Key Saudi money rate drops as funding squeeze due to cheap oil eases

31/01/2017 07:09 AST

A key Saudi Arabian money market rate dropped below the central bank’s repo rate yesterday 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% from Sunday’s 2.009%.

The central bank’s repo rate, which it uses to lend money overnight to commercial banks caught short of funds, is 2.00%.

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 $17.5bn 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 eight-year high of 2.386% hit in late October, although it remains far above the 0.80 % 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 100bn riyals ($26.7bn) to the private sector over the previous two months, and expected to pay an additional 30bn riyals soon.

Government deposits at the central bