As the shares market stabilizes and continued good performance by banks is maintained, it is expected that the financial system will greatly benefit from the efforts of the authorities to deepen and broaden the capital market. Now let me briefly touch upon the opportunities for the Saudi banks over the medium term. 1. The Saudi economy is undergoing unprecedented boom era based on a well- developed and diversified base covering all sectors of the economy, including oil and gas, heavy, medium and light industries; banking, investment and insurance services; and transport and tourism, within a population demographic structure which indicates an expected growth in the segment that would need banking services. These entire factors make the banking and financial services market poised to grow exponentially, with great opportunities for banks to expand in the provision of their conventional services in addition to the expansion in the area of investment banking. Banks will benefit greatly from their expertise and experience to provide advisory services in the area of underwriting and covering of new IPO’s, corporate finance, financing projects, particularly mega projects (in the fields of petroleum and gas, petrochemicals, water, electricity, housing, education and health), mergers and acquisitions,  4  BIS Review 59/2006  securities advisory services and domestic and international brokerage, private wealth management and asset management businesses. This may require banks restructure their business to cope with new regulations.

In addition, active and widespread use of foreign currency hedging instruments is also beneficial to mitigate the negative knock-on effects from exchange rate volatility. Liberalization of outward investment by domestic investors also helps promote more balanced capital inflows and alleviate upward pressure on the exchange rate. These international asset holdings can provide a buffer when domestic market faces rigorous tests of volatility. Nevertheless, liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh costs. The appropriate degree of liberalization for a country at a given time depends on its specific circumstances, notably its financial and institutional development. More stable and long-term flows, particularly direct investment flows, should be liberalized prior to short-term portfolio flows, which are more volatile and sensitive to cyclical factors. In October 2012, the BOT launched the Capital Account Liberalization Master Plan. This was part and parcel of our longer-term plan to facilitate Thai companies to diversify their investments abroad, especially in neighboring countries. This would encourage private companies to operate their businesses more efficiently by expanding their markets and production bases. In turn, such diversification will help strengthen their competitiveness and absorptive capacity. At the other end of the spectrum, limiting leverage in the banking system would add more cushions to the economy against external shocks. Last but not least, developing fundamental economic strengths to enhance countries’ resiliency to external shocks can work through well-diversified export items focusing on high value-added products.