Key Saudi money market rate drops

dubai — A key Saudi Arabian money market rate dropped below the central bank’s repo rate on Monday for the first time since last April, in a sign that a liquidity crunch due to low oil prices is easing.

The three-month interbank offered rate fell to 1.999 per cent from Sunday’s 2.009 per cent. The central bank’s repo rate, which it uses to lend money overnight to commercial banks caught short of funds, is two per cent.

In normal times, short-term money rates tend to trade below the repo rate. That ceiling was breached last year as shrunken petrodollar flows due to cheap oil and government austerity measures starved banks of funds, sending money rates soaring and threatening to burden companies with higher borrowing costs. But in recent weeks conditions have eased as the government has raised money through a $17.5 billion international bond issue and injected some of those funds into the economy. Higher international oil prices, now around $55 a barrel compared with last year’s average of about $45, have also helped.

The three-month interbank rate has pulled back from an eightyear high of 2.386 per cent hit in late October, although it remains far above the 0.80 per cent seen in mid-2015.

Olivier Panis at Moody’s said government payments to companies had boosted commercial banks’ deposits while reducing the need for them to extend loans to keep firms afloat. “There is a scissors effect,” he said. “There is less need for banks to fight for liquidity.”

Saudi authorities have worked to wrestle down money rates by introducing new money market instruments for the central bank to inject funds and by suspending domestic government bond issues for several months.

They have also improved liquidity by beginning to settle tens of billions of dollars in state debts to the private sector. Finance minister Mohammed Al Jadaan told Reuters in late December that the government had paid SR100 billion ($26.7 billion) to the private sector over the previous two months, and expected to pay an additional SR30 billion soon.

After payment delays lasting months or years, many private sector executives and bankers were sceptical of this claim, but central bank data released on Sunday supported it. — Reuters