“Macroeconomic factors influencing the Saudi balance of payments’ current account dynamics from 1995 to 2019”

Reliable development reports highlight persistent deficits in developing countries’ balance of payments since the 1980s and 1990s, attributed to monetary turmoil and ambitious development plans. Saudi Arabia faces similar challenges as the leading economy in the Middle East and North Africa region. The objective of this study is to pinpoint the macroeconomic determinants influencing Saudi Arabia’s current account balance from 1995 to 2019. This aligns with the objectives of Saudi Vision 2030, which emphasizes economic diversification and sustainability. Eleven macroeconomic determinants were subjected to the Principal Component Analysis model and the Autoregressive Distributed Lag model for analysis. Five determinants, such as budget balance, goods exports, per capita gross domestic product, gross domestic product growth, and domestic liquidity growth, were identified as significant contributors to the current account balance. The Autoregressive Distributed Lag model revealed that goods exports, domestic liquidity growth, gross domestic product growth, and per capita gross domestic product exert a statistically significant positive impact on the current account balance in the long term. The research findings highlight the significance of goods exports, economic growth, and domestic liquidity in shaping Saudi Arabia’s current account balance, emphasizing the need for diversification away from oil dependence to mitigate economic vulnerabilities. The study underscores the implications for Saudi Vision 2030, stressing strategic policy interventions to foster non-oil exports and stimulate economic growth. Additionally, the analysis identifies temporal variations in export dynamics, emphasizing the importance of policy continuity and adaptability for economic resilience.


INTRODUCTION
Development reports from reputable international institutions such as the International Monetary Fund, the World Bank, and the United Nations Trade and Development Organization have indicated a persistent trend towards deficits in the balance of payments of a group of developing countries since the 1980s and 1990s.This phenomenon is attributed to the monetary turmoil prevalent during that period.The escalating deficits are linked to the pursuit of ambitious development plans, despite the limited resources available to finance such programs.
Given the heavy reliance on imports and continuous pressure on the exchange rates of national currencies, these countries have experienced a decline in confidence from both local and foreign investors, further contributing to their deficit.
This study seeks to identify the critical macroeconomic determinants of Saudi Arabia's current account balance from 1995 to 2019.Eleven economic determinants, grounded in prior research, are presented, including the ratio of foreign reserves to gross domestic product, the ratio of the balance of the general budget to gross domestic product, the ratio of total goods exports to gross domestic product, the ratio of total goods imports to gross domestic product, the external openness rate, the ratio of average per capita gross domestic product, the inflation rate, gross domestic product growth rate, the ratio of the total investment to gross domestic product, the ratio of foreign investment to gross domestic product, and domestic liquidity growth rate.
Aligned with the objectives of Saudi Vision 2030, this study addresses non-oil investments and their impact on Saudi Arabia's economic diversification and its reflection on the country's export capacity, investment stimulation, and attractiveness of foreign investments, thereby influencing the current account balance.
To the best of the authors' knowledge, this study stands as one of the few recent examinations of the current Account Balance in the context of Saudi Arabia, aligning with the objectives outlined in Saudi Vision 2030.As such, it lays a solid groundwork for future research endeavors in this domain.The study significantly contributes to the literature on the current account balance through various dimensions.It represents the inaugural scientific data analysis addressing the current account balance in Saudi Arabia, encompassing pivotal explanatory variables applicable to oil-exporting nations.The insights garnered extend beyond academia, offering valuable information for governmental bodies, regulatory agencies, and public officials, shedding light on the factors steering current account dynamics.Notably, the study holds lessons pertinent to the realization of Saudi Vision 2030.
The subsequent sections of this study include a literature review, a discussion of data and methods, an analysis of estimated results, and concluding remarks with policy implications.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
Existing scholarly works have predominantly centered on the impact of economic growth on current account balance, particularly during the notable decline in oil prices in 2014, which received considerable attention.In contrast, this study surpasses prior research efforts by scrutinizing this association over a three-and-a-half-decade period, utilizing annually gathered data encapsulating recent developments.This study injects a fresh econometric perspective, underscoring the substantial significance of oil pressures as a primary determinant of inflation, especially in times of economic turbulence and geopolitical risks.By delving into this intricate relationship, the study furnishes guidance and indispensable insights for enterprises, monetary policymakers, governments, and international institutions.
Numerous studies on the balance of payments of oil-exporting countries over the past three decades emphasize the imperative of corrective measures to stabilize their balance of payments in response to recurrent collapses in oil prices (Karamelikli et al., 2017;Tlemsani, 2021).In alignment with this economic context, Saudi Arabia, as outlined in its Vision 2030, strategically pursues domestic and international investments diversifying beyond the hydrocarbon industry.
The current account balance holds paramount importance within any country's balance of payments, offering a precise reflection of economic, financial, and investment trends.Saudi Arabia's current ac-count balance, unlike many countries, had maintained a surplus for an extended period due to rising oil prices.This study explores the principal determinants influencing Saudi Arabia's current account balance from 1995 to 2019.The motivation for this study stems from the fundamental understanding that current account balances play a pivotal role in shaping a country's foreign investment position.The academic literature encompasses four distinct paradigms regarding the impact of economic growth on the current account balance (Blanchard, 2007;Ghosh & Ostry, 1995).Conversely, during periods of low economic growth, governments may encounter challenges in achieving tax revenue and budget deficit targets, leading to inflows in the current Account Position (Barro, 1974).The Ricardian equivalence theory posits that the current account balance is cyclical (Nickel & Vansteenkiste, 2008).
Significantly, an escalation in the real exchange rate and a deterioration in the terms of trade con-tribute to worsening current account deficits in the transition region, aligning with Thirlwall's Balance of Payments Constrained Growth Model (Thirlwall, 1979).Additionally, the intertemporal approach underscores the dynamic nature of current account balance and its close ties to consumption and investment decisions (Gandolfo & Goldberg, 2005).These models highlight the role of temporary changes in cash flow, terms of trade, and productivity in influencing a country's borrowing or lending behavior through the current account, treating it as a shock absorber (Obstfeld & Rogoff, 1994 Alternatively, the vector autoregression (VAR) estimating methodology was employed to explore key determinants of current account balances for South Asian economies from 1980 to 2020.Findings indicated that exchange rate depreciation significantly enhanced current account balances, while higher per capita income, trade openness, and net foreign capital inflows did not threaten them.The fiscal deficit had no significant impact, except for Bangladesh and Nepal, where increasing savings negatively affected current account balances (Mallick, 2022).
Notably, the employed technique for long-term coefficient estimation was found less favorable in prominent oil-exporting nations such as Saudi Arabia.This method, when used with scientific data testing, particularly in countries heavily reliant on macroeconomic variables like oil, failed to identify significant determinants of current account balances.
This study aims to address this gap by employing two less-utilized techniques, overcoming limitations identified in previous studies, and providing new insights into the determinants of current account balances, especially in contexts marked by oil dependency and political stability.
Considering the comprehensive review of the literature above, the following hypotheses are formulated: H1: There exists a positive and significant relationship between macroeconomic determinants and the current account balance of Saudi Arabia.

