0.63% 0.47%
Mar-07 4.20% 2.42% 3.28% 3.54% 0.15% 0.13%
Apr-07 1.61% -0.17% -0.32% -0.06% 0.00% 0.00%
May-07 -7.94% -9.72% 7.04% 7.30% -0.58% 0.53%
Jun-07 12.07% 10.29% -7.20% -6.94% -0.84% 0.48%
Jul-07 2.31% 0.53% -9.54% -9.28% -0.21% 0.86%
Aug-07 -6.02% -7.79% 4.58% 4.84% -0.29% 0.23%
Sep-07 1.60% -0.18% -8.52% -8.26% -0.13% 0.68%
Oct-07 5.51% 3.73% -10.74% -10.48% -0.58% 1.10%
Nov-07 8.21% 6.43% -17.56% -17.30% -1.42% 2.99%
Dec-07 -17.24% -19.02% 13.40% 13.66% -2.35% 1.86%
Jan-08 0.83% -0.95% -6.13% -5.87% -0.05% 0.35%
Feb-08 -5.79% -7.56% 11.37% 11.63% -0.67% 1.35%
Mar-08 40.35% 38.57% -10.95% -10.69% -4.31% 1.14%
Apr-08 5.00% 3.22% 5.01% 5.27% 0.26% 0.28%
May-08 10.12% 8.34% 2.53% 2.79% 0.28% 0.08%
Jun-08 8.65% 6.87% 5.78% 6.04% 0.52% 0.37%
Jul-08 -5.97% -7.75% 0.18% 0.44% -0.03% 0.00%
Aug-08 -7.94% -9.72% 19.51% 19.77% -1.57% 3.91%
Sep-08 -46.90% -48.68% 21.18% 21.43% -10.05% 4.59%
Oct-08 -22.08% -23.86% 16.31% 16.57% -3.66% 2.75%
Nov-08 16.39% 14.61% -3.57% -3.31% -0.54% 0.11%
Dec-08 23.15% 21.37% -0.12% 0.14% 0.03% 0.00%
Jan-09 -14.73% -16.51% 9.53% 9.79% -1.44% 0.96%
Feb-09 -1.59% -3.37% -6.31% -6.05% 0.10% 0.37%
Mar-09 37.18% 35.40% -18.90% -18.64% -6.93% 3.48%
Apr-09 6.40% 4.62% -7.29% -7.03% -0.45% 0.49%
May-09 -11.71% -13.49% 5.38% 5.64% -0.66% 0.32%
Jun-09 14.70% 12.92% -3.02% -2.76% -0.41% 0.08%
Jul-09 4.38% 2.60% 1.30% 1.56% 0.07% 0.02%
Aug-09 -5.69% -7.47% -10.75% -10.49% 0.60% 1.10%
Sep-09 17.14% 15.36% 0.25% 0.51% 0.09% 0.00%
Oct-09 8.40% 6.62% -1.05% -0.79% -0.07% 0.01%
Nov-09 3.50% 1.72% 3.50% 3.76% 0.13% 0.14%
Dec-09 -2.66% -4.44% -2.13% -1.87% 0.05% 0.04%
Jan-10 3.72% 1.94% -3.53% -3.27% -0.12% 0.11%
Feb-10 2.63% 0.85% -5.31% -5.05% -0.13% 0.25%
Mar-10 6.76% 4.98% -0.47% -0.21% -0.01% 0.00%
Apr-10 -11.57% -13.35% 10.05% 10.31% -1.19% 1.06%
May-10 0.49% -1.29% 0.44% 0.70% 0.00% 0.00%
Jun-10 14.25% 12.47% -3.12% -2.86% -0.41% 0.08%
Jul-10 -1.08% -2.85% 3.37% 3.63% -0.04% 0.13%
Aug-10 4.13% 2.35% -5.28% -5.02% -0.21% 0.25%
Sep-10 -12.32% -14.10% 0.60% 0.86% -0.11% 0.01%
Oct-10 -5.00% -6.78% 0.56% 0.82% -0.04% 0.01%
Nov-10 4.26% 2.48% -4.78% -4.52% -0.19% 0.20%
Dec-10 (39.93)% 36.30%

Different economic factors affect the overall market movements, which in turn affect the share price movements of individual stocks. The measurement of the movement in stock prices in relation to the overall market movement is called the “beta” value of the stock concerned. “Some stocks move in tandem with the market, some move more than proportionately on the same side of the market, and others inversely,” (Parasuraman). A stock having a beta value of one will move along with the market movement and a stock having a negative beta value will find its prices move upward when the market moves downwards and the stock prices move downward when the market moves upward.

The following steps are involved in the calculation of beta value of SCCO.

  • The average return on the stock of SCCO is calculated (1.779%).
  • The average return of Tadawul is calculated (-0.259%).
  • For both SCCO and Tadawul the deviations from the average return are to be calculated (Columns (2) and (5) in the table above).
  • The deviations of SCCO are to be multiplied by the deviations of Tadawul [Column (6)].
  • The squared deviations of Tadawul are to be calculated [Column (7)].
  • Total of the values derived by the deviations of SCCO multiplied by the deviations of Tadawul is to be calculated [Total of Column (6)].
  • Total of the squared deviations of Tadawul is to be calculated [Total of Column (6)].
  • Beta value is arrived by dividing total of the values derived by the deviations of SCCO multiplied by the deviations of Tadawul by the total of the squared deviations of Tadawul

[Total of Column (6) ÷ Total of Column (7)]

Beta of SCCO = – 39.93% ÷ 36.30% = – 1.1006

Since the beta value of Saudi Chemical Company is – 1.1006 the prices of the stock of SCCO will be moving in the opposite direction to that of Tadawul movements. The beta of SCCO calculated based on the stock price movements through the financial crisis period and two years after the crisis, indicates that the global financial crisis did not have any impact on the growth and profitability of the company. The beta value of less than one indicates that although there has been high volatility in Tadawul index during the period of crisis, the stock prices of Saudi Chemical Company has not moved along with the movements of the Exchange. The increased incidence of government expenditure on infrastructure projects has helped SCCO to sustain its market position and the company has increased its sales and profitability, unaffected by the crisis. Low beta also indicates the high investor confidence in the shares of SCCO, that there were no huge fluctuations in the prices.

Normal Distribution

When the distribution of return percentages is spread normally over the period, it can be represented by a bell-shaped curve. For the normal bell-shaped probability distribution, 0.68 or two thirds of the distribution would fall within one standard deviation of the expected return. Out of the distribution, 0.95 falls within two standard deviations and above 0.99 within three standard deviations.

The 1.416 (14.16%) standard deviation obtained for Saudi Chemical Company for the returns for a period of four years can be interpreted in the following way.

If the stock returns of Saudi Chemical Company follow a normal distribution, about two-thirds of the returns have to be around 14.16% of the average return of 1.779%. The distribution of returns from the stock of SAIB can be illustrated with the following histogram.

Distribution of Return Percentages

This implies that two thirds of the returns from SCCO stocks will fall between – 12.38% (this figure is calculated as mean –standard deviation = 1.779% – 14.16%) and 15.94% (this figure is calculated as mean + standard deviation = 1.779% + 14.16%).

With a normal distribution of the returns, about 95% of the returns from SCCO stock will fall within two standard deviations. This implies that 95% of the returns will fall between – 26.54% (this figure is calculated as mean – twice the standard deviation = 1.779% – (2) (14.16%)) and 30.01% (this figure is calculates as mean + twice the standard deviation = 1.779% + (2) (14.16%)).

Using Ms Excel function of ‘Normal Distribution’, we have found 29.24% of the returns will fall within -5% of the range and 56.34% of the returns might fall within +5% ranges.

Petrochemicals Industries Sector

The Saudi economy is predominantly an oil-based economy. Because of this reason, changes in oil prices have significant impact on the economy. It also makes the petrochemical industry as one of the important sectors in the economy contributing to the expansion. Volatile oil prices ruling the market immediately after the global financial crisis had some serious impact in the Saudi economy, especially the petrochemical sector. Lower demand for oil in the United States and in the Asian countries including China has affected the sales growth of the companies operating in the petrochemical industries. Global financial crisis had affected the profitability of these companies and as a result, the stock prices of these companies in the Saudi Stock Exchange. This section analyzes the financial performance of Saudi Basic Industries Corporation (SABIC) operating in the petrochemical industries.

Overview of Petrochemical Sector

From the position of being a net importer of petrochemical products during 1970s, Saudi Arabia became one of the largest petrochemical exporters. The country caters to the petrochemical needs of more than 100 countries all over the world. Saudi Arabia supplies 7 percent of the world supply in the sector. Presently there are 14 companies listed in Saudi Stock Exchange – TADAWUL. Increased demand for oil and related products in the year 2010 has enabled the sector to regain its strong financial position. High-energy prices and continued growth in demand from Asia, the petrochemical sector will contribute to the economic expansion of the Kingdom. The main constraint of petrochemical sector is the domestic scarcity of gas feedstock. Companies like SABIC are trying to gain access to gas feedstock at a low cost from other countries.

