The Impact of Global Economic Crisis on the organizations in oil producing countries - Essay Example

?The Impact of Global Economic Crisis on the organizations in oil producing countries -A Case Study of SABIC Introduction The impact of the financial crisis of 2008-2009 affected the global world with threats to long term objectives including the Millennium Development Goals. Developed Countries, Emerging Economies and Least Developed Countries are suffering the effects, as financial markets have collapsed, lending and investment opportunities declined, exports decreased due to reductions in demands and many countries facing high energy and food prices were incapable of finding the resources to protect their financial institutions from bankruptcy (UNGLS, 2008). This crisis is different from the earlier crises as it spreads very swiftly from one country to another through various means. Even though it is generally agreed that the root of the problem was the housing market in US, it was flared up by the excessive leverage at macro levels by the governments, firms and households in several countries (Kotz, 2009). The economies in Middle East, which were then among the fastest growing in the world; primarily driven by the soaring crude oil prices, were first considered immune, but by 2009 it began affecting the region including Gulf Cooperation Council (GCC) States. Most of the economies including UAE, Qatar, Bahrain, and Kuwait suffered significantly, due to the steep decline in their housing markets, which formed the crux of economic development in these countries. Saudi Arabia Economy: Saudi Arabia, which is the largest economy in the region, too suffered dearly due to its heavy dependent on crude oil, whose prices had retreated at record pace in 2009 (Berkmen et al., 2009). The impact of economic crisis was felt by the firms not only because of the dependence on oil, but also, as a result of numerous government controls over the main economic activities in the economy. The country has at least 25% market share of the world’s petroleum reserves, is regarded as the largest petroleum exporter in the world and plays a very crucial in OPEC deliberations and decision makings. The petroleum sector takes up to at least 55% of the GDP, 90% of export earnings and 45% of all budget revenue. 40% of this GDP is from the private sector. At least, 5.2 million workers play a vital role in the Economy of Saudi and especially in the service and oil sector. In order to reduce the dependence on oil, the government of Saudi Arabia had been encouraging the private sectors to increase the employment opportunities for the fast growing population. It has also begun to allow the participation of foreign investors and private sectors in the Telecom and power generation sectors of the economy. It was expected that the move will motivate other countries in the region to also embrace the concept in their economies. Strategies to diversify the economy and attract foreign investment into the country were given a boost when the government succeeded in joining the WTO in 2005, after many years of negotiation. This success and the high revenues from the oil, then further enabled it to build a very large budget surplus and easily facilitated expenditures on education, infrastructural development, increase government salaries, and make investments in job trainings and other timely and critical developmental projects. This no doubt lay the foundation for the economy to develop in a balanced way, as foreign companies were able to earn significant profits, and in the process transfer hundreds of job skills to local employees, even as the country continue to earn billions of dollars from the sale of oil. The purpose of this proposed research consequently, is to critically examine the impact of global economic crisis on the financial performance and financial position of Saudi Basic Industries Corporation (SABIC), which is the largest listed company in Middle East region. This will entail the strategies used to obtain the results that the financial ratios and other statistical and analytical tools generated, during the study. The financial tools used to effect the measurements will be established industrial tools, and can be applied across organizations, to yield consistent results that will substantiate theoretical concepts that have can be successfully replicated else where. The economic crisis of 2008-2009 has been a popular topic of research among the academic researchers as well as the practitioners, because the period saw a series of crises including financing, liquidity, banking and economic crises. It is believed that these crises may offer several opportunities to observe and establish points of references, which in future could be useful in preventing and alleviating the ill effects of other crises of such magnitude. It is noted that most of the researchers have focused on this topic from the point of view of each country’s economic indicators such as GDP, GNP, inflation rate, exchange rate, unemployment rate, and the prevailing interest rate for each country. According to Arnold (2009), they have often taken an economic or financial perspective and attempted to study the impact of crisis on a sector or a segment of the economy. However, it is believed that the individual capabilities of the internal environment of an organisation can play a crucial role in amplifying or mitigating the impact of any crisis it faces. Therefore, there is a need to focus on the micro level effects of the crisis as well, because it is our belief that this can be accomplished by studying the effects of the crisis on the individual firms. 