Currency and Repatriation Risk on a Saudi Investment: A Worked Example

An illustrative example of how an investor measuring returns in euros is affected by currency moves on a SAR investment, and what hedging and repatriation planning change.

Because the Saudi riyal is pegged to the US dollar, an investor whose home currency is the dollar faces little exchange rate risk while the peg holds, but an investor measuring returns in euros, sterling or another currency carries the full swing of the dollar against that currency. Repatriation itself is generally not restricted, but withholding tax, timing and transfer costs affect what arrives home. The example below uses invented figures.

The situation

A European investor puts equity into a Saudi company and expects to receive dividends and eventually sell the stake. They measure performance in euros. They want to see how a change in the euro against the dollar, and therefore the riyal, affects their return. Figures are illustrative and do not represent real exchange rates.

Assumptions (illustrative)

• Equity invested: SAR 10,000,000 (illustrative).
• Exchange rate at investment: EUR 1 equals SAR 4.00 (illustrative), so EUR 2,500,000 invested.
• Assumed annual dividend before withholding: SAR 800,000.
• Assumed withholding tax on dividends to the non-resident: 5 per cent (illustrative; confirm the actual rate and any treaty relief with ZATCA and your adviser).
• Assumed sale proceeds after five years: SAR 13,000,000.
• Exchange rate at sale: EUR 1 equals SAR 4.40 (the euro strengthens against the dollar in this case).

Step 1: Return in riyals

SAR 13,000,000 minus SAR 10,000,000 equals a gain of SAR 3,000,000, or 30 per cent before dividends.

In local currency the investment performs well.

Step 2: Annual dividend after withholding

SAR 800,000 times 95 per cent equals SAR 760,000 per year.

Withholding tax reduces the cash that leaves the Kingdom, which is why treaty relief matters.

Step 3: Sale proceeds in euros

SAR 13,000,000 divided by 4.40 equals about EUR 2,954,545.

The capital gain in euros is about EUR 454,545, or about 18 per cent, rather than 30 per cent.

Step 4: Currency effect on the gain

At the original rate of 4.00, proceeds would have been SAR 13,000,000 divided by 4.00, equal to EUR 3,250,000; the difference is EUR 3,250,000 minus EUR 2,954,545, equal to about EUR 295,455.

Almost EUR 300,000 of the return is lost to currency movement, with no change in the business.

Step 5: Dividends in euros

If the rate moves evenly, a rough average of 4.20 applied to five years of SAR 760,000 gives SAR 3,800,000 divided by 4.20, about EUR 904,762.

Dividends also lose value in euros as the euro strengthens.

Step 6: Total return in euros

EUR 2,954,545 plus EUR 904,762 equals about EUR 3,859,307, against EUR 2,500,000 invested, a gain of about EUR 1,359,307, or about 54 per cent over five years.

Still positive, but in riyals the same investment returned SAR 3,000,000 plus SAR 3,800,000, or 68 per cent.

What changes the answer

• If the euro weakens against the dollar instead, the investor gains from currency movement.
• For a dollar-based investor, the peg removes most of this effect while it holds.
• Hedging with forward contracts can fix part of the rate, at a cost that reflects interest rate differences between the currencies.
• Treaty relief can lower withholding tax, so check the treaty between Saudi Arabia and your home country.
• Timing of repatriation matters: dividends paid regularly spread the currency risk, while a large sale is exposed to the rate on one date.

What the numbers tell you

• Measure returns in the currency your investors use, not only in riyals.
• Remember that the peg links the riyal to the dollar, so your real exposure is to your currency against the dollar.
• Consider hedging the largest and most certain cash flows, such as planned dividends or a known sale.
• Plan withholding tax and treaty relief before setting up the holding structure.
• Keep repatriation documents in order so transfers are not delayed by bank checks.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If a Vision 2030 programme or market trend is shaping your investment case, Domira can test it against real land, construction costs and local demand in the city you are considering before you commit capital.