SAR Swaps Cost 115bp More Than USD. Currency Risk Explains Only 17bp.

Fixing riyal debt costs roughly 115bp a year more than fixing dollar debt. A treasurer taking out a five-year swap, or a fund locking the rate on a riyal-denominated project, currently pays around 5.30% in SAR against 4.13% for the equivalent USD trade. And it is not a Gulf-wide phenomenon: the UAE runs the same dollar peg, yet a dirham treasurer pays only about 30bp over USD.

As of the 24 August 2026 close, the gap between SAR swap rates and USD swap rates holds across the curve:

It is not new, either. The two curves have sold off and rallied together for two and a half years, and through all of it the spread held an 85 to 130bp band:

This is a puzzle. A hard peg with an open capital account should pull riyal rates close to dollar rates, and the peg has held at 3.75 for almost four decades. So what is the 115bp made of? Four things, and each of them can be measured separately:

Rounded midpoints of measured ranges; the components do not sum exactly.

The catch: the first three terms cannot be read off a single market, because they all sit inside the gap between the two benchmarks. So the plan is to measure the combined benchmark gap first, use FX forwards to strip out the currency, and use the dirham market to size the construction term. Whatever is left is the residual, and it turns out to be roughly zero.

The gap between the two benchmarks (~120bp)

Most of the spread exists because the two swaps are built on floating rates that measure different things. A SAR swap fixes 3M SAIBOR, the rate at which Saudi banks lend to each other unsecured for three months. It carries bank credit risk and the cost of riyal liquidity. A USD swap fixes SOFR, an overnight rate secured by US Treasuries, which is close to risk-free.

Two structural facts sharpen the comparison. Since its 2022 reform, SAIBOR is anchored to panel banks' actual funding transactions, with the published rate capped at 20bp above their measured cost of funds. The gap is real funding cost, not quoting convention. And unlike LIBOR, SAIBOR has no announced successor and no risk-free fallback, so the floating leg of a 5Y SAR swap means SAIBOR for the life of the trade.

A 5Y swap's fixed rate is essentially the expected average of its floating benchmark over five years. The swap spread is therefore, first and foremost, a bet on the future gap between these two rates. That gap is directly observable in the daily fixings, and it has been wide for years. Comparing 3M SAIBOR with 3M compounded SOFR:

Two notes on reading that table. The narrow prints in the middle are a measurement artefact: compounded SOFR is backward-looking while SAIBOR is forward-looking, so the gap compresses mechanically while the Fed is cutting. And in stable-rate periods the gap has lived in a 90 to 120bp range; the last two months have averaged slightly above it.

Independent observers see the same picture. The IMF's latest Article IV assessment describes the 3M spread fluctuating between roughly 90 and 140bp on the back of double-digit credit growth, and Saudi banking analysts put the longer-run norm closer to 70bp.

Now put the swap spread next to the spot gap: ~116bp against ~120bp. The swap market is pricing current Saudi funding conditions to persist for five years, with essentially no normalisation. And it is doing so even though the gap sits at the high end of its own history, even though liquidity data has begun to ease at the margin (deposit growth has outpaced credit growth in recent quarters), and even though a Fed hike would narrow the gap from the dollar side with no change in Saudi conditions at all.

One subtlety before moving on. This observable ~120bp gap bundles three of the formula's four terms: the construction gap, the riyal funding premium, and any genuine difference in risk-free rates between the two currencies. To split it, we need markets that each price only one piece. FX forwards price the currency.

The currency, priced by FX forwards (~17bp)

This is the term where the peg would show up, and the FX forward market is where to measure it. A forward price is not a forecast; it is an arbitrage. A bank selling you dollars five years forward hedges itself today: it borrows dollars, converts them to riyal at spot, and parks the riyal at riyal rates until delivery. The forward price that makes that trade break even is spot adjusted by the gap between the two currencies' rates (covered interest parity).

That means forward points can only contain two things: differences in expected policy rates between SAMA and the Fed, and any extra yield the market demands for holding riyal at all, the devaluation premium. They cannot contain SAIBOR's bank credit premium, because no leg of the arbitrage transacts at SAIBOR. The forwards' verdict is small:

• If the full 115bp were currency risk, arbitrage would force the 5Y USD/SAR forward to trade roughly 5.9% above spot.
• What forwards actually price: with spot pinned near 3.756, the 5Y forward trades around 3.787. That is a cumulative premium of just 0.83%, or about 17bp per year.
• The 1Y point agrees: the 1Y forward sits about 21bp above spot.
• 17bp is a ceiling, not a floor: it bundles the true rate differential together with any devaluation premium, and for a currency pegged at 3.75 since June 1986 that is close to noise.

Forwards are not incapable of pricing peg risk; they have priced it before, loudly. In early 2016, with oil below $30, 1Y USD/SAR forward points spiked from single digits to a record of roughly 1,000 points, about 2.7% of implied depreciation. They jumped again to around 264 points in the spring 2020 oil crash. Today (late August 2026) they sit near 80. When there is something to price, this market prices it. The IMF's current assessment reads the same way: the peg is appropriate and the external buffers ample.

Two caveats belong here. First, SAR forwards are a managed market. SAMA has historically intervened in the forward market directly and restricted speculative forward products, so quoted points reflect policy as well as positioning. There is, deliberately, no offshore riyal market to quote a second opinion. Second, for rates readers: the same observation can be restated as a cross-currency basis. FX-swap-implied riyal yields sit close to dollar yields while SAIBOR-linked rates sit about 100bp above them. That is exactly the benchmark premium this note is decomposing.

Subtracting the currency from the benchmark gap leaves roughly 100bp that has nothing to do with the riyal itself. But that 100bp still mixes two things: the mechanical construction gap that exists in every IBOR-style market, and the premium specific to riyal funding. Splitting those two needs one more market.

The dirham test: construction ~30bp, residual ~0

The UAE runs the same experiment with the Saudi-specific variables removed. Same dollar peg. Same benchmark structure: 3M EIBOR is an unsecured term rate, just like SAIBOR. But no funding squeeze and, per its forwards, no currency premium:

With the currency at zero and no funding story, the dirham's ~30bp spread is a clean reading of the last two terms: the construction gap (~25 to 30bp) plus at most a few basis points of liquidity and term premia. Carry that back to the Saudi side and the formula closes. Take ~116bp of spread, subtract ~17bp of currency and ~30bp of construction, and roughly 70bp remains. That 70bp is specific to riyal bank funding conditions, with essentially nothing left unexplained. The control also cuts the other way: if the peg were the driver of Saudi Arabia's premium, it would show up in the dirham market. It does not.

That ~70bp has a well-documented story behind it. Saudi bank lending has outgrown deposits for most of the Vision 2030 era: SAR 372bn of new loans against SAR 219bn of deposit growth in 2024 alone. The sector's loan-to-deposit ratio has run above 108%, against a ten-year average near 96%, and banks raised a record $33bn in international markets last year, roughly three times the previous record. Rating agencies expect the funding gap to persist for several more years, which is consistent with what the swap curve is pricing.

Putting the numbers together

What this means if you are the one fixing

1. When you fix SAR debt, the premium you are paying is the one already inside SAIBOR, not a charge for the peg. Your loan already pays SAIBOR, and SAIBOR already contains Saudi bank credit and funding costs. A pay-fixed swap converts that floating stream into a fixed one, so its price inherits the same premium. It looks expensive next to a USD swap only because the USD swap is built on a near risk-free benchmark.
2. The forward market currently prices essentially no devaluation premium out to five years. Whatever view you hold on the peg, the market's own pricing of it is about 17bp per year. That is worth knowing before attributing the swap spread to currency risk.
3. The curve prices today's funding tightness as permanent, and the easing tailwind as over. The swap spread extrapolates a benchmark gap that sits at the top of its historical range, and the SAIBOR forward curve now slopes upward. On current pricing, waiting is no longer a strategy the curve rewards.
4. If you are underwriting a riyal-denominated project, the rate assumption is defensible in parts. The all-in fixed rate is the USD curve plus a spread that is mostly funding premium, with a measurable ~17bp currency component. Sensitivity analysis belongs on the funding term, the one component that actually moves (the overall spread has ranged roughly 85 to 130bp), not on the peg.

The market appears to be acting on this. As of late August 2026, SAR swap activity we track is running about 70% ahead of 2025's full-year total, with the growth concentrated at the short end: the average tenor of new trades has shortened from roughly five years to under three. More Saudi borrowers are hedging, and mostly with short-dated trades.

Watch it live

Everything in this note is reproducible from our platform: the SAIBOR forward curve, SAR swap rates, Saudi government bond and sukuk yields, and USD/SAR forwards are all live. You can price a SAR swap against the current curve in the app in under a minute, or download the SAIBOR forward curve straight into Excel for your model. If you are working through a riyal hedging decision, book a call with our team.

Curve levels are end-of-day 24 August 2026 and move a few basis points day to day. Spreads are quoted-rate differentials: the SAR fixed leg accrues 30/360 while the USD fixed leg accrues Act/360, and restating the SAR leg on Act/360 lowers its quoted rate by roughly 7bp, so like-for-like spreads are slightly tighter than the differentials shown; the AED comparison needs no adjustment. The FX forward analysis is limited to tenors of five years and under, where forward pricing is deep. Nothing here is a prediction about the peg or hedging advice; it is a description of what market pricing currently implies.

Frequently asked questions

Why are SAR swap rates higher than USD swap rates?

Because the floating rates the two swaps are built on measure different things. A SAR swap fixes 3M SAIBOR, the rate at which Saudi banks lend to each other unsecured for three months, so it contains bank credit risk and the cost of riyal liquidity. A USD swap fixes SOFR, an overnight rate secured by US Treasuries, which is close to risk-free. Most of the roughly 115bp gap is that difference between the two benchmarks; FX forwards attribute only about 17bp a year to the riyal itself.

Does the SAR swap spread mean the riyal peg is at risk?

The forward market says no. USD/SAR forwards currently trade less than 1% above spot at the 5Y point, which works out to about 17bp a year of implied compensation for holding riyal rather than dollars. That is close to noise for a currency pegged at 3.75 since 1986. This is a description of current market pricing, not a forecast.

What is SAIBOR?

SAIBOR is the Saudi Arabian Interbank Offered Rate, the benchmark that most riyal floating-rate loans and swaps reference. It is published daily across tenors, and SAR interest rate swaps typically exchange a fixed rate against 3M SAIBOR. You can see the market's expected path of SAIBOR on our SAIBOR forward curve page.

How can I see live SAR swap rates and forwards?

BlueGamma publishes live SAR swap rates and the SAIBOR forward curve, and in the app you can price a SAR swap against the current curve, download the forward curve to Excel, or pull it through the API.