H1a:
The ratio of foreign reserves to gross domestic product exhibits a positive and significant relationship with the current account balance of Saudi Arabia.
H1b: The ratio of the general budget balance to gross domestic product shows a positive and significant relationship with the current account balance of Saudi Arabia.
H1c: The ratio of total goods exports to gross domestic product displays a positive and significant relationship with the current account balance of Saudi Arabia.
H1d: The ratio of total goods imports to gross domestic product demonstrates a positive and significant relationship with the current account balance of Saudi Arabia.
H1e: The external openness rate is expected to have a positive and significant relationship with the current account balance of Saudi Arabia.H1f: The ratio of average per capita gross domestic product is anticipated to exhibit a positive and significant relationship with the current account balance of Saudi Arabia.
H1g: The inflation rate is hypothesized to have a positive and significant relationship with the current account balance of Saudi Arabia.
H1h: The gross domestic product growth rate is expected to show a positive and significant relationship with the current account balance of Saudi Arabia.
H1i: The total investment to gross domestic product ratio is expected to demonstrate a positive and significant relationship with the current account balance of Saudi Arabia.

H1j:
The ratio of foreign investment to gross domestic product is anticipated to have a positive and significant relationship with the current account balance of Saudi Arabia.
H1k: There exists a positive and statistically significant association between the domestic liquidity growth rate and the current account balance of Saudi Arabia.