3. Aims and Objectives The study aims to provide empirical data on the performance of firms in the Middle East economies that were not directly linked to the housing market, to show that the impacts of the falling oil prices affected their liquidity, solvency and leverage, and should have been focused on by the policy and decision makers at al levels. It is hoped also to use the data obtained to influence analyst and academicians in the discipline to re-think their perspectives, so that in the future firms and governments will have more reliable empirical data to make inform decisions that may avert or diminish the effect of future Global Financial Crises. Objectively, the research serves to critically examine and measure the impact of Global Economic Crisis on SABIC Group on companies during the 2008-2009 periods, using scientifically approved financial ratios and to develop a body of empirical data that they can be used to enhance future organizational performance capabilities that will ensure consistent profitability and sustainability. In particular it will be the author’s to take detailed examinations and assessments of how; 1. The external and internal factors like interest and inflation rates, labour cost, government intervention policies, and OPEC production quotas affects the performance of firms in the portfolio of SABIC during the crises of 2008-2009 using the pre-requisite economical and financial tools 2. The direct effect if any of the variation of oil prices on the profitability of SABIC Group of companies during the period 2008-2009, by applying specific and relevant economic and financial tools 3. To find out how the impact of the 2008-2009 global economic crisis affected the liquidity and solvency of SABIC Group of companies, by examining the financial results available 4. To ascertain how the impact of the global economic crisis and government’s interventions changed the strategic management policies of SABIC Group of companies on a quarterly basis, during the 2008-2009 period of operation. The First objective is deemed necessary, because SABIC does not operate in a vacuum, and external factors in the environment like inflation and interest rates, as well as OPEC production decisions will impact the strategies these companies will have to take to remain competitive. 5. Literature Review -Conceptual Frame work Independent variable Dependent Variables Market forces (Author, 2011) 6. The possible causes of the global and economic crisis According to Merrouche and Ner (2010), the major causes for the Global and Economic Crisis between 2008 and 2009, were the build up of global financial imbalances in the sector ahead of the crisis, the role of monetary policies, and poor supervisions and regulations across global economies. The global economic and financial crisis has brought about major challenges to all countries in the world including Saudi Arabia. It has exposed weaknesses in the proper functioning of the economies of the world and caused several global financial experts calling for international financial architectural reforms. Even though the global financial and economic crisis was brought about by the events of the United States housing market, it had also spread to adversely affect investment, trade and growth globally. This crisis has become a serious setback for all the countries in the world, because it occurred at a time with most regions taking measures to improve their economic performance. There were poor underwriting standards for mortgage loans, resulting in a boom in the US housing market, weak regulations and supervision of banks, exposure to the sub-prime security backed financial assets and collaterised obligations (CDO’s), and inappropriate policy incentives (very low policy rates or a prolonged easing in the monetary policy stance), which resulted in abundantly high liquidity. Between 2004 and 2007, a series of monetary tightening by the US Federation, raised borrowing costs and consequently reduced many consumers ability to service their debts when interest rates rose. The high loan defaults, foreclosures and declines in the demands for homes caused MB’s and CDO’s to depreciate significantly in values and as a result inflicted huge financial losses. There were also several bank failures in the developed world, due to exposures to toxic assets and global economic imbalances. 