Alshammary, Meshaal (2014) An Investigation of the Relationship between Capital Market Development and Economic Growth : the Case of Saudi Arabia. Other Degree thesis, Victoria University.

Abstract

This thesis investigates the long-term and short-term relationships between capital market development and economic growth in the Kingdom of Saudi Arabia (KSA) for the period from 1970 to 2010. It employs a wide range of vector autoregression (VAR) and Vector Error Correction (VECM) models, Unit roots tests, optimal lag tests, Johansen-Juselius cointegration tests and Granger causality testes to evaluate the importance and impact of capital market development on economic growth. Using real GDP growth rate (RGDPR) and real non-oil GDP growth rate (RNOIL) as proxies for economic growth and LM1, LM2 and bank credit to private sector (LBCP) as proxies for the capital market development. The vector-autoregression models (VAR) indicates significant long-term causal relationship among all the variables in the system. Granger causality tests show a bidirectional causal relationship between the economic growth variable RGDPR and the capital market when proxied by the bank credit to private sector (LBCP). However, Error-correction models results show no relationships in the short-run. The thesis implications are as follows. Firstly, investment in real economic activities leads to economic growth. Secondly, the stock market might hinder economic growth due to its volatile and international risk sharing nature, low free-floating share ratio, number of listed companies, the domination of Saudi Individual Stock Trades (SIST) characteristics and the small size of the least active and limited bond and ETF markets. Thirdly, policymakers should seek to minimise stock market volatility and fluctuations, increase all the free-floating share ratio, number of listed companies, size and offering in the bond and ETF markets and shift investment domination toward corporate investors by considering its effect on economic growth when formulating economic policies. Fourthly, the banking sector might hinder economic growth due to its lack of small and medium enterprises lending and shareholder concentration issues. Finally, policymakers should seek to encourage banks toward more involvement in small and medium enterprises SMEs’ lending, which will strengthen the private sector role.

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