Profile of Saudi Basic Industries Corporation (SABIC)

SABIC was established in the year 1976. A Royal Decree of the Kingdom of Saudi Arabia put the company into operation. The company’s products are manufactured under four different divisions – “chemicals, plastics, fertilizers and metals”. The company has expanded its marketing activities in the region of “Middle East, Africa, Asia Pacific, Europe” and North America. “Its Chemicals segment includes olefins, oxygenates, aromatics, chemical intermediates, fiber intermediates, industrial gases and linear alpha olefins. The Plastics products include polyvinyl chloride (PVC) and polyester, and poly-olefins. Its Fertilizers products consist of urea, ammonia and phosphate, and sulfuric acid. Its Metals products include flat and long steel products.” The company has established its manufacturing locations in the Saudi Arabian cities of “Al-Jubail, Dammam and Yanbu” (Corporate Information.com)

Financial Performance Evaluation – Analysis of Financial Ratios

Ratio analysis of profitability, liquidity, investment valuation and capital structure helps judging the financial performance of an organization. The ratios calculated in respect of the Saudi Basic Industries Corporation (SABIC) reveal the following financial performance of the company during the four-year period 2007-2010.

Turnover and Profitability

Global financial crisis has affected the turnover of the company during the year 2009. The company could regain its sales growth in 2010. This is evident from the sales figures for the four years from 2007 until 2010 shown in the following graph.

Turnover of Saudi Basic Industries Corporation
Figure: Turnover of Saudi Basic Industries Corporation – 2007 – 2010

The impact of global financial crisis has affected SABIC in such a way that its sales went down in the year 2008 by 39.4% of the previous year sales. There was heavy decline in the sales for the year 2009, which was the year immediately following the financial crisis. Volatile oil prices and low demand for oil has affected the company’s sales during the year 2009.

There is significant reduction in the operating profit of the company for the year 2009, as can be observed from the following profitability ratios. The operating profit for 2009 went down by 47.5% over the previous year profit and the net income by 58.8%. The company is able to show improvements in the operating profit during 2010 coupled with the growth in sales turnover.

Profitability Ratios
2007 2008 2009 2010
Sales SAR Millions 126,204.4 150,809.6 103,105.2 151,970.0
Gross Profit 47,950.2 47,261.7 28619 48546.7
Gross Margin 37.99% 31.34% 27.76% 31.94%
Operating Profit 41,046.5 38,089.7 19,984.4 37,892.6
Operating Profit to Sales (%) 32.52% 25.26% 19.38% 24.93%
Net Income 27,022.3 22,029.8 9073.7 21528.7
Equity 134,496.3 146,641.6 152,630.2 166,146.6
Return on Equity 20.09% 15.02% 5.94% 12.96%
Total Assets 253,731.1 271,760.0 296,861.3 317,579.9
Return on Total Assets 10.65% 8.11% 3.06% 6.78%

With the sharp decline in net profits, the return on equity shows a decline in 2009. The company performed poor on the return on the total assets during 2009. This implies that the global financial crisis has affected the profitability of SABIC badly. Subsequent recovery of oil prices and increased demand has helped the company to improve its turnover and profitability.

Liquidity

The company has shown its ability to improve its liquidity through its operations during 2009, which might be the result of strong financial resources of the company. This is seen from the current ratio of the company, which has not declined in 2009, the year after the crisis.

Liquidity Ratio
2007 2008 2009 2010
Current Assets 98305.3 95455.0 106463.7 117099.4
Current Liabilities 33,682.6 26,588.0 32,172.6 44,304.7
Current Ratio 2.92 3.59 3.31 2.64

However, the current ratio for the company has shown a decline during 2010, which signifies that the effect of global financial crisis has been felt by the company a year after the financial crisis. This has caused a reduction in the liquidity of the company in the post-crisis period.

Capital Structure or Gearing

The debt to equity ratio shows how well the capital of the company is distributed between owned funds and borrowed funds. Some of the organizations include both current and long-term liabilities to compare it against the proportion of equity in the total capital employed by the company. In the case of Saudi Chemical Company, because of the sound financial position of the company the current liabilities are not included in the calculation of gearing ratio.

Gearing Ratio
2007 2008 2009 2010
Long-term Debt 75,438 88,368 100537.8 93848
Long-term Debt + Equity 209,934 235,009 253,168 259,995
Gearing Ratio (%) 35.93% 37.60% 39.71% 36.10%

SABIC has been able to maintain almost the same gearing ratio between 2007 and 2010. The company has not altered its capital structure during the period by obtaining any additional loans. This shows that the company could maintain strong financial position irrespective of the negative impact of global financial crisis.

Investment Valuation Ratios

Investment valuation ratios guide the investors on the attractiveness of a given stock for investment. The following investment valuation ratios pertain to Saudi Basic Industries Corporation.

