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Impact of Rising Interest Rates in Saudi Arabia

When banks raise interest rates, it affects the economy in different ways. Consumers may spend less because it costs more to borrow money, while savers may benefit from higher interest rates on their deposits. Investors may also be impacted, as higher rates can make stocks less attractive compared to bonds. All of these factors can have an impact on Saudi Arabia, both domestically and in its role as a key player in the global economy.

A Global & Local Perspective

The Saudi Arabian economy is heavily dependent on oil exports, which account for around 60% of government revenue. Over the past year, oil prices have spiked and global interest rates have soared, putting the Saudi economy in a uniquely beneficial position. Most Saudi banks and lenders' Long-Term Issuer Default Ratings remain on "Positive Outlook" — despite rising interest rates — as the country continues to enjoy the benefits of higher oil prices.

However, not all countries are faring as well. Turkey, for example, is struggling with an inflation rate at a 20-year high, which has been exacerbated by the recent global rise in rates. However, Turkey's central bank has refused to raise interest rates, keeping them at a constant 14 percent despite the currency crisis.

The United States is also feeling the effects of higher rates. While the U.S. economy is strong, Consumer Price Index inflation has been rising by 0.3% every month, leading to the highest inflation rate in more than 40 years. The Federal Reserve has responded by moving its benchmark interest rate by 0.5%, which follows a prior rise of .25% last March.

The rise in rates has caused the value of the U.S. Dollar to increase, making American exports more expensive and imports cheaper. This has put pressure on American companies that do business internationally, as well as domestic companies that rely on imported goods.

The Effect On KSA's Export & Import Industry

One of the most immediate impacts of higher interest rates is likely to be on Saudi exports. Since rising interest rates have pushed the value of the dollar to new highs, the value of the U.S. dollar-pegged Saudi Riyal has risen along with it. This could potentially lead to a decrease in demand for Saudi products internationally, as foreign buyers are likely to turn to cheaper alternatives.

The same is true for Saudi imports, which will become relatively cheaper as the dollar strengthens. This could lead to an increase in demand for imported goods, as Saudi consumers and businesses take advantage of the lower prices. In addition, higher interest rates could lead to increased investment in Saudi Arabia from abroad, as foreign investors seek out higher returns.

The Future Outlook

For investors, higher interest rates can have an impact on asset allocation. With bonds yielding more, they may become more attractive than stocks, which could lead to money flowing out of equities and into fixed-income investments. This could have a negative impact on the stock market, and on the Saudi economy more broadly. Of course, it's important to remember that interest rates are just one factor that can impact the market, and so it's important to take a holistic view when making investment decisions. Regardless of where rates are heading, it's important to remember that diversification is key.

However, according to the IMF, the Saudi economy is on course to grow more than double in 2022. They had originally forecast a GDP growth rate of 4.8%, but due to the ongoing rise in oil prices and additional non-oil-related growth, they are now predicting a jump of 7.6%. This spells good news for the Saudi economy, which is continuing to meet and exceed the expectations of the National Transformation Program.

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