7. Impact of the Financial Sector The rise of the global economic and financial crisis raised fears that the upcoming markets would be exposed to a debacle just likes the one that East Asia faced in 1997. According to ADB (2008), the impact on the asset markets had placed undue pressure on the financial markets; more specifically on economies that have high participation of the foreigners in the local equity markets, those that have deficits of external current accounts and those that have banking systems that relied heavily on funding short term foreign currency. Korea, Indonesia and East Asia underwent serious shortage of foreign currency imbalances, which consequently led to very sharp depreciation in the rupiah and won. The relative resilience and regional banking in East Asia reflects several factors including strong balance sheets which ensure timely return to profitability, minimal exposure to subprime lending as well as other securitized products, improved liquidity and risk management, effective regulatory and supervisory systems and responsible consumer lending by banks intent on remaining profitable. In the year 2008 many of the banking institutions continued to report high rates of return on equity and assets, but overall, the financial sector still remain prone to further consequences of the global economical and financial crisis. According to International Labour Office, economic and financial crisis had adversely impacts on the Asian labour markets, including slowing the growth in employment, whereby employers began reducing the number of recruits, as well as drastically curtailing overtime to streamline cost. Several other sectors, including the financial services and construction sectors, export industry, real estate market, the tourism industry, communication and transport divisions were also negatively affected by the crisis, in terms of employment for school leavers and graduates at the higher level. In Indonesia, and Sri Lanka for example the youth unemployment rate were 25.1% and 25% respectively. Slow wage growth and significant erosions the standards of living were also products of the crises, as reflected in most Asian economies experience negative growth, and increase in their unemployment rates. To demonstrate the gravity of the impact of the crisis on these economies, in the period January and October 2008, a total of 125 factories in Thailand retrenched at least fifteen thousand workers, as the employment market underwent drastic constriction in that country. 8. Impact on profitability According to May and Abdelhak (2010), GCC countries’ economies performed well between the year 2003 and 2008 oil boom, but this boom also posed challenges. The increased economic activities like rising investor and consumer investments, brought on excessive economic growth, increase in the prices of assets and inflation. In some of these countries the growing dependence of banks on foreign financing, as well as exposure to construction of real estates, lending and to a small extent, and the equity market contributed to the vulnerabilities that can arose, when there were slowdowns in the growth of these economies. Corporately, this boom has been closely linked to high leverage, which has in turn increased the vulnerability to rising cost and limited availability of financing. As the global economic crisis persisted, the GCC countries were affected adversely through financial and trade channels. By mid 2008, GCC external positions and government finances were being adversely affected by the decline in demand and reduction in the market prices for oil. In addition, the GCC countries went through speculative capital inflow reversals between 2007 and 2008. These experiences led to a tightening of the liquidity, and erosion of investors’ confidence. This was exacerbated by the collapse of the Lehman in September 2008 which gave way serious deleveraging and shortages in the liquidity. Government Fiscal Model: To reduce the impact of the crisis, governments in the GCC countries increased the spending rates. The government of Saudi Arabia in particular, adopted the largest fiscal stimulus when it introduce outstanding financial measures, including raising the liquidity level and massive financial injections. In accordance with the United States monetary policy in late 2008, and the need to ease domestic credit conditions, GCC countries had their interest rates lowered and reduced the liquidity through injections to the money market as well as statutory changes, which included relaxation of prudential loan to deposit ratio, as well as reserve requirements. The global crisis, according to Nanto (2009), had exposed fundamental weaknesses in financial systems worldwide, and showed how interdependent and interconnected economies are today. However, by means of joint applications of a similar economic model throughout the GCC, the economy was placed on a proper footing to ensure recovery, so that individual organizations can regain their respective profitability and liquidity. 9. Impact on crude oil prices The impact of Oil price volatility is measured with the Vector Auto-Regression (VAR) analysis system that uses N-equation and N variable linear model. Each variable is explained by its own lagged values, as well as the current and past values of remaining n-1 variables according to Rafiq, S. et al (2009). Additionally, the Granger Casualty Test, Impulse Response Functions, and Variance Decomposition analyses according to Rafiq et al (2009), shows that oil price volatility significantly impact on macroeconomic indicators like investments, and unemployment, especially during the 1993 to 2006 period, which was a boon period The Role of OPEC: OPEC plays a lead role in the price oil is sold at, in that it is a lead producer which only set floor to prices. Real Oil prices however, according to Barrell and Pomerantz (2004), display dollar inertia as a result of this policy, is influenced by the dollar real exchange rate. Barrell