Saudi narrows rate gap with Libor to boost riyal’s appeal
dubai — 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 has climbed 16 basis points this week to 2.18 per cent, curbing its discount to Libor to about two basis points after the Saudi Arabian Monetary Authority unexpectedly raised both its repurchase and reverse repurchase rates on 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. On 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, the UAE’s 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 28 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.
Loan-deposit policy
Meanwhile, Saudi central bank has instructed banks to change the way they calculate their loan-to-deposit ratios, giving greater
The current move by Sama is likely to have been driven by a need to ensure the appeal of the Saudi riyal Anita Yadav, Head of fixed-income research, Emirates NBD
weight to long-term deposits in order to permit more lending, according to a report on the Maaal financial news website. The new rules, set to come into effect in early April, will introduce a weighting system for calculating a bank’s deposits, ranging from 100 per cent for the face value of deposits on demand to 190 per cent for deposits of over five years, Maaal quoted unnamed sources as saying. The kingdom’s maximum loan-to-deposit ratio for commercial banks will remain at 90 per cent, said the report, but by increasing the value of deposits in the calculation, the new system will give more room for loans to increase.
The Saudi central bank did not immediately respond to a request for comment on the Maaal report.
It last raised the loan-to-deposit ratio in February 2016, to 90 per cent from 85 per cent. The current industry-wide ratio is well below the ceiling, at 79.9 per cent in January, because of low loan demand due to slow economic growth. But authorities hope to speed up growth this year and in coming years by boosting government spending and providing incentives for the private sector to invest. — Bloomberg, Reuters