Abstract

Objectives: The research question arises from the case of an oil-exporting economy under a pegged exchange rate without an independent interest rate policy; how will the private-sector credit react to oil price shocks in such an economy? This study addresses this question by analyzing and identifying the impact of oil price shocks on private-sector credit in the Saudi economy. Methods: To satisfy the aim of this study, Vector Auto-Regressive (VAR) Model was applied based on quarterly data during (1993-2023). Results: We found a positive correlation between oil prices and credit, with a cumulative impact that increases over 3 years to reach a 3.1% growth rate in credit for each oil price shock of 1%, in addition to the existence of a positive relationship between real interest rate and credit, that is, when interest is raised (by one percentage point), the cumulative credit response rate rises by 1.6% (after 3 years), which contradicts economic theory. Moreover, variance decomposition shows that oil prices' contribution is more evident in the medium term (after 3 years), explaining the 9.1% of bank credit variance compared to a contribution of 1.2% in the short term, likewise for government spending. As for the interest rate contribution, it appears at a comparable level of 15% (during the first quarter) and 17.9% (after 3 years). Conclusion: Given the possibility of witnessing a double positive shock to credit when oil prices rise, it is imperative to ensure that demand levels are consistent with what is available in the credit market (especially during periods of oil price fluctuations). This is done by monitoring credit. In the case of inconsistency, other policies to enhance aggregate demand should be activated (other than interest rate and government spending).