A key gauge of borrowing costs in Saudi Arabia has risen to a record, potentially hitting economic-diversification projects that have become the main driver of growth amid cuts in oil production.
(Bloomberg) — A key gauge of borrowing costs in Saudi Arabia has risen to a record, potentially hitting economic-diversification projects that have become the main driver of growth amid cuts in oil production.
Saudi Arabia is spending hundreds of billions of dollars on a diversification drive championed by Crown Prince Mohammed bin Salman and dubbed Vision 2030. While part of that will be funded by oil revenue, the government also needs to attract foreign investment and borrow.
Many key bodies investing in Vision 2030 projects, including the Public Investment Fund and its subsidiaries developing the new city of Neom, have already borrowed tens of billions of dollars.
The cost of money as measured by the three-month Saudi Interbank Offered Rate, or Saibor, climbed above 6% this week, even higher than it was during the 2008 global financial crisis and after oil prices collapsed in 2020.
The rate was below 1% only 18 months ago. Its rise has come as the US Federal Reserve has hiked interest rates to lower inflation, with its latest move of 25 basis points coming last week. The riyal is pegged to the dollar and the kingdom’s central bank has to follow the Fed’s decisions closely, even though Saudi inflation has been well below that of the US in the past two years.
“Rising oil prices mitigate some pain but a prolonged period of higher rates is clearly negative,” said Tarek Fadlallah, head of Nomura Holdings Inc.’s asset management arm in the Middle East.
This year’s surge in Saibor is unlikely a result of tight liquidity. That’s in contrast to 2022, when it spiked as a rise in bank lending wasn’t matched by deposit inflows.
Still, elevated interest rates “put pressure on the debt-burden ratio for Saudi consumers, limiting their capacity to borrow more,” said Edmond Christou, senior Bloomberg Intelligence analyst. “Demand on Saudi subsidized mortgages has slowed this year but demand on non-subsidized mortgages, which have become the new focus of banks, will likely be dampened.”
Saudi officials have repeatedly played down concerns about tight liquidity, saying the central bank has all the necessary levers needed to support lending. SAMA, as the monetary authority is known, has resorted at times to open market operations — transactions that provide short-term liquidity to lenders. It’s kept the spread of Saibor over SOFR, a US interbank lending rate, at between around 60 and 70 basis points.
Growth Slowing
A series of oil production cuts and lower prices may lead the kingdom’s economy to contract this year. Last week, the International Monetary Fund gave Saudi Arabia the steepest growth downgrade among major economies for this year.
The non-oil sector continues to expand rapidly, with growth in the second quarter of 5.5%.
Oil Cuts and Price Drop Slow Saudi Arabia’s Economy
The supply cuts have started to boost crude prices, with Brent rising above $85 a barrel from around $72 in mid-June. Still, concerns remain that higher interest rates could stifle economic activity in the US and Europe, and Brent remains well below levels from last year, when it averaged $100 as Russia’s invasion of Ukraine upended energy markets.
“A downward shift in the Fed’s monetary policy should support Saudi banks’ ability to finance the growing project pipeline,” Christou said. It may also “encourage lenders to fix their funding mix by tapping into cheaper debt.”
–With assistance from Matthew Martin.
(Updates with context on borrowing.)
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