and Pomerantz (2004), went further to say that changes in oil prices affects the terms of trade between countries that has high dependence on it in terms of importation, raises the GDP, and negatively impact on savings, investments, tax revenues and solvency. Implications for SABIC: The energy companies have been affected in several ways by the current global financial and economic crisis. The first one is tighter credit which has become much more difficult for energy companies to obtain for their ongoing projects as well as for raising new capital for their new projects, soon to commence. Furthermore the increasing share prices will increase the gearing ratios or the long term debt/capitalization ratio, and putting the company on pressure to cut the levels of debt to reduce their risk levels. In some cases, the cost of financing had become very expensive due to increasing lending rates. The second one is low profitability due to increasing price of the oil as well as other forms of energy since 2008. This has made the new projects and investments become less profitable as they are not able to finance projects that had risen beyond budgetary expectations. The third one is reduction in capacity levels. The decreasing demand for energy had lead to a slowdown in the economy and concomitant reduction in supply of new opportunities (IMF 2010). The energy investment industry world wide has been facing a tough financial environment, owing to the weakening demand for energy and the cash flow reductions arising from the global financial crisis. The current trends in demand and capital spending became clear indicators that energy investment had dropped sharply in most of the countries. Both demand and supply are being affected because the energy companies were drilling fewer gas, coal and oil wells, and cutting back on pipelines, power stations and refineries at the same time. Reductions in demand lowered the supply curve for barrels of oil, and resulted in lower than expected equilibrium price, which makes production unprofitable for OPEC, unless there are government interventions in the market. Many of the ongoing projects have had to be slowed down, with those that have been planned for being cancelled or postponed due to lack of funds or due to down ward revision in the profit expectations. Lower prices as well as tighter credit has made investment in energy less attractive while the global crisis persisted, and caused end users to divert their funds to other portfolios as defensive measures. Although it is considered that the economic and financial crisis were the main cause of sharp and sudden economic down turn in 2008, other factors including high oil prices between 2003 and 2009 were attributable. The high oil prices made the economies of countries more prone to financial crisis, because it erases their trade balances, drives up inflation levels and interest rates as well as reduce business incomes. These concerns made Saudi Arabia called for the Jeddah Energy meeting on 22nd June 2008, which was aimed at enhancing the relationship between the producers and the consumers, in light of the volatile oil prices. According to a research carried out by IEA in 2006, the persistent rise in the prices of over the past few years, lowered the world GDP growth by an average of 0.3% each year, which also drew the attention to the fact that further increases would threaten economies by worsening the account imbalances and accelerate upwards prevailing interest rates. Capital Flight: Ravichandran and Maloain (2010) observe that most of the developing economies suffered from the economic crisis primarily due to the pulling out of capital by the foreign institutions. However, the authors note that the impact of the crisis on the GCC economies was primarily transmitted through the crude oil price variations. It is observed that during the period of crisis there was a steep decline in the price of crude oil, as the markets discounted the sharp decline in the demand for crude oil. This affected most of the GCC economies which were significantly dependent on the crude oil revenues. Composition Model: Using error composition model, the authors examine the relationship between crude oil and the economic performance of the states in GCC including Saudi Arabia. The authors confirm that the asset markets including the stock markets in the GCC states were weakened during the period of crisis. It is also noted the once the crisis was over, the markets strengthened in GCC. This also coincided with the recovery in the crude oil prices. This research evidently shows that the crisis directly impacted GCC economies including Saudi Arabia through the crude oil route. Arouri and Rault (2010) observe that most of the researchers had focused on the impacts of crude oil on the performance of net oil-importing economies. However, very few researchers directed their attention on the impact of the crude oil prices on the markets in the net oil-exporting countries. The authors use the data on both weekly and monthly bases in order to study the impact of crude oil price variations on the performance of stock markets in GCC economies. Statistical Evidence: The authors show that there is “strong statistical evidence that the causal relationship is consistently bi-directional for Saudi Arabia”. In other words, it