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Financial Markets and Instruments

Under the regulatory instrument, emphasis is on the use f commercial paper by larger corporations or companies who have had the backing of an issuing bank, promising to make settlement for the quotation on the face of the commercial before or on the date specified. Like in most other financial jurisdictions, the issuance of commercial paper is not guaranteed by a collateral and so the need for strict regulations that ensure that such instruments on the money market are used only by corporations that have been rated with excellent credit rating status (Fombrun, 2012). 2. At different times in the economic management of the country, the government of the Kingdom has had the need to generate both long term and short term financing. As far as short term financing is concerned, emphasis has always been on the use of short term financing to take care of short term debt financing. One of the commonest instruments used in this case is overdraft, whereby it transmits cash that are beyond available funds (Greenley and Foxall, 2011). On the long term also, the use of equity investment ranks as the commonest form of financing that the government undertakes. Often, this is done by targeting local industries and buying and holding shares of the stocks of such businesses for projected capital gains and dividend growth. Commonly, equity investment has been selected in cases where investments have been proven to have high information asymmetries and moral hazard (Drumwright and Murphy, 2001). 3. With a global rank of 40, the Macro Economy Meter (2013) rates the total outstanding debt of the Kingdom of Saudi Arabia as $134 billion. Of this total outstanding debt, the share of public debt has been calculated to be 12.9% of the gross domestic product of the country, coming up to $6.6 billion. According to the CIA World Factbook, the Kingdom of Saudi Arabia as of 31 December 2012 had a total outstanding external debt of $127.4 billion. By this, it means the government of the Kingdom owed this amount to public and private entities that were nonresident of the country and thus repayment had to be done in either foreign currency, goods or services (Fombrun, 2005). Because these external debts are paid through foreign currency, they are calculated based on exchange rate base rather than the use of purchasing power parity terms. 4. Since 2001, the annual total value of new borrowing by the Kingdom of Saudi Arabia has generally been experiencing and upward rise trend. This means that the rate of borrowing done by the government has been increasing consistently by the year. In the graph below, it would be noted that but for the periods from 2003 to 2005, and 2008 to 2009, the annual total value of debt has been increasing, indicating a rise in new borrowing. Source: Marco Economy Meter (2013) Based on readings from the graph, McAlister and Ferrell (2012) have argued that the new borrowing that is done by the Saudi government on a monthly basis is US $1.2 billion, coming up to an annual total of $14.4 billion. With this value, the debt-to-income ratio of Saudi Arabia has been estimated to be very high, leading to annual per capita income of $25,000. 5. The use of stripped coupons is not illegitimate in the Kingdom of Saudi Arabia but not a commonly preferred form of debt financing or financial capital generator. This is because in the use of stripped coupons, there are often two stripped parties, one of which receives the principle as zero-coupon bond when the bond is ...Show more

Summary

FINANCIAL MARKETS AND INSTRUMENTS 1. In the Kingdom Saudi Arabia, the use of money market is very active as a means of provision of liquidity funding for most transactions that take place on short term basis with asset maturity period of less than a year (Hargroves, and Smith, 2005)…
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