Saudi Riyal vs Dollar: Comprehensive Analysis of Financial Stability

The history of the Saudi Riyal's peg to the US Dollar dates back to the mid-1980s, specifically in 1986 when Saudi monetary authorities decided to fix the exchange rate of the Riyal at 3.75 Riyals per US Dollar. This decision came after a period of sharp fluctuations in oil prices and global currencies in the 1970s and early 1980s, during which the Saudi economy experienced revenue fluctuations and fiscal deficits due to changes in global oil prices. The primary goal of the peg was to achieve monetary stability and provide a stable environment for long-term investment and financial planning, especially since the majority of the Kingdom's revenues from oil are priced and paid in US Dollars. Through this peg, Saudi Arabia was able to protect its economy from foreign currency fluctuations, particularly those related to global oil markets, while also controlling inflation rates by linking monetary policy to that of the US Federal Reserve. Moreover, the peg has helped enhance confidence among both foreign and local investors, as they can anticipate investment costs and returns without surprises arising from exchange rate changes. Over the following decades, this system proved effective in shielding the Saudi economy from regional and global financial crises, such as the Asian financial crisis in 1997 and the global financial crisis in 2008, as the Saudi Riyal remained stable against global market fluctuations. Practically, a fixed peg system requires massive foreign reserves to support the Riyal under any market pressures, which Saudi Arabia has successfully achieved through accumulating vast cash reserves resulting from oil revenue surpluses, enabling it to defend the exchange rate within cautious and balanced monetary policies.

The fixed peg system relies on the commitment of the Saudi Arabian Monetary Authority (SAMA) to maintain the exchange rate of the Riyal against the US Dollar at a specified level (3.75 Riyals per Dollar), which is achieved through precise management of foreign currency reserves and adjustment of local monetary policy. In this system, SAMA commits to buying and selling the Riyal against the Dollar at the official rate, meaning that any excess demand for the Dollar is met through foreign reserves, and vice versa. The wisdom behind the persistence of this system lies in its provision of high monetary stability, granting companies and investors significant certainty regarding future costs and revenues, especially since most of the Kingdom's contracts—whether in oil or foreign trade—are conducted in US Dollars. Technically, the fixed peg requires the central bank's ability to intervene in currency markets to stabilize the rate, necessitating substantial Dollar reserves, which Saudi Arabia has achieved thanks to decades of trade surplus. The system also requires close coordination with US monetary policy, as SAMA often follows US interest rate movements to avoid unexpected capital flows that could threaten exchange rate stability. The continuation of the peg is also attributed to its success in achieving financial stability goals, as Saudi Arabia has not experienced any monetary crises or currency collapses for decades, compared to other countries that have adopted flexible exchange systems. Additionally, the system mitigates the risks of fluctuations in imported commodity prices and controls inflation rates, which is vital in an economy that heavily relies on imports. Given these advantages, there are no strong indications of the Saudi authorities' intention to change this system in the near future, especially with ongoing trade surpluses and rising foreign reserves to record levels.

Foreign reserves play a pivotal role in sustaining the fixed peg system of the Riyal to the Dollar, representing the main guarantee of SAMA's ability to defend the exchange rate against any market pressures or global fluctuations. In recent years, Saudi Arabia has maintained high levels of foreign reserves, primarily consisting of US Dollars and US Treasury bonds, in addition to other hard currencies. In 2024, Saudi foreign reserves exceeded $400 billion, according to SAMA data, granting it significant flexibility to intervene in the currency market whenever necessary. These reserves provide security for local and international investors, preventing the formation of expectations of exchange rate changes, as the market recognizes SAMA's readiness to intervene and inject Dollars at any fluctuation or excess demand. Another importance of the reserves lies in their ability to cover imports for extended periods (over 40 months of goods imports), which far exceeds the minimum recommended by international institutions (3-6 months). Furthermore, the massive reserves contribute to enhancing the Kingdom's credit rating, reducing the cost of government borrowing and that of Saudi companies in global markets. It is noteworthy that the accumulation of these reserves has resulted from prudent fiscal policies and surpluses from oil revenues, with a significant portion of oil revenue going to support the reserve rather than consumer spending. In contrast, the authorities closely monitor any global developments that may affect foreign currency flows, such as fluctuations in oil prices or changes in global monetary policies, and work to diversify sources of foreign currency to maintain the sustainability of the existing monetary system.

