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The first thing you need to know as an expat in Saudi Arabia is that the Saudi Riyal is pegged to the US dollar. One US dollar equals 3.75 Saudi Riyals, and it has been like this for decades.
As a result, a Saudi-based investor can park its money into US or USD-denominated assets without taking foreign currency exposure. Strictly, pegged exchange rates should not be absolutely taken for granted over the very long term. In other words, the foreign currency risk still exists, but it is very low.
Beating inflation and taxes
As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings. The good news is that residents of Saudi Arabia generally do not pay tax on their investments, unless they carry on a trade in Saudi Arabia. The core concern is therefore about beating inflation.
Inflation is a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned by Saudi Arabia’s inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.
Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Saudi Arabia or the United States but you invest in any SAR-denominated or USD-denominated assets, you are effectively taking a currency bet.
Inflation in Saudi Arabia
Inflation in Saudi Arabia is not subject to central bank monitoring. This is because the Saudi Arabian Monetary Agency focuses on defending the USD/SAR exchange rate at 3.75, rather than a specific inflation target. Accordingly, inflation may be allowed to be quite volatile if this is necessary to defend the exchange rate.
Putting a figure on how Saudi Arabia’s inflation is going to be in the next decade is quite tricky because the Saudi Arabian Monetary Agency will endeavour to defend the SAR exchange rate.
Eventually, this depends on US monetary policy. If the US dollar is resilient, Saudi Arabia will tend to be in tight monetary policy, even if it involves going into deflation. On the other hand, inflation in Saudi Arabia may well exceed 5% if the US dollar is in a weak period.
The best thing to do in relation to savings accounts is to enquire, as interest rates (if any) are not always published. Under current market conditions, it’s quite possible to get 1%.
Interest rates on basic savings accounts in Saudi Arabia (“profit margins”) tend not to beat inflation. Consequently, you would likely need to look for riskier investments.
There is a stock market in Saudi Arabia, which is called the Tadawul (more than 150 listed companies). Only shares are traded; there are no bonds listed on the Tadawul. Another important issue is that the Saudi markets are still fairly opaque. Financial information may be hard to come by.
Strictly, expats working in Saudi Arabia are the only category of foreign investors that can invest in the Saudi stock market. To this effect, you would need to see if your Saudi bank offers stockbroker services. SABB, for example, does offer trading accounts.
In practice, it is very uncommon for expats in Saudi Arabia to open a trading account just to get exposure to Saudi stocks.
The yields available on Saudi stocks, if you are to buy any, are not impressive. Assume it is going to be hard to come across a company that regularly pays a 4% dividend yield. This is to be compared with what’s available with US equities.
Surely, financial analysis should not focus too much on dividend yields, as Saudi growth may lead to earnings growth and attractive capital gains for equity investors. However, many wrong investment decisions can be made because of overoptimistic growth prospects, be it in Saudi Arabia or in the US.
Investing offshore may be the most straightforward option for many expatriates, especially those who are not going to stay in Saudi Arabia for long. For many expats, this means keeping their savings and investments in their home country.
Before doing this, you should assess carefully if this is going to be a smooth process, i.e. if you can invest in your home country on the same basis as residents of that country. Check with your existing home country bank or broker if you can keep using their services while you are in Saudi Arabia.
Other potential bad news may include:
Sections in FINANCIAL CONSIDERATIONS IN SAUDI ARABIA:
» Money Transfers for Expats in Saudi Arabia
» Foreign Exchange for Expats in Saudi Arabia
» Banking for Expats in Saudi Arabia
» Pensions for Expats in Saudi Arabia
» Investment for Expats in Saudi Arabia
» Wealth Management for Expats in Saudi Arabia
» Property Investment for Expats in Saudi Arabia
» Insurance for Expats in Saudi Arabia
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