Saudis narrow rate gap with Libor to boost riyal appeal

SINGAPORE: Saudi Arabia has narrowed the difference between a key rate and its US dollar equivalent in London, days before the Federal Reserve is due to set monetary policy.

The three-month interbank rate climbed 14 basis points to 2.16%, curbing its discount to Libor to four basis points after the Saudi Arabian Monetary Authority (SAMA) unexpectedly raised both its repurchase and reverse repurchase rates last Thursday.

Saudi Arabia typically follows US monetary policy because its currency is pegged to the dollar, but it increased its key rates less than a week before the Fed is due to raise borrowing costs.

Historically, Saibor has been higher than Libor – by more than 150 basis points as recently as 2016. That changed this year amid ample liquidity in the banking system and relatively slow credit growth. Last Friday, Saibor was 19 basis points below its US dollar equivalent, the biggest gap in a decade.

“The current move by SAMA is likely to have been driven by a need to ensure the appeal of the Saudi riyal in an environment of generally tightening monetary conditions in the developed world,” said Anita Yadav, the head of fixed-income research at Emirates NBD PJSC, the United Arab Emirates’ second-biggest bank.

More specifically, the risk of allowing the discount to widen is that it could lead to capital outflows or a shift in deposits to dollars from Saudi riyals, Monica Malik, chief economist at Abu Dhabi Commercial Bank, wrote in a report on March 16.

While the central bank is unlikely to boost borrowing costs this week, it may raise its benchmark rates two more times in 2018, according to Malik.

Saibor has risen 26 basis points so far this year, compared with a 51 basis points advance in Libor.

“The central bank could eliminate the remaining gap by selling government bonds in the open market to fine-tune Saibor within the interest rate corridor,” said Ziad Daoud, the chief Middle East economist for Bloomberg Economics.