The stability of inflation in the Kingdom is considered one of the most positive outcomes of the Riyal's peg to the Dollar. Most imported goods and services, especially food and consumer goods, are priced in US Dollars or currencies linked to it, meaning that fixing the exchange rate significantly limits the risk of price increases due to currency fluctuations. In recent years, the annual inflation rate in Saudi Arabia has remained relatively low; according to mid-2025 data, the annual inflation rate reached 2.3%, up from 1.5% in June 2024. This slight increase was primarily attributed to rising rental and service prices rather than exchange rate fluctuations. Economically, the fixed peg allows authorities to manage inflation expectations more effectively, as citizens or businesses do not expect surprises in import costs or sharp changes in the prices of essential goods. Additionally, currency stability contributes to stable interest rates, positively reflecting on the cost of financing for companies and individuals. Furthermore, inflation stability attracts long-term investments, especially in non-oil sectors, as it reduces the risks of eroding the real value of investment returns. The International Monetary Fund has confirmed in its reports that the peg policy has been a key factor in keeping Saudi inflation close to 2% over the last decade, compared to other countries in the region that have experienced sharp price fluctuations due to flexible exchange systems or monetary crises. However, authorities continue to closely monitor any local or global factors that may affect prices, such as changes in energy prices or government support policies, and use fiscal and monetary policy tools to keep inflation within targeted limits.

Under the fixed peg system of the Riyal to the Dollar, the Saudi Arabian Monetary Authority (SAMA) must closely follow US monetary policy movements, especially regarding interest rates. When the US Federal Reserve decides to raise or lower interest rates, SAMA typically takes similar steps to ensure that there is not a significant gap between local and US interest rates. The goal is to prevent speculative capital flows that could affect exchange rate stability, as higher interest rates in the US compared to Saudi Arabia may prompt investors to shift their funds to the Dollar in search of higher returns, putting pressure on the Riyal. During the period of 2024-2025, amid a global monetary easing cycle, Saudi Arabia witnessed a gradual reduction in interest rates, in line with the Federal Reserve's trend to lower rates to stimulate the US economy after years of monetary tightening. This reflected on borrowing costs within the Kingdom, helping to boost investment and local spending in productive sectors. At the same time, SAMA maintained a cautious policy to ensure that lowering interest rates does not lead to inflationary pressures or bubbles in financial assets. The importance of the peg is clearly evident here, as it forces Saudi monetary authorities to balance local economic requirements with the necessities of maintaining exchange rate stability. Although the peg limits SAMA's flexibility in using monetary policy tools independently, it provides greater stability in capital fluctuations and exchange rates, which is a priority in the current economic conditions in Saudi Arabia. On the other hand, SAMA closely monitors developments in global financial markets and US monetary policy developments, adjusting its tools accordingly to ensure that the Saudi economy remains stable.

The fixed peg of the Riyal to the Dollar represents a fundamental factor in enhancing the attractiveness of the Saudi market for trade and investment, as it provides high certainty regarding exchange rates and transaction costs. For foreign trade, most of Saudi Arabia's exports (especially oil) rely on the US Dollar, thus the stability of the exchange rate reduces the risks of revenue fluctuations when converting returns to Riyals. Additionally, imports, which represent a significant share of local consumption, are often priced in Dollars or currencies linked to it, meaning that local importers enjoy cost stability and do not face sudden price fluctuations due to changes in the value of the local currency. From an investment perspective, the peg provides a stable environment for foreign investors, as they are less concerned about the erosion of their returns due to the depreciation of the local currency, and it facilitates their ability to repatriate profits without worrying about exchange rate losses. Locally, Saudi companies benefit from the ability to plan long-term financial strategies, as they can more confidently anticipate the costs of imported raw materials and major project contracts. This stability in the business environment has been one of the key factors in attracting foreign investments and stimulating local companies, especially in non-oil sectors that the Kingdom seeks to develop under Vision 2030. Furthermore, currency stability contributes to lowering the cost of financing major projects, as the government and Saudi companies receive high credit ratings due to exchange rate stability, reducing borrowing costs. In summary, it can be said that the fixed peg has been and remains a cornerstone of the Kingdom's strategy to attract trade and investment, supporting long-term economic diversification plans.

Despite the significant benefits achieved by the fixed peg system of the Riyal to the Dollar, it faces several challenges and risks that require close monitoring by Saudi monetary authorities. The first of these challenges is the limited flexibility of monetary policy, as SAMA must follow US interest policies even if they do not fully align with local economic requirements, which may sometimes lead to monetary policies that are unsuitable for the local business cycle. Secondly, in the event of sharp fluctuations in the US Dollar against other major currencies, the Saudi economy may be indirectly affected, especially regarding the cost of imports from regions outside the Dollar (such as Europe or Asia). Thirdly, the system requires massive foreign reserves to defend the exchange rate in times of pressure, which may pose a challenge during periods of low oil prices or declining export revenues. Other challenges include the potential for significant capital flows (outflows or inflows) due to sudden changes in global interest rates or financial crises, which may create pressures on the banking system and currency market. Regarding alternatives, some economists have discussed the possibility of shifting to a more flexible exchange system or a peg to a basket of currencies instead of just the Dollar, but regional and global experiences have shown that such transitions can be fraught with risks and require extensive preparations, especially in terms of diversifying the economy and increasing its flexibility. Under current circumstances, the fixed peg remains the optimal choice, with the need for authorities to continue monitoring financial and monetary balances and increasing the diversification of income sources and foreign reserves to reduce reliance on oil and the Dollar in the future.