Investment Valuation Ratios
2007 2008 2009 2010
Share price SAR 165.50 82.75 41.4 104.75
Earnings per share SAR 7.18 7.34 3.03 10.81
Price to Earnings Ratio 23.05 11.27 13.66 9.69
Dividend per share SAR 1.50 3.00 3.00 1.5
Dividend Yield 0.91% 3.63% 7.25% 1.43%
Book Value of Equity SAR m 134,496.3 146,641.6 152,630.2 166,146.6
No of Outstanding Equity Shares (millions) 30,000 30,000 25,000 25,000
Book Value per Common Equity share SAR 4.48 4.89 6.11 6.65

The earnings per share reduced in the year 2009, which again is proving that the global financial crisis has seriously affected the financial position of the company. However, the dividend yield for the shares is high for the year 2009, which was due to reduction in the stock value because of the financial crisis. However, the company has distributed significant dividends during 2009 and even in 2010, years after the crisis. Book value per equity share is also showing an increasing trend, which can be inferred to show a strong financial position of the company. Price to book is of no relevance as the company’s shares are undervalued grossly considering the total assets value of the company. The P/E ratio of the company is high in 2010 implying that the company’s stocks offer.

Return and Risk Analysis of the Stock of Saudi Basic Industries Corporation

As a part of this study, this section presents a report on return and risk factors of the stocks of Saudi Basic Industries Corporation (SABIC).

Return Statistics

Since the company is formed in 1976 and the stocks are dealt in TADAWUL for several years, the return from the stock of Saudi Basic Industries Corporation (SABIC) is calculated by drawing the information on the month end closing values of the stock from January 2007 until December 2010, which made up a four-year period. The same method of calculations as followed for Saudi Chemical Company is followed for SABIC also.

The analysis shows that the stock has provided a maximum return of 36.55 % and a minimum return of -32.54% over the three-year period. The mean or average return from the stock is 1.331%.

Variance is calculated by dividing the total of 80.24 by total number of months less one. Threrefore, variance = 80.24 ÷ (47 – 1) = 80.24 ÷ 46 = 1.744

Standard Deviation = √ Variance = √ 1.74 = 1.321

Since the distribution has a less value of standard deviation in relation to its expected return, it indicates that the stock of SABIC has a less degree of dispersion. This has led to higher confidence level of the investor. The interpretation of standard deviation will be clear with the knowledge of normal distribution.

The following table shows the calculation of mean value or average return.

Table: Calculation of Mean Value

Month Return
% (R)
(R1– R) (R1– R)2 Month Return
% (R)
(R1– R) (R1– R)2
Jan-07 12.94% -11.99% 0.0144 Jan-09 -24.76% 0.0613 0.0272
Feb-07 0.78% 10.59% 0.0112 Feb-09 12.88% 0.0166 0.0011
Mar-07 4.13% 5.69% 0.0032 Mar-09 17.81% 0.0317 0.1253
Apr-07 2.48% -6.76% 0.0046 Apr-09 35.21% 0.1240 0.0021
May-07 -10.65% 17.09% 0.0292 May-09 -9.05% 0.0082 0.0182
Jun-07 11.92% 5.74% 0.0033 Jun-09 9.03% 0.0081 0.0167
Jul-07 7.02% 23.57% 0.0556 Jul-09 -2.41% 0.0006 0.0007
Aug-07 -5.43% -18.55% 0.0344 Aug-09 15.46% 0.0239 0.0056
Sep-07 18.42% 12.35% 0.0153 Sep-09 -2.58% 0.0007 0.0236
Oct-07 7.07% -12.73% 0.0162 Oct-09 2.15% 0.0005 0.0044
Nov-07 24.91% 7.00% 0.0049 Nov-09 -0.41% 0.0000 0.0003
Dec-07 -17.22% -7.69% 0.0059 Dec-09 4.12% 0.0017 0.0020
Jan-08 13.69% -1.15% 0.0001 Jan-10 0.68% 0.0000 0.0004
Feb-08 -11.40% -9.00% 0.0081 Feb-10 10.50% 0.0110 0.0001
Mar-08 8.33% -3.26% 0.0011 Mar-10 4.46% 0.0020 0.0025
Apr-08 -6.35% -18.46% 0.0341 Apr-10 -16.57% 0.0275 0.0178
May-08 0.18% -33.87% 0.1147 May-10 -3.58% 0.0013 0.0002
Jun-08 -7.66% -30.91% 0.0955 Jun-10 -1.91% 0.0004 0.0156
Jul-08 -1.93% 1.67% 0.0003 Jul-10 -3.07% 0.0009 0.0008
Aug-08 -17.13% -8.52% 0.0073 Aug-10 4.26% 0.0018 0.0006
Sep-08 -32.54% -11.99% 0.0144 Sep-10 7.30% 0.0053 0.0199
Oct-08 -29.58% 10.59% 0.0112 Oct-10 1.75% 0.0003 0.0046
Nov-08 3.00% 5.69% 0.0032 Nov-10 2.90% 0.0008 0.0006
Dec-08 -7.18% -6.76% 0.0046 Total 80.24 92.27
Beta Analysis

