Trade Balance Dynamics in Saudi Arabia: The Interplay of Oil Prices, Exchange Rate, and Financial Development

This study investigates the asymmetric effects of the real effective exchange rate (REER), oil prices, and financial development on Saudi Arabia’s trade balance from 1980 to 2021, employing the Non-Linear Autoregressive Distributed Lag (NARDL) model. The results reveal the presence of long-run relationships and significant asymmetries. Specifically, negative shocks to REER adversely affect the trade balance, while positive shocks exhibit no statistically significant impact. Oil prices demonstrate both immediate and asymmetric effects on the trade balance in the short and long run, though the long-run impact gradually diminishes. Moreover, financial development exerts a significant yet negative influence on the trade balance. These findings underscore the dominant role of Saudi Arabia’s position as a major oil exporter in shaping its trade dynamics and highlight the complex interplay of macroeconomic factors influencing external balances.

Keywords: Trade Balance, REER, Financial Development, Saudi Arabia, NARDL.