Global oil prices are the primary factor supporting the stability of the Saudi Riyal and the fixed exchange rate against the Dollar, as oil represents the main source of government revenues and foreign currencies in the Kingdom. When oil prices are high, billions of Dollars flow into the Saudi treasury, leading to the accumulation of foreign reserves and increasing SAMA's ability to defend the fixed peg of the Riyal to the Dollar. Conversely, periods of declining oil prices pose challenges to monetary policy, as financial surpluses may decline, forcing the government to draw from reserves or reduce public spending to maintain monetary stability. In recent years, the Saudi government has shown resilience in dealing with fluctuations in oil prices by adopting prudent fiscal policies and increasing spending efficiency, in addition to launching economic diversification programs such as Vision 2030 aimed at reducing reliance on oil as the sole source of income. In 2024, despite ongoing fluctuations in global oil markets, Saudi Arabia managed to maintain exchange rate stability thanks to a balance between oil revenues and high foreign reserves. On the other hand, the stability of the Saudi currency indirectly affects local oil and petrochemical companies, as it contributes to stabilizing production costs and net profits when converting returns from Dollars to Riyals. In the long term, monetary stability remains contingent on the Kingdom's ability to diversify its income sources and increase the contribution of non-oil sectors to GDP, to ensure the economy can absorb oil shocks and maintain currency stability.

The cement sector is one of the strategic industrial sectors in the Kingdom of Saudi Arabia, playing a pivotal role in supporting infrastructure projects and real estate development under Vision 2030. This sector is directly and indirectly affected by exchange rate stability and the fixed peg of the Riyal to the Dollar, due to its reliance on importing some raw materials and technologies from abroad, as well as the linkage of major project contracts to the US Dollar or their valuations. The stability of the Riyal against the Dollar reduces the risks of fluctuations in the prices of production inputs, as cement companies can more easily predict the costs of essential materials (such as imported coal or clinker), helping them to set more accurate pricing and production plans. On the other hand, monetary stability facilitates financing for major projects, as companies obtain financing at stable interest rates and relatively low costs thanks to the Kingdom's high credit rating. Additionally, currency stability attracts both foreign and local investors to the cement sector, especially amid growing demand stemming from housing projects and new economic cities like NEOM and Qiddiya. Conversely, the sector faces challenges related to global energy price fluctuations, as part of the production inputs is affected by global oil and coal prices, but exchange rate stability mitigates the impact of these fluctuations on final costs. Competitively, Saudi cement companies rely on the stability of the Riyal in pricing their products locally and regionally, giving them a competitive advantage in neighboring markets that suffer from fluctuations in their local currencies. Overall, monetary stability and the fixed exchange rate represent a key safety factor for the cement sector, enhancing its ability to grow and expand in both the local and export markets.

Hail Cement Company (symbol 3001) is a clear example of how Saudi industrial companies interact with a stable exchange rate environment thanks to the fixed peg of the Riyal to the Dollar. Since its listing on the Tadawul market, the company has benefited from currency stability in planning its financial and production operations, especially amid strong competition in the Saudi cement sector. During 2024 and 2025, the stock price of Hail Cement ranged within an average among sector companies, supported by a stable economic environment and continuous demand for construction projects. The stability of the Riyal facilitated the company's international supply operations, as it did not face fluctuations in the prices of imported raw materials, while stable cash liquidity provided a suitable environment for the regular dividend distributions adopted by the company. The company's market capitalization reached several billion Riyals, with a price-to-earnings (P/E) ratio ranging between 10 and 15 times, reflecting investor confidence in the continuity of profits amid overall economic stability. Regarding distributions, the company has adhered to a dividend distribution policy ranging from 50% to 70% of net profit in years of good performance, attracting investors seeking stable cash returns. The company has not experienced any exceptional events recently but has continued to benefit from the growing demand for cement, especially as the government continues to implement massive infrastructure projects under Vision 2030. Given these factors, it can be said that exchange rate stability and a stable macroeconomic environment have been decisive factors in the performance of Hail Cement's stock and the strength of its financial position within the Saudi market.

