Saudi Arabia: Current account surplus in H1 largely invested abroad

Saudi Arabia’s interbank rates have continued to rise over the last few weeks, with the 3m SAIBOR rate reaching 5.69%, the highest since the mid-2000s. While some of the increase in the interbank rate is due to higher USD rates this year, the 3m SAIBOR rate spread over the 3m USD rate has widened to around 130bp, which reflects tight liquidity condition in the domestic market.

3m Saibor spread over 3m USD Libor widened in October

Source: Bloomberg, Emirates NBD Research

We have noted before that deposit growth in KSA has lagged strong credit growth. As the authorities push forward with ambitious infrastructure and development projects, the demand for credit from both public sector entities and the private sector is likely to remain high. While the finance minister has said that there is “plenty” of liquidity in the financial system, higher borrowing costs will make it more challenging for firms to boost investment.

Balance of payments data show that while the current account has recorded a sizeable surplus of almost USD 84bn in H1 2022 on the back of surging oil export revenues, most of this has been deployed in investments outside the kingdom.

Inward FDI to Saudi Arabia has averaged USD 2bn per quarter this year, much lower than the government has targeted. Meanwhile, outward FDI from the kingdom to the rest of the world reached USD 14.2bn in H1 2022.  Outward FDI is likely to remain high with the Public Investment Fund committing another USD 24bn in direct investment to MENA countries at the 2022 Future Investment Initiative event; USD 10bn of this has already been allocated to the Saudi Egypt Investment Company and funds have already been deployed to acquire assets in Egypt over the summer.

Inward FDI has been dwarfed by investment abroad

Source: Haver Analytics, Emirates NBD Research

The portfolio investment component of the financial account shows a similar trend: more than USD 18bn of financial assets were acquired by Saudi entities in H1 2022, mostly in Q2. Portfolio inflows from abroad in H1 were only USD 4bn so there was a net outflow of portfolio investment of around USD 14.4bn in the first half of the year.

Once other investments are taken into account, the increase in reserve assets in H1 2022 was just over USD 11bn, from a current account surplus of USD 84bn. PIF has committed to investing USD 40bn per year within the kingdom through 2025, but as it is not included in the government’s budget figures it’s not clear how much of that has been spent year-to-date. We expect that more of the current account surplus will need to be deployed domestically in order to fund investment projects within the kingdom, in the absence of a meaningful increase in inward foreign investment.