Dollar Based Loans Jump 600% in Saudi Arabia as Companies Raise Cash; What’s the Risk?

In yet another oil price crash side effect, Dollar Denominated Loans in Saudi Arabia Jump 600%.

Dollar borrowing in Saudi Arabia has surged seven-fold this year as the kingdom’s companies switch out of increasingly expensive local currency-denominated loans.

About 65 percent of all loans taken out in Saudi Arabia through Tuesday were in dollars, compared with 13 percent for all of 2014, according to data compiled by Bloomberg. Borrowers raised more than $11 billion in U.S. currency, compared to $1.7 billion for all of last year. Riyal borrowing fell 45 percent.

The shift underscores the knock-on effects of oil’s 50 percent plunge in the past 12 months. Saudi Arabia, OPEC’s biggest crude exporter, is tapping local debt capital markets with long-term bonds for the first time in eight years to plug a growing budget deficit. That reduced bank liquidity and helped send the three-month Saudi Interbank Offered Rate, a benchmark used to price many Islamic and conventional loans, to its highest since November.

“Local liquidity is weakening, so they have to go and borrow in other currencies," said Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG. “If Saibor is rising faster than the U.S. rates, then it makes more sense for Saudi borrowers to go externally and borrow at a cheaper rate." There aren’t many risks as long as Saudi Arabia maintains its peg to the dollar, he said.

While bets for a devaluation of the riyal reached the highest in more than a decade last month after China weakened the yuan, the governor of the kingdom’s central bank Governor Fahad Al-Mubarak said last week the peg at 3.75 per dollar will remain as long as oil underpins the Saudi economy.

Saibor was at 0.8775 percent on Tuesday, compared with 0.332 percent for the London Interbank Offered Rate, which is used as a benchmark for many dollar loans. While comparatively high, the Saudi rate remains at a historically low level. It rose as high as 5.3 percent in 2006.

No Risk Unless

"There aren’t many risks as long as Saudi Arabia maintains its peg to the dollar," said a Dubai-based credit analyst.

And what if they don't?

Didn't we see a nice blow-up in Swiss Franc bets earlier this year? And what about all the countries that were forced to drop a dollar peg for one reason or another?

Mike "Mish" Shedlock