The beta value for Saudi Chemical Company is calculated as below:

Month
(1)
SABIC
Return
% (R)
(2)
(R1– R)
(3)
Tadawul
Return
% (X)
(4)
(X1– X)
(5)
(R1– R)*
(X1– X)
(6)
(X1–X)2
(7)
Jan-07 12.94% 11.61% -17.34% -17.08% -1.98% 2.92%
Feb-07 0.78% -0.55% 6.61% 6.87% -0.04% 0.47%
Mar-07 4.13% 2.80% 3.28% 3.54% 0.10% 0.13%
Apr-07 2.48% 1.15% -0.32% -0.06% 0.00% 0.00%
May-07 -10.65% -11.99% 7.04% 7.30% -0.88% 0.53%
Jun-07 11.92% 10.59% -7.20% -6.94% -0.73% 0.48%
Jul-07 7.02% 5.69% -9.54% -9.28% -0.53% 0.86%
Aug-07 -5.43% -6.76% 4.58% 4.84% -0.33% 0.23%
Sep-07 18.42% 17.09% -8.52% -8.26% -1.41% 0.68%
Oct-07 7.07% 5.74% -10.74% -10.48% -0.60% 1.10%
Nov-07 24.91% 23.57% -17.56% -17.30% -4.08% 2.99%
Dec-07 -17.22% -18.55% 13.40% 13.66% -2.53% 1.86%
Jan-08 13.69% 12.35% -6.13% -5.87% -0.73% 0.35%
Feb-08 -11.40% -12.73% 11.37% 11.63% -1.48% 1.35%
Mar-08 8.33% 7.00% -10.95% -10.69% -0.75% 1.14%
Apr-08 -6.35% -7.69% 5.01% 5.27% -0.40% 0.28%
May-08 0.18% -1.15% 2.53% 2.79% -0.03% 0.08%
Jun-08 -7.66% -9.00% 5.78% 6.04% -0.54% 0.37%
Jul-08 -1.93% -3.26% 0.18% 0.44% -0.01% 0.00%
Aug-08 -17.13% -18.46% 19.51% 19.77% -3.65% 3.91%
Sep-08 -32.54% -33.87% 21.18% 21.43% -7.26% 4.59%
Oct-08 -29.58% -30.91% 16.31% 16.57% -5.12% 2.75%
Nov-08 3.00% 1.67% -3.57% -3.31% -0.06% 0.11%
Dec-08 -7.18% -8.52% -0.12% 0.14% -0.01% 0.00%
Jan-09 -23.43% -24.76% 9.53% 9.79% -2.42% 0.96%
Feb-09 14.21% 12.88% -6.31% -6.05% -0.78% 0.37%
Mar-09 19.14% 17.81% -18.90% -18.64% -3.32% 3.48%
Apr-09 36.55% 35.21% -7.29% -7.03% -2.48% 0.49%
May-09 -7.72% -9.05% 5.38% 5.64% -0.51% 0.32%
Jun-09 10.36% 9.03% -3.02% -2.76% -0.25% 0.08%
Jul-09 -1.08% -2.41% 1.30% 1.56% -0.04% 0.02%
Aug-09 16.79% 15.46% -10.75% -10.49% -1.62% 1.10%
Sep-09 -1.25% -2.58% 0.25% 0.51% -0.01% 0.00%
Oct-09 3.48% 2.15% -1.05% -0.79% -0.02% 0.01%
Nov-09 0.92% -0.41% 3.50% 3.76% -0.02% 0.14%
Dec-09 5.45% 4.12% -2.13% -1.87% -0.08% 0.04%
Jan-10 2.01% 0.68% -3.53% -3.27% -0.02% 0.11%
Feb-10 11.83% 10.50% -5.31% -5.05% -0.53% 0.25%
Mar-10 5.79% 4.46% -0.47% -0.21% -0.01% 0.00%
Apr-10 -15.24% -16.57% 10.05% 10.31% -1.71% 1.06%
May-10 -2.25% -3.58% 0.44% 0.70% -0.02% 0.00%
Jun-10 -0.57% -1.91% -3.12% -2.86% 0.05% 0.08%
Jul-10 -1.73% -3.07% 3.37% 3.63% -0.11% 0.13%
Aug-10 5.59% 4.26% -5.28% -5.02% -0.21% 0.25%
Sep-10 8.64% 7.30% 0.60% 0.86% 0.06% 0.01%
Oct-10 3.08% 1.75% 0.56% 0.82% 0.01% 0.01%
Nov-10 4.23% 2.90% -4.78% -4.52% -0.13% 0.20%
Dec-10 -47.22 36.30

The following steps are involved in the calculation of beta value of SABIC.

