The United States Federal Reserve is moving to continue pushing interest rates higher this year, with the first of three rate hikes in 2018 expected to come after the Federal Open Market Committee's (FOMC) March 20-21 meeting. In his first appearance before Congress as the new head of the Federal Reserve, Jerome Powell testified that the central bank plans to slowly increase interest rates in an attempt to strengthen the U.S. economy.
Interest rate hikes by the U.S. central bank could lead to complications for Saudi Arabia, which is currently restructuring its economy in preparation for the IPO of its state-owned oil company, Saudi Aramco. In a sweeping program called Vision 2030, the Saudi government is aiming to diversify the country's economy beyond its heavy dependency on the oil sector, with plans to make the country a major hub for trade and global investment and to increase its focus on non-oil natural resources.
First announced by the Crown Prince Mohammed bin Salman in 2016, Vision 2030 will in part be financed by the IPO of Saudi Aramco, one of the largest oil producers in the world. The state-owned oil company, which owns the world's largest hydrocarbon network, is expected to be valued at billions of dollars, and the New York Stock Exchange, the Hong Kong Stock Exchange, and the London Stock Exchange are competing to list the company. However, the Federal Reserve's planned quarter-point rate increases could have negative ramifications for the dollar-pegged Saudi riyal and the Saudi government's plans for its economy.
Fixed at 3.75 riyal to 1 U.S. dollar, the riyal's value and stability are directly affected by the monetary policies enacted by the Federal Reserve. Should the dollar strengthen in reaction to the Fed's rate hikes, the riyal and other dollar-fixed currencies would become vulnerable to volatility.
"In order to maintain the peg, the Saudi authorities have to move interest rates in lockstep with the Fed," said Marcus Chenevix, a London-based MENA analyst with TS Lombard. If the Saudi Arabian Monetary Authority (SAMA) does not follow suit once the Fed raises rates, "the dollar would give a higher rate of return than the riyal, while still being exchangeable for the same amount [of] riyals," making the riyal less desirable.
The Federal Reserve's potential series of rate increases could force Saudi officials into raising interest rates during a delicate time for the country's economy. Saudi Arabia recently emerged from a downturn resulting in part from austerity measures taken by its government in late 2016. In January, the Saudi government's latest austerity efforts were met with widespread discontent from its citizens, forcing King Salman to issue a stimulus package amounting to 2% of the country's GDP.
If SAMA increases rates to keep up with the Federal Reserve, the currently improving Saudi economy could suffer from tightening credit and slowing growth, which could force the Saudi government to direct spending toward stimulating the economy. Such volatile economic conditions for its majority shareholder would add uncertainty to the planned IPO of Aramco. Initially projected for later this year, the Financial Times reported this week that Saudi officials told the UK government that Aramco's IPO would likely be postponed until 2019.