was confirmed that the crude oil prices Granger, caused stock market fluctuations in Saudi Arabia, which in turn caused Granger crude oil price variations. In further analysis, it was noted that stock market price variations in other GCC markets did not cause Granger changes in oil prices. However, the oil price variations Granger cause stock market changes in GCC countries other than Saudi Arabia. Reinikka (2010) observes that the 2008-09 economic crisis impacted GCC economies in the MENA region, through two different channels. Firstly, the economic crisis caused a drop in oil prices due to trade balances being adversely affected in most of the GCC economies, and secondly, the crisis led to lack of confidence and consequently a financial crisis in domestic markets, which led to major write-offs in the domestic banks and a general curtailing of lending capacity. On the basis of these factors, the authors note that those economies which had fragile and over-leveraged banking sectors, as well as those that were mostly dependent on the crude oil exports were the worst affected among the GCC economies. Economic Analysis The authors used economic analysis to show that the GCC oil exporters suffered the most during the crisis, while the oil importers were affected only to a limited extent. Source: Reinikka (2010) Reinikka (2010) cited that the economies were impacted through an increase in unemployment rate, which has been a major problem for most of the GCC economies including Saudi Arabia for many years. 10. Impact on Liquidity The global financial stock market actually struggled due to the liquidity crisis. According to Thakkar R (2010), the Indian economy which heavily depends on external funding, had been affected by the liquidity crisis emanating from the global economic and financial crisis. Indian companies, like those in Saudi Arabia, depended heavily on European and the US economies, and suffered immensely during the crisis and have learnt their lessons for the future in terms of crafting more appropriate management strategies. Leveraging: In order to strengthen their positions in the markets, these companies have had to leverage themselves and at least take advantage of the economic booms that took place between 2003 and 2007. The financial crisis and the down turns in the economy have brought corporate distress and have left many wondering about their solvency. According to the Global Financial Stability Report (2009), the emerging economies face rollover needs of over $1.8 trillion in 2009. External funds were quickly cut off even more than it had been projected. in relation to the intense global deleveraging and deteriorating economic prospects. Medium and Small Enterprise: This is also most likely to affect medium and small enterprises as the large borrowers who used to depend on foreign borrowers would turn to the local banks for borrowing so as to meet their financial needs. It then becomes like a double-side sword for the Small and Medium Enterprises (SME’s) as there will be decrease in demand for their goods and services as well as their inabilities to maintain their own liquidity. It is important to note that the growth of the SME’s is the most significant contributor to the growth and development of an economy as a whole. The deterioration of the exchange rate made the situation worse as it caused these companies balance sheets to become overburdened with heavy debt repayments. Looking at revenues, many of the large companies have resorted to selling their receivables to banks and factored without or with recourse. Therefore, they occupy holding positions to earn premiums on those buyers or customer who are not in a position to pay their debts on time, and end up spending even more on interest in recovering their debts. *11. Management Strategy During the global crisis, managers of organizations were challenged to deliver the most appropriate business strategies that will enable lost market share, low profitability, depreciating liquidity, solvency, bankruptcy, falling share prices, rising energy cost due to fluctuation of oil prices, high operational expenses and other variables to fall within operational expectation, so that their companies can remain prosperous and competitive. According to Navarro (2006, p.21), managers has to ensure they have an understanding of what corporate and business strategies are before that will be able to implement the five basis steps necessary to ensure successful strategies are delivered, especially during global crises. Corporate strategy, according to Navarro (2006, p.21) is the overall strategy of as multi-business company. A company like Motorola for example had several business units, namely Broadband Communications, Commercial, Government and Commercial, Global Telecom Solutions, Integrated Electronic Systems, and Semiconductors Products when new Chief Executive Officer Ed Zander took over the company. His job at the outset was to come up with a game plan or a corporate plan for these companies, and this may entail cutting, expanding or contracting selected entities for the overall success of the company, according to Navarro (2006). Business Strategy is the overall strategy of any of the business unit in the organization to serve it particular market segment, according to Navarro (2006, p.22) which may include a standalone approach or the venturing into new markets to ensure goals and objectives are met. According to Navarro (2006. 