  • The average return on the stock of SABIC is calculated (1.331%).
  • The average return of Tadawul is calculated (-0.259%).
  • For both SABIC and Tadawul the deviations from the average return are to be calculated (Columns (2) and (5) in the table above).
  • The deviations of SABIC are to be multiplied by the deviations of Tadawul [Column (6)].
  • The squared deviations of Tadawul are to be calculated [Column (7)].
  • Total of the values derived by the deviations of SABIC multiplied by the deviations of Tadawul is to be calculated [Total of Column (6)].
  • Total of the squared deviations of Tadawul is to be calculated [Total of Column (6)].
  • Beta value is arrived by dividing total of the values derived by the deviations of SABIC multiplied by the deviations of Tadawul by the total of the squared deviations of Tadawul

[Total of Column (6) ÷ Total of Column (7)]

Beta of SCCO = – 47.22% ÷ 36.30% = – 1.3009

Since the beta value of Saudi Basic Industries is – 1.1006 the prices of the stock of SABIC will be moving in the opposite direction to that of Tadawul movements. The beta of S SABIC calculated based on the stock price movements through the financial crisis period and two years after the crisis, indicates that though the global financial crisis had its impact on the growth and profitability of the company during 2009, the company was able to face the negative impact by its strong reserves. The stock value though declined for a short period, has not seriously affected the confidence of the investors on the stocks of the company. The beta value of less than one indicates that although there has been high volatility in Tadawul index during the period of crisis, the stock prices of Saudi Basic Industries has not moved along with the movements of the Exchange. The increased demand for oil and high-energy prices immediately after the financial crisis has helped SABIC to regain its market position and the company has increased its sales and profitability, unaffected by the crisis. Low beta also indicates the high investor confidence in the shares of SABIC, that there were no huge fluctuations in the prices.

Normal Distribution

The 1.321 (13.21%) standard deviation obtained for Saudi Chemical Company for the returns for a period of four years can be interpreted in the following way.

If the stock returns of Saudi Chemical Company are distributed normally, about two-thirds of the returns will fall within 13.21% of the average return of 1.331%. The distribution of returns from the stock of SAIB can be illustrated with the following histogram.

Distribution of Return Percentages

This implies that two thirds of the returns from SABIC stocks will fall between – 11.88% (this figure is calculated as mean –standard deviation = 1.331% – 13.21%) and 14.54% (this figure is calculated as mean + standard deviation = 1.331% + 13.21%).

With a normal distribution of the returns, about 95% of the returns from SCCO stock will fall within two standard deviations. This implies that 95% of the returns will fall between – 25.08% (this figure is calculated as mean – twice the standard deviation = 1.331% – (2) (13.21%)) and 27.75% (this figure is calculates as mean + twice the standard deviation = 1.331% + (2) (13.21%)).

Using Ms Excel function of ‘Normal Distribution’, we have found 29.05% of the returns will fall within -5% of the range and 58.12% of the returns might fall within +5% ranges.

Calculation of Correlation Coefficient

The correlation coefficient indicates the relative movement in one stock as compared with another stock. In this case, for comparing the return performance of SCCO, we have calculated the return percentages of SABIC for the same period from the stock price information obtained from TADAWUL Website. The correlation coefficient of returns from SCCO as compared the returns from SABIC has a value of 0.77. The value of correlation coefficient always lies between – 1 and + 1.

“A correlation coefficient of 1.00 indicates that an increase in the return for one security is always associated with a proportional increase in the return for other security and similarly for decreases. A correlation coefficient of – 1 indicates that an increase in the return for one security is always associated with a proportional decrease in the return for the other security and vice versa,” (Van Horne)