METHOD AND DATA ANALYSIS
This study scrutinizes the principal determinants influencing the current Account Balance in the Kingdom of Saudi Arabia.Additionally, two essential steps were undertaken subsequent to variable determination and data collection: 1) a pre-processing step involving data screening and the identification of the most pertinent determinants for the study through principal component analysis; 2) a processing step focused on modeling the intricacies inherent in the study.
This step specifically delved into cointegration processes using autoregressive distributed lag to explore the relationship between the study determinants in both short-term and long-term perspectives.

Data pre-processing and data screening
For the purpose of data screening, assessments were conducted for missing values, outliers, and adherence to normality distribution.

Principal Component Analysis
During this phase, all determinants underwent inclusion in principal component analysis to discern the most pivotal factors influencing the Kingdom of Saudi Arabia's current account balance.As illustrated in Figure 1, a subgroup comprising five determinants (goods exports, domestic liquidity growth, budget balance, per capita gross domestic product, and gross domestic product growth) encapsulates the current account balance.

Utilization of a scatter plot
In the subsequent phase, a scatter plot was utilized to further affirm the significance of the determinants under examination in this study.Figure 2 attests to a linear relationship between the current account balance and five specific determinants: budget balance, goods exports, per capita gross domestic product, domestic liquidity growth, and gross domestic product growth.

Categorization of the study period based on governmental policies
This analysis involves classifying study years into subgroups, covering the period from 1995 to 2019.Three distinct subgroups are delineated as follows: • 1995 to 2003: Characterized by the decline in oil prices and, consequently, the reduction in Saudi exports; • 2004 to 2006: Marked by the rise in oil prices and, consequently, the increase in Saudi exports; • 2014 to 2019: Defined by the decline in oil prices and, consequently, the reduction in Saudi export revenues.

Descriptive analysis
In this phase of the study, data processing is undertaken, and the initial step involves a descriptive analysis.
Observing Figure 5 alongside the summary statistics presented in Table 1, it is evident that all determinants exhibit substantial volatility.It is noteworthy that the data are presented on an annual basis.The mean values of all determinants fall within the range of 2.26 to 43.4.Additionally, the standard deviation for the majority of determinants exceeds 11, with the exceptions being gross domestic product growth (3.12) and domestic liquidity growth (5.94).

Modeling using Ordinary Least Squares
Following the identification of the five crucial determinants (budget balance, goods exports, per capita gross domestic product, domestic liquidity growth, and gross domestic product growth, Ordinary Least Squares (OLS) were employed to assess the impact of these determinants on the current account balance.
The results, as presented in Table 3, indicated insignificant effects on current account balance (Durbin-Watson statistics = 0.54), suggesting the potential presence of a spurious regression (Durbin-Watson < R 2 ), despite a high coefficient of determination (R 2 = 0.89).This renders the model invalid, necessitating the consideration of cointegration among all study determinants (cointegration modeling).

Stationarity analysis
To assess stationarity assumptions, both difference stationary and unit roots were employed for the endogenous variables of current account balance, bud-

Figure 5. Evolution variables of the study
get balance, goods exports, per capita gross domestic product, domestic liquidity growth, and gross domestic product growth.The findings revealed that the determinants exhibit stationarity at the first difference (I(1)).Factors influencing the current account balance were approximated using principal component analysis and scatter plots.Using these factors or variables, dependent or independent, and the differentiation for the all-time series determined that they are stationary at order 1 (I(1)).
Subsequently, the Johnson-Juslus or the autoregressive distributed lag method (or the Engle-Granger test as per Econometrics Analysis 7th Edition) was employed.Unlike other cointegration techniques, the autoregressive distributed lag method's primary advantage lies in its ability to test the long-run relationship without requiring the same order of integration for all variables.Notably, the autoregressive distributed lag approach applies to small samples, offering robust estimates even in such scenarios, whereas alternative methods often rely on larger sample sizes.Consequently, the autoregressive distributed lag approach obviates the need for unit root tests and autocorrelation function tests to assess the order of integration.

Determination of the optimal lag structure
The optimal lag structure was determined based on the Akaike Information Criterion (AIC) test value, yielding a value of 4.48.Among the 20 models considered, the autoregressive distributed lag (1,2,0,2,2) model emerged as the most suitable, encompassing the smallest values.
The general form of the error correction version of the autoregressive distributed Lag model is expressed as: ( )

Unrestricted error correction model estimation
The unrestricted error correction model results are presented in Table 4. Notably, a negative and significant correction coefficient is observed in the vector error correction model, suggesting a long-term relationship.The unrestricted error correction model procedures outlined above are crucial for testing the existence of, at most, one cointegrating vector between a dependent variable and a set of regressors.Following the assumptions made by Pesaran et al. (2001) in Case III, involving unrestricted intercepts and no trends, the derived model can be expressed as the Unrestricted Autoregressive Distributed Lag error correction model.