21), managers pursuing corporate or business strategies has to set firm goals, conduct external and internal analyses, develop competitive advantages, choose competitive strategies and design organizational structures to ensure these variables are accommodated in the pursuit of profitability, and maintain solvency and effective leveraging ratios required to withstand market variations. In the analysis of SABIC in the Middle East, the corporate and business strategies of the different entities, as well as the overall organizations will be examined in light of the 2008-2009 Global Crises, to see the effects of different factors of the crisis on their performance. *12. Financial Ratio Analysis Organizational performances are assessed using financial ratios, which gives indications of their relative importance, as well as their propensity for utilization of specific strategic planning to effect growth and development under different economic conditions. Ratios are also important in drawing comparisons among companies operating within specific industries and economies, as well as points of reference for the development of certain structures necessary to achieve desired goals and objectives within different frameworks. Evidence of trouble within firms according to University of Notre Dame (2011), as far back as five years preceding their eventual failures or even bankruptcy, are given by the different financial ratios, but in many cases, managers may not be able interpret and relate to them. Liquidity ratios, leveraging, stock market ratios, earnings per share, price earning ratio, and dividend ratio are common examples of the ratios used in the analysis of the performance of firms in different industries, even at the global level. The liquidity of a firm is a measure of its financial health and is computed using the current ratio and quick ratio. Current Ratio= Current Assets ? Current Liabilities Quick Ratio = (Cash+ Market Securities+ Net Receivables) ? Current Liabilities Leverage: A combination of debt and equity are used to finance firms, and the right capital structure depends on the prevailing tax policy and on the overall corporate risk in the different environments (University of Notre Dame, 2011). Companies that are concerned with threats of bankruptcy are interested in long run solvency or leverage. Debt to Asset Ratio and Debt to Equity Ratio are the two components used to measure leverage within a firm. Debt to Asset Ratio = Total Liabilities ? Total Assets Debt to Equity Ratio = Long Term Debt ? Shareholders Equity The ratios differ across industries due to the unique characteristics and environment associated with each segment, according to The University of Notre Dame (2011). Rates of Return measure the profitability using Return on Assets (ROA), and Return on Equity (ROE) ratios. ROA= Net Income? Total Average Assets. ROE= Net Income ? Total Stockbrokers Equity Stock Market Ratios for firms are calculated using the income statements and balance sheets reports of different firms. Earnings per Share (EPS), Price Earning Ratio (PE) and Dividend Yield Ratio are used to measure Stock Market Ratios (University of Notre Dame, 2011). EPS= Net Income- Preferred Dividends? Common Shares Outstanding PE= Market Price per Share ? Earnings per Share Dividend Yield= Annual Dividends ? Price per Share In assessing the different firms within SABIC, these ratios and others will be used to measure the impact of the 2008-2009 Global Crisis on their performance. The application of these ratios will generate consistent results, which can be used to provide empirical data to substantiate the hypotheses postulated by the author. 13. CONCLUSION From the preliminary review of research papers conducted in this section, it is evident that almost all the researchers have found significant negative impact of economic crisis on the performance of economies, and the stock market performances of the GCC economies including Saudi Arabia. The papers have showed how the global economic and financial crisis had impacts on the liquidity of a company, return to profitability, solvency and efficiency of a company. 14. Type of Research It is proposed that this research use quantitative research approach to identifying solutions to the research questions, as it as it will provide the researcher with historic price information as well as economic data to measure the impact of economic factors on the performance of SABIC and other companies in GCC. Data collected from the different SABIC companies after processing, and the results compared with the proposed hypothesis. It is hoped to use the results in the final analysis to confirm the validity of the approach, so that the conclusions regarding the proposed hypothesis were indeed correct. 