Assessing the Impact of Stock Market Development on Economic Growth in Saudi Arabia:
An Empirical Analysis

Abstract

The relationship between stock market development and economic growth has long been a significant subject of debate. Some argue that a well-functioning stock market can have an accelerating effect on economic growth by channelling more savings to investment and enhancing capital productivity through the efficient allocation of resources. In contrast, others hold that stock market development has little relevance to real economic activity or even that may be harmful to the economy. The majority of empirical studies on this topic focus on advanced markets and developed emerging markets, and no major study exists for markets in petroleum-based economies, such as Saudi Arabia. This research therefore aims to conduct an empirical analysis of the overlooked role of stock market development in the economic growth process in the case of Saudi Arabia; thereby it aims to examine the effect of stock market development on economic growth in Saudi Arabia.
In order to achieve the research aim, a mixed method approach is taken, combining quantitative and qualitative methods to enhance the study’s validity and reliability. In the initial empirical chapter, time-series econometric analysis is utilised to measure the nexus between economic growth and stock market. After treating the data for time series features, the OLS regression analysis showed the market capitalisation (LNMC) variable was statistically significant in all of the results presented. In addition, the number of shares traded (LNNST) was found to be significant in all of the results, except in the non-oil PSGDP model. These results indicate that the Saudi economy in general still relies on oil revenues and fiscal policies. As part of the econometric analysis, the results of the Granger causality analysis produced inconclusive results, which revealed that the government plays an active role in the economy and intervenes when the macro-economic performance does not achieve the desired results. These interventions seem to be situational rather than long-term and structural. The causal relationships from the independent variables of the financial markets weakened, when the influence of the oil revenues was removed from the equation, suggesting that the Saudi financial markets still rely heavily on oil revenues. Finally, the results of Error Correction Model or ECM with all the models for GDP showed that there is a bi-directional causality that runs from GDP, NOGDP, NOPSGDP, GFC and NOGFC to MCR, and to NST. The Error Correction Model of ECt-1 shows that the significant results indicate the speed of adjustment to the long-run equilibrium, and reveal the direction of causality.
Secondly, in an attempt to provide qualitative meaning to the results, eighteen interviews were conducted with respondents closely linked to the stock market, in order to elicit their opinions. These interviews complemented the empirical work and added better understanding to the study’s findings. The analysis of the interviews shows that the Saudi stock market is an emerging market, which has undergone several stages of development. Some of the interviewees were optimistic, believing that movements of stock market prices over the next five years may be more stable as a result of the strength of the Saudi economy. Those with an optimistic outlook saw more stability, improvement and profits, while those with a more pessimistic outlook foresaw more volatility, fluctuations and losses.