Saudi money mar­ket faces chal­lenges ahead

The Pak Banker - - COMPANIES/BOSS -

The Saudi gov­ern­ment sold SR20 bil­lion ($5.3 bil­lion) of riyal bonds to banks last Tues­day to help to cover a huge deficit caused by low oil prices.

Jit­ters in Saudi Ara­bian money mar­kets sug­gest that fi­nanc­ing the gov­ern­ment's bud­get deficit in an era of cheap oil may not be smooth as banks worry about the risk of a liq­uid­ity squeeze.

The gov­ern­ment sold SR20 bil­lion ($5.3 bil­lion) of riyal bonds to banks last Tues­day to help to cover a huge deficit caused by low oil prices.

It was only the sec­ond sov­er­eign bond is­sue since 2007; the first, placed with qua­sisovereign in­sti­tu­tions, oc­curred in July.

Cash-rich Saudi banks easily ab­sorbed last week's is­sue, but money mar­ket moves show con­cern about their abil­ity to ab­sorb the multi-year se­ries of is­sues that may be­come nec­es­sary if oil prices re­main low. Adding to the jit­ters is of­fi­cials' se­crecy about their bond plans. Author­i­ties have pri­vately told banks no more than 40 per cent of the deficit will be fi­nanced with bonds; the rest will be cov­ered by run­ning down fis­cal re­serves.

But author­i­ties have not re­leased a bond is­suance cal­en­dar or de­tailed fig­ures for the gov­ern­ment's bor­row­ing re­quire­ment.

This has left banks in the dark about how many more bonds they might be asked to buy in com­ing months and years.

Bankers, there­fore, are scram­bling to hedge against the risk of a liq­uid­ity crunch a year or two from now, caus­ing the Saudi money curve to steepen even as the US curve flat­tens in an­tic­i­pa­tion of an in­ter­est rate rise this year - an un­usual di­ver­gence.

The cost of two-year riyal de­posits in the in­ter­bank mar­ket shot up to 1.53 per cent last week from as low as 1.05 per cent six weeks ear­lier.

The cost of swap­ping fixed for float­ing pay­ments with a one-year in­ter­est rate swap jumped 30 ba­sis points from July. One-year US dol­lar/Saudi riyal for­wards hit 290 points, their high­est since March 2003. For most of 2015 they were be­tween zero and 100 points.

The prospect of a US rate rise has added to up­ward pres­sure on Saudi mar­ket rates, said Anita Ya­dav, head of fixed in­come re­search at Dubai's Emi­rates NBD.

"I ex­pect riyal spreads to go higher from here as liq­uid­ity in the sys­tem be­comes tight due to lower oil rev­enue-re­lated de­posits, large lo­cal cur­rency bond is­suance by the Saudi gov­ern­ment and in­creased de­mand for hedg­ing from the cor­po­rates as US rates be­gin to rise." With Brent oil priced at about $50 a bar­rel, Riyadh is run­ning an an­nual state bud­get deficit es­ti­mated by an­a­lysts at be­tween $130 bil­lion and $150 bil­lion.

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