Month
(1)
SCCO
Return
% (R)
(2)
(R1– R)
(3)
SABIC
Return
% (Y)
(4)
(Y1– Y)
(5)
(R1– R)*
(Y1– Y)
(6)
(Y1– Y)2
(7)
Jan-07 11.02% 9.24% 12.94% 11.61% 1.07% 1.35%
Feb-07 -9.16% -10.94% 0.78% -0.55% 0.06% 0.00%
Mar-07 4.20% 2.42% 4.13% 2.80% 0.07% 0.08%
Apr-07 1.61% -0.17% 2.48% 1.15% 0.00% 0.01%
May-07 -7.94% -9.72% -10.65% -11.99% 1.16% 1.44%
Jun-07 12.07% 10.29% 11.92% 10.59% 1.09% 1.12%
Jul-07 2.31% 0.53% 7.02% 5.69% 0.03% 0.32%
Aug-07 -6.02% -7.79% -5.43% -6.76% 0.53% 0.46%
Sep-07 1.60% -0.18% 18.42% 17.09% -0.03% 2.92%
Oct-07 5.51% 3.73% 7.07% 5.74% 0.21% 0.33%
Nov-07 8.21% 6.43% 24.91% 23.57% 1.52% 5.56%
Dec-07 -17.24% -19.02% -17.22% -18.55% 3.53% 3.44%
Jan-08 0.83% -0.95% 13.69% 12.35% -0.12% 1.53%
Feb-08 -5.79% -7.56% -11.40% -12.73% 0.96% 1.62%
Mar-08 40.35% 38.57% 8.33% 7.00% 2.70% 0.49%
Apr-08 5.00% 3.22% -6.35% -7.69% -0.25% 0.59%
May-08 10.12% 8.34% 0.18% -1.15% -0.10% 0.01%
Jun-08 8.65% 6.87% -7.66% -9.00% -0.62% 0.81%
Jul-08 -5.97% -7.75% -1.93% -3.26% 0.25% 0.11%
Aug-08 -7.94% -9.72% -17.13% -18.46% 1.79% 3.41%
Sep-08 -46.90% -48.68% -32.54% -33.87% 16.49% 11.47%
Oct-08 -22.08% -23.86% -29.58% -30.91% 7.37% 9.55%
Nov-08 16.39% 14.61% 3.00% 1.67% 0.24% 0.03%
Dec-08 23.15% 21.37% -7.18% -8.52% -1.82% 0.73%
Jan-09 -14.73% -16.51% -23.43% -24.76% 4.09% 6.13%
Feb-09 -1.59% -3.37% 14.21% 12.88% -0.43% 1.66%
Mar-09 37.18% 35.40% 19.14% 17.81% 6.31% 3.17%
Apr-09 6.40% 4.62% 36.55% 35.21% 1.63% 12.40%
May-09 -11.71% -13.49% -7.72% -9.05% 1.22% 0.82%
Jun-09 14.70% 12.92% 10.36% 9.03% 1.17% 0.82%
Jul-09 4.38% 2.60% -1.08% -2.41% -0.06% 0.06%
Aug-09 -5.69% -7.47% 16.79% 15.46% -1.15% 2.39%
Sep-09 17.14% 15.36% -1.25% -2.58% -0.40% 0.07%
Oct-09 8.40% 6.62% 3.48% 2.15% 0.14% 0.05%
Nov-09 3.50% 1.72% 0.92% -0.41% -0.01% 0.00%
Dec-09 -2.66% -4.44% 5.45% 4.12% -0.18% 0.17%
Jan-10 3.72% 1.94% 2.01% 0.68% 0.01% 0.00%
Feb-10 2.63% 0.85% 11.83% 10.50% 0.09% 1.10%
Mar-10 6.76% 4.98% 5.79% 4.46% 0.22% 0.20%
Apr-10 -11.57% -13.35% -15.24% -16.57% 2.21% 2.75%
May-10 0.49% -1.29% -2.25% -3.58% 0.05% 0.13%
Jun-10 14.25% 12.47% -0.57% -1.91% -0.24% 0.04%
Jul-10 -1.08% -2.85% -1.73% -3.07% 0.09% 0.09%
Aug-10 4.13% 2.35% 5.59% 4.26% 0.10% 0.18%
Sep-10 -12.32% -14.10% 8.64% 7.30% -1.03% 0.53%
Oct-10 -5.00% -6.78% 3.08% 1.75% -0.12% 0.03%
Nov-10 4.26% 2.48% 4.23% 2.90% 0.07% 0.08%
Dec-10 49.92% 80.24%

The correlation coefficient of SCCO with SABIC is calculated as follows:

  • The average return on the stock of SCCO is calculated (1.779%).
  • The average return of SABIC is calculated (1.331%).
  • For both SCCO and SABIC the deviations from the average return are to be calculated (Columns (3) and (5) in the table above).
  • The deviations of SCCO are to be multiplied by the deviations of SABIC [Column (6)].

Covariance of SCCO and SASBIC = Total of deviations of SCCO and SABIC ÷ 47 (Total Number of Observations) = 49.92% ÷ 47 = 1.062

Correlation coefficient of SCCO with respect to SABIC = Covariance of SCCO and SABIC ÷ Standard Deviation of SCCO x Standard Deviation of SABIC

= (1.062)÷ (1.416 * 1.321) = 0.567

In the case of correlation between SCCO and SABIC, since the correlation coefficient is 0.567 with the increase in the return for the stock of SCCO there will be a corresponding increase in the returns from the stock of SABIC. This is evident from the maximum return percentage for SABIC at 36.55% (SCCO: 40.35%) and minimum at – 32.54% (SCCO at

– 46.90%).

