How volatility in the oil market and uncertainty shocks affect Saudi economy: a frequency approach

This study employs spectral Granger causality to examine how uncertainty transmissions—crude oil volatility, geopolitical risk (GPR), and the World Uncertainty Index (WUI)—affect financial development and economic growth in Saudi Arabia over 1993–2020. Financial development is proxied by market capitalization-to-GDP (MCGDP) and the Financial Institutions Access Index (FIAIX). Results show negative shocks in crude oil volatility significantly affect financial development measured by MCGDP through capital flight and reduced domestic investment, though higher government spending mitigates these effects. For FIAIX, positive oil volatility shocks are insignificant, but negative shocks display long-run causal effects, highlighting banking-sector vulnerability to oil price fluctuations. Geopolitical risk exerts a significant long-term impact on MCGDP and exhibits mixed effects on FIAIX, with negative shocks showing significant causality at certain frequencies. Global uncertainty (WUI) has limited direct impact on FIAIX, suggesting resilience of the Saudi financial sector to global uncertainty. For economic growth, positive oil volatility shocks have stronger effects than negative shocks; GPR shocks have little direct effect. Robustness using the Industrial Production Index (IPI) indicates susceptibility to positive oil volatility shocks across horizons. The findings inform policies to strengthen Saudi Arabia’s financial and economic resilience to uncertainty.

Haykel Tlili, Kais Tissaoui, Bassem Kahouli, Rabab Triki