15. Research Design and Methodology This research adopts case study methodology involving companies incorporated the under SABIC organization. These companies were selected on the basis of, (a) their involvement in manufacturing of various chemicals, industrial polymers, fertilizers and metals, (b) limited exposure to the housing or real estate sector. The rationale behind the approach is that most of the companies and business groups in the GCC region has shown a tendency to get involved in housing market and since the impact of crisis might have been particularly harsh on the housing sector in general it would be better to focus on companies that has interest in other areas of business to see how the crisis will impact on their performances. Additionally, these group of companies are regarded the largest listed in the GCC region and as such were financially stable before the crisis to finance their operations successfully. The impact of the crises on their solvency, liquidity, and profitability, due to the changes in the prices of oil will therefore be ideal standards to measure other companies in the different economies. SABC companies were also chosen, because it was easy to obtain financial and other important data, unlike most of the large business groups in Middle East, particularly in Saudi Arabia, are owned by families and are not typically open to external investors. Ratio Analysis Methodology: Ratio analysis will be the method for studying the impact of crisis on different aspects of the financials of these companies. It will be performed from both time series as well as cross-sectional perspectives. The time series analysis allows the researcher to study the trends in different ratios over the years. Deviations during the period of crisis will be areas of special focus for the research, as it will provide the critical data necessary for proving the accuracy and validity of the hypothesis. Cross Analysis and Cointegration: Cross sectional analysis allows the researcher to compare the financial ratios of the various entities of SABIC engaged in manufacturing of chemicals, fertilizers and polymers, while Co-integration analysis will study the causal relationship that the stock returns of these companies shares with some of the relevant variables including crude oil, S&P 500 and Saudi Arabia’s GDP. Cointegration analysis is identified as the suitable technique on the basis of the review of Arouri and Rault (2010). In this case, Cointegration is used to study the relationship between crude oil and each one of the major economic variables of interest. The following are the relationships tested using co-integration. Ri = ?1 + ?1Ci + ui Ri = ?2 + ?2Si + ui Ri = ?3 + ?3Yi + ui Where, Ri is the monthly return on SABIC’s stock, Ci is the percentage change in crude oil on monthly basis, Si is the percentage change in S&P500 index, Yi is the growth rate of Saudi Arabia’s GDP, and ?1, ?2 and ?3 are the slope coefficients Deduction: The use of co-integration analysis on the above sets of equations will help to ascertain whether each of crude oil price changes, the S&P500 returns and Saudi Arabia’s GDP growth rate Granger causes returns on SABIC’s and other companies stock. Work Cited Arnold, P. J. (2009). ‘Global financial crisis: The challenge to accounting research’, Accounting, Organizations and Society, 34(6-7), 803-809. Arouri, M. E. H., Rault, C. (2010). ‘Oil Prices and Stock Markets: What Drives What in the Gulf Corporation Council Countries?’ 2010 CESifo Working Paper Series No. 2934 Barrell, R., Pomerantz, O. (2004). Oil Prices and the World Economy NIESR Discussion Paper Retrieved from www.un.org/en/development/desa/policy/project..., on 08/21/11 Berkmen, P., Gelos, G., Rennhack, R. K. & Walsh, J. P. 2009 ‘The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact’, IMF Working Paper No. 09/280. IMF (2010) “The Impact of the Global Financial Crisis on the GCC Region: Lessons and Reform Priorities” 2010 Retrieved on 7th August 2011 from http://www.oecd.org/dataoecd/23/16/46758795.pdf Kotz, D. M. (2009) “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism”, Review of Radical Political Economics, 41(3), 305-317. Khamis M & Senhadji A (2010) “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update” Retrieved from http://www.imf.org/external/pubs/ft/dp/2010/dp1002.pdf on 08/14/11 Merrouche, O., Ner, E., (2010) IMF Working Paper: What Caused the Global Financial Crisis-evidence on the drivers of global financial imbalances 1999-2007 International Monetary Fund 2010 WP/10/265 Retrieved on 24th August 2011 from www.imf.org/content/pubs/ft/wp2010/wp10265.pdf Nanto, D.K. (2009) “The Global Financial Crisis: analysis and policy implications” Congressional Research Service Retrieved from: www./fas.org/sgp/crs/misc/RL34742.pdf on 08/17/11 Navarro, Peter, 2006. What the Best MBA’s Know The McGraw-Hill, New York Rafiq, S., Salim, R., & Bloch, H., (2009). Impact of Crude Oil Volatility on Economic Activities: an empirical investigation on the Thai Economy Journal of Royal Statistical Society Retrieved from www.sciecedirect.com/.science/article/pu/50301420708000536 on 08/21/11 Ravichandran, K., Maloin, A. M. (2010). ‘The Global Financial Crisis and Stock Market Linkages: further evidence on GCC market’, Journal of Money, Investment and Banking, 16, 46-56. Reinikka, R. (2010). ‘The financial crisis, recovery, and long-term growth in the Middle East and North Africa’, in Canuto, C. and Guigale, M. (eds.) The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, World Bank Publications SABIC (2011) About SABIC, Retrieved from: http://www.sabic.com/, Date accessed 23/5/2011. University of Notre Dame, 2011. Financial Ratios Explanations Managerial Economics Retrieved from www.nd.edu/~mgrecon/simulation on 08/18/11 Read More