Conclusion and Recommendations

Conclusion

The objective of this study was to analyze the impact of the global financial crisis on different sectors of Saudi economy and the correlation between two sectors operating in the economy. With the objective analysis of the financial performance as well as the risk-return analysis of the stocks of two companies, operating in the industrial investment sector and petrochemical sectors of Saudi economy was undertaken.

Certain statistical measures based on the historical movements of stock prices and dividends enable the analysts to form a decision about the impact of the global financial crisis on the financial performance as well as stock values. Some among the widely used ones are mean or average return and standard deviation. This paper made a detailed analysis of the statistical measures as applied to four-year stock price movements of Saudi Chemical Company (Industrial Investment Sector) and Saudi Basic Industries Corporation (SABIC) with the information gathered from the Saudi Stock Exchange TADAWUL.

In the case of Saudi Chemical Company operating under industrial investment sector, this study observed that global financial crisis has not had any impact on the financial performance of the company. The study observes that the increased government expenditure on infrastructure projects might have helped the company to sustain its turnover and profitability to weather the negative impact of the financial crisis. As regards the movements in the stock value with a beta lower than one, the stock value of the company has not moved along with that of the trend in TADAWUL.

On the other hand, Saudi Basic Industries Company, operating under the petrochemical sector was severely hit by the global financial crisis during the year 2009. The turnover and profitability of the company suffered a setback during the year 2009. Reduced demand and high volatility in the oil prices has affected the profitability of the company. However, with renewed demand and increased oil prices, the company was able to regain its financial position in 2010. SABIC also had a beta value of less than one and hence the stock values were more or less consistent with occasional variations due to financial crisis.

The stocks of Saudi Chemical Company and Saudi Basic Industries have a correlation coefficient of 0.567, which implies that the returns from both the companies will move along with each other to some extent. This has been proved by the maximum and minimum returns of both the stocks.

Recommendations

Based on the risk return analysis and the financial performance of the companies operating in the two sectors of Saudi economy, the study recommends that the companies must maintain adequate financial reserves to withstand any negative impact of an economic crisis. Another recommendation may be to protect the exchange fluctuations by proper hedging of the foreign assets. Investments in foreign currencies may be protected by suitable forward contracts. The companies must establish strong treasury departments to ensure that their exposure in different areas is well protected by efficient risk management programs. A review of the risk management practices periodically will help the company to reduce the potential negative impact on the finances of the companies.

Work Cited

Corporate Information.com Saudi Basic Industries Corporation, 2011. Web.

Corporate Information.com Saudi Chemical Company, 2011. Web.

Parasuraman, N R. A Look at the Beta. 2001. Web.

Ross, Stephen A, Randolph W Westerfield and Jeffrey Jaffe. Corporate Finance Seventh Edtion. New Delhi: Tata McGraw Hill, 2005.

SABIC Annual Report, 2010. Web.

Samba Financial Group Key Sectors in Saudi Arabia: Historical Performance and Outlook. 2010. Web.

Saudi-US Relations Information Service, Saudi Arabia Economics – 2011- BSF, 27. 2001. Web.

Shah Anup, Global Financial Crisis, 2010, Web.

Tadawul.com Saudi Basic Industries Corporation, 2011. Web.

Tadawul.com Saudi Chemical Corporation, 2011. Web.

Truman, E. M.. The Global Financial Crisis: Lessons Learned and Challenges for Developing Countries. 2009. Web.

VanHorne, James C. Financial Management Policy XII Edition. New Delhi India: Prentice-Hall of India Private Limited, 2004.

Cite this paper

Reference

EduRaven. (2022, April 3). Financial Crisis Impact on Saudi Market. Retrieved from https://eduraven.com/financial-crisis-impact-on-saudi-market/

Reference

EduRaven. (2022, April 3). Financial Crisis Impact on Saudi Market. https://eduraven.com/financial-crisis-impact-on-saudi-market/

Work Cited

"Financial Crisis Impact on Saudi Market." EduRaven, 3 Apr. 2022, eduraven.com/financial-crisis-impact-on-saudi-market/.

References

EduRaven. (2022) 'Financial Crisis Impact on Saudi Market'. 3 April.

References

EduRaven. 2022. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.

1. EduRaven. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.


Bibliography


EduRaven. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.

References

EduRaven. 2022. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.

1. EduRaven. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.


Bibliography


EduRaven. "Financial Crisis Impact on Saudi Market." April 3, 2022. https://eduraven.com/financial-crisis-impact-on-saudi-market/.