Bounds and Wald tests (coefficient diagnostics)
The autoregressive distributed lag methodology emphasizes diagnostic parameter tests, specifically the Wald and Bounds tests, over the examination of residual diagnostics.These diagnostic parameter tests ascertain the presence or absence of a long-term equilibrium relationship.The outcomes are detailed in Table 5.
The Bound test results show that the computed F-statistic surpasses the upper bound values.Consequently, a long-run level relationship exists between the current account balance and its determinants across all levels (refer to Table 6).The Wald Test imposed restrictions on the estimated long-run coefficients of variation for CAB, DL, BGB, and GDPG.The null and alternative hypotheses are outlined as follows: Against the alternative hypothesis  H 0 : β 1 ≠ β 4 ≠ β 6 ≠ β 9 ≠ β 13 ≠ 0 (a long-run relationship exists).
The autoregressive distributed lag results in Table 7 display the computed F-statistic values, which were assessed against the critical values tabulated in the wor k of Pesaran et al. (2001).Consequently, based on the findings from the Wald and Bounds tests, it can be concluded that there is indeed a long-run relationship that can be estimated using ordinary least squares, as detailed in Table 7.
These variables were found to exhibit a positive and significant relationship with the current account balance.However, the budget balance was identified to have an insignificant relationship with the current account balance.

Residual diagnostics
The above outcome (see Table 8) indicates a Breusch-Godfrey test for Heteroscedasticity.The p-value (P(Chi-square (1) > 0.785) = 0.375) is greater than 0.05, leading to the acceptance of H1 and rejection of H0, suggesting the absence of heteroscedasticity.
Table 7 details the estimation using the auto-regressive distributed lag model.The goodness of fit for the specification is reflected in the R-squared (0.98) Based on the preceding analysis, it has been determined that five out of the eleven selected determinants exhibit a positive and significant relationship with the current account balance of Saudi Arabia.These determinants are the budget balance, goods exports, per capita gross domestic product, gross domestic product growth, and domestic liquidity growth.Consequently, the corresponding hypotheses (H1b, H1c, H1f, H1h, and H1k) are accepted.

DISCUSSION
This study sought to discern the primary macroeconomic factors influencing the current account balance of the Saudi economy within the period 1995-2019.From the initial selection of 11 determinants, applying the principal component analysis and scatter plots revealed that five determinants, namely, budget balance, goods exports, per capita gross domestic product, gross domestic product growth, and domestic liquidity growth, hold significant importance.An autoregressive distributed lag cointegration model was employed to examine the association between these chosen determinants and the current account balance.The findings indicate that four determinants (goods exports, domestic liquidity growth, gross domestic product growth, per capita gross domestic product) exhibit a positive and substantial relationship with the current account balance in the long run, while the remaining determinants impact the model itself, as evident from the F-test and adjusted R 2 .
The findings revealed a positive and statistically significant influence of goods exports on the current account balance.The interaction between oil and the current account balance is a pivotal subject of economic investigation.Oil holds considerable significance for the economies under scrutiny, constituting a substantial portion of their exports and revenue streams.Alterations in the trade balance primarily mediate the impact of oil on the current account balance.Elevated oil prices lead to an increase in the value of oil exports, thereby enhancing the trade balance and positively affecting the current account balance.