The Saudi cement sector includes a number of large and medium-sized companies that compete fiercely for shares in the local and regional markets. Alongside Hail Cement Company, companies such as Saudi Cement Company (3000), Yamama Cement, Najran Cement, and Arabian Cement play key roles in meeting the growing demand for cement across various regions of the Kingdom. The success of these companies largely depends on the monetary stability provided by the fixed peg of the Riyal to the Dollar, as it reduces the risks of price fluctuations and ensures stable production costs, especially concerning imported raw materials or energy costs priced in Dollars. In a stable environment like Saudi Arabia, companies can set long-term pricing strategies and plan investments in new production lines without worrying about exchange rate surprises. Competitively, factors such as production efficiency, energy costs, the ability to meet the requirements of major projects, and the adoption of modern manufacturing technologies stand out. In light of monetary stability, companies focus on improving their operational processes, reducing costs, and increasing efficiency to achieve competitive advantages. On the other hand, companies face challenges related to occasional overcapacity amid slowing demand, prompting them to seek export markets or develop high-quality products. Companies' profitability is also affected by changes in global energy and coal prices, but local currency stability mitigates the severity of these fluctuations on profit margins. In summary, it can be said that monetary stability and the fixed peg policy have provided a healthy competitive environment for the cement sector, enabling companies to face global challenges and achieve sustainable growth in the local market.

Major government projects, especially those linked to Saudi Vision 2030, are critical factors in the growth of the cement sector in recent years. The Saudi government has launched a series of mega-projects such as NEOM City, Qiddiya Project, and massive housing initiatives, creating unprecedented demand for construction materials, foremost among which is cement. In a stable monetary environment and a fixed exchange rate, cement companies, including Hail Cement, have been able to plan their production expansions and meet project requirements without fears of cost or revenue fluctuations. These projects have enhanced companies' ability to negotiate long-term contracts, benefiting from exchange rate certainty and reduced inflation risks. On the financial side, the government has provided significant funding and investments in infrastructure, multiplying public spending and raising demand for cement across all regions of the Kingdom. Operationally, intense competition among companies has driven improvements in efficiency, cost reductions, and the development of environmentally friendly products to meet the standards of new projects. Companies have also benefited from the stability of the Riyal in exporting to neighboring markets, especially amid currency fluctuations in some regional countries. Overall, major government projects and Vision 2030 have created an ideal environment for the growth of the cement sector, supported by stable monetary policy and fixed exchange rates, enabling companies to achieve sustainable profits and expand their market shares in the face of local and international competition.

The Saudi financial market is increasingly influenced by global developments, whether in terms of changes in energy prices, international monetary policies, or sudden economic crises. In recent years, global markets have witnessed notable increases in the prices of coal and some basic raw materials, leading to increased production costs for Saudi cement companies, which partially rely on importing these materials. However, the fixed peg policy of the Riyal to the Dollar has provided partial protection against fluctuations in foreign currency prices, as companies did not face additional cost increases due to the depreciation of the local currency, as seen in some neighboring countries. On the other hand, movements of the US Federal Reserve affect interest rates in Saudi Arabia, which reflects on the cost of financing for companies and major projects. In the context of financial globalization, SAMA closely monitors developments in global monetary policies, adjusting its tools to ensure the stability of the local market. Furthermore, global environmental trends, such as the shift towards clean energy and reducing emissions, impact the strategies of Saudi cement companies, which face increasing pressure to improve energy efficiency and adopt environmentally friendly production technologies. Overall, a stable exchange rate environment provides a strong foundation for facing global challenges, but Saudi authorities and companies must continue to innovate and diversify to keep pace with rapid economic and financial developments.

The impact of monetary stability and the fixed exchange rate extends to all aspects of economic life in the Kingdom, starting from the lives of Saudi families, through small and medium-sized enterprises, to the macro economy. For families, the stability of the Riyal against the Dollar ensures stable prices for essential imported goods, such as food, electrical appliances, and clothing, reducing inflationary pressures on their budgets. It also contributes to stable interest rates on mortgage and consumer loans, allowing families to plan financially with greater confidence. For small and medium-sized enterprises, monetary stability provides a predictable business environment, where the risks of sudden cost changes due to currency fluctuations are reduced, enhancing their competitiveness and expansion capabilities. At the macroeconomic level, monetary stability reflects in high credit ratings, lower government borrowing costs, and increased flows of foreign direct investments, supporting sustainable economic growth. Furthermore, monetary stability helps curb inflation and ensures the continuity of social programs and government support for the most needy families. Overall, the fixed peg of the Riyal to the Dollar is one of the pillars of social and economic stability in the Kingdom, providing a solid foundation for achieving the goals of Vision 2030 in economic diversification and improving the quality of life for citizens.