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The Impact of Increasing Federal Rates on the Saudi Manufacturing Sector

Market Studies Department

In March 2022, the US Federal Reserve began increasing its federal funds' rates, which has had a ripple effect on other countries' economies.
This includes Saudi Arabia, due to that the Saudi Central Bank had to adjust its repo and reverse repo rates to keep up with the US’s rising interest rates given the SAR-USD peg, bringing rates up to levels not seen since 2008. This article will explore the impact of these changes on the Saudi manufacturing sector.

What is the Repo Rate and why is it important?

The repo rate, or repurchase agreement rate, is the interest rate at which banks can borrow money from the central bank by pledging securities as collateral. When the central bank increases the repo rate, borrowing becomes more expensive, and banks may pass on this increased cost to their customers, including businesses. This makes it more challenging for companies to access credit, which can have a significant impact on their ability to invest and grow. Therefore, the repo rate is an essential tool for central banks to manage monetary policy and control inflation.

In the context of the Saudi manufacturing sector, the rise in repo rates may make it more challenging for companies to access credit and could result in reduced investment momentum and profitability.

The Saudi Central Bank made several amendments to the repo and reverse repo rates in response to the US Federal Reserve's actions. As of March 2023, the repo rate has increased to 5.5%, up from 1% in March 2020, while the reverse repo rate has risen to 5%, up from 0.5% in March 2020. This monetary policy aims to reduce inflation levels in the market, control the money supply, and minimize lending in the economy. However, it may have negative implications for the manufacturing sector.

The manufacturing sector may be negatively affected by the increase in repo rates, as borrowing from commercial banks becomes more expensive. This could result in higher interest costs on business loans for large companies and SMEs. As a result, companies may have less money to invest in expansion projects or may decide to delay or cancel new projects altogether, which could lead to a reduction in employment and profitability in the short term. Furthermore, rising interest rates may lead to a slowdown in purchasing raw materials or semi-finished goods for certain industries, which could further impact the manufacturing sector's performance. This reduction in cash flow and consumption may also lead to lower profitability and investment in the sector.

While rising interest rates may help control inflation levels and maintain the labor market’s recovery from an economic perspective, it's important to consider the potential impact on specific industries and sectors, such as manufacturing. The Saudi manufacturing sector may face challenges in the short term due to the rise in interest rates, but the long-term impact remains to be seen. It will be crucial for policymakers and businesses to monitor the situation closely and adapt their strategies accordingly. Towards this end, SIDF has been providing some incentives and programs to manufacturing projects, which seek to close the gap between supply and demand by providing the necessary funds to factories in order to improve the overall business environment and liquidity, contributing to Vision 2030 objectives.

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