CONCLUSION AND RECOMMENDATIONS
This study delves into the paramount macroeconomic determinants shaping Saudi Arabia's current account balance from 1995 to 2019.The scrutinized determinants encompass the ratio of foreign reserves to gross domestic product, the ratio of the balance of the general budget to gross domestic product, the percentage of total goods exports to gross domestic product, the proportion of total goods imports to gross domestic product, the external openness rate, the ratio of average per capita gross domestic product, the inflation rate, gross domestic product growth rate, total investment to gross domestic product ratio, the ratio of foreign investment to gross domestic product, and domestic liquidity growth rate.Statistical analyses identified five determinants that significantly influence the current account balance of the Saudi economy.
The findings of this study underscore several key conclusions: First, Goods Exports as a Primary Driver: The analysis revealed a significant and positive relationship between goods exports and the current account balance.Given Saudi Arabia's heavy reliance on oil exports, fluctuations in oil prices played a pivotal role in shaping the current account balance over the study period.Elevated oil prices bolstered the trade balance and contributed to a surplus in the current account, while downturns in oil prices led to deficits.This underscores the importance of diversifying Saudi Arabia's export base to mitigate vulnerabilities associated with oil price fluctuations.Second, Impact of Economic Growth and Domestic Liquidity: Gross domestic product growth, domestic liquidity growth, and per capita gross domestic product exhibited positive and significant relationships with the current account balance.These findings emphasize the importance of sustained economic growth and domestic economic activity in supporting a favorable current account balance.Policies aimed at fostering economic expansion and enhancing domestic liquidity can contribute positively to Saudi Arabia's external balance.Third, Policy Implications for Saudi Vision 2030: The research findings have significant implications for Saudi Vision 2030, which seeks to reduce the country's dependence on oil exports and diversify its economy.The study underscores the need for strategic policy interventions to promote non-oil exports, stimulate economic growth, and enhance domestic economic activity.By reducing reliance on oil exports and fostering a more diversified and resilient economy, Saudi Arabia can strengthen its current account balance and achieve sustainable economic development.Fourth, Temporal Variations and Economic Policies: The analysis identified distinct temporal variations in Saudi Arabia's export dynamics, reflecting oil price shifts and government policy changes.Understanding these temporal variations is crucial for designing effective economic policies and mitigating the impact of external shocks on the economy.The findings highlight the importance of policy continuity and adaptability to ensure economic resilience and stability in the face of evolving global economic conditions.
Overall, this study contributes to a deeper understanding of the macroeconomic determinants influencing Saudi Arabia's current account balance and provides valuable insights for policymakers, economists, and stakeholders involved in shaping the country's economic trajectory.By addressing the identified challenges and leveraging the opportunities presented by Saudi Vision 2030, Saudi Arabia can enhance its economic resilience, promote sustainable growth, and achieve its long-term development objectives.
The findings not only elucidate the nexus between economic growth, oil pressures, and the current account balance but also underscore the need for vigilant consideration of this relationship.In essence, this study elevates the collective understanding and serves as a compass for various stakeholders, facilitating informed contributions to economic decision-making processes.
The study acknowledges its limitations and suggests avenues for future research.Expanding the scope by integrating data from other countries and regions, increasing the sample size, and considering additional variables are proposed for future investigations.Additionally, exploring strategies to boost foreign investment in non-oil sectors, enhancing local services such as tourism, and understanding mechanisms to encourage expatriate workers' local spending could be valuable areas for future research.

Figure 1 .Figure 2 .
Figure 1.Box plot of the study's variables

Table 1 .
The dataset encompassing the requisite criteria spans the years 1995 to 2019.Guided by prevailing literature underscoring the pronounced impact of macroeconomic variables in contrast to institutional and financial factors on the current account balance (Altayligil & Çetrez, 2020; Çetin et al., 2023; Cheung et al., 2013), the study incorporates the following selected variables.Firstly, the ratio of foreign reserves as a percentage of gross domestic product is considered.Additionally, the study includes the ratio of the general budget balance to gross domestic product and the ratio of total goods exports/imports to gross domestic product.Designated variables and their description The external openness rate is also a focal variable.The percentage of average per capita gross domestic product, the inflation rate, and the growth rate are distinct variables in this investigation.Lastly, the study incorporates total investment, foreign investment, and domestic liquidity growth as additional independent variables.Details regarding data sources, measurement units, and definitions are outlined in Table1.(2)In the provided model, 0 denotes the constant term.The coefficients β 1 , β 2 , β 3 , β 4 , and β 5 pertain to the short-term dynamics, while β 6 , β 7 , β 8 , β 9 , and β 10 correspond to the long-term dynamics.The variable 't' represents time, and ε t signifies the error correction term, addressing the adjustment error speed.and Fuller (1979), while the second type utilized the approach introduced by Phillips and Perron (1988) to examine unit roots within individual processes.

Table 2 .
Summary statistics using the observations from 1995-2019

Table 3 .
Estimation model using OLS

Table 6 .
Wald test Note: Restrictions are linear in coefficients.

Table 5 .
F-bounds test Note: Null hypothesis: No levels of relationship.

Table 7 .
Model estimated using ARDL Note:The final equation sample is larger than the selection sample.

Table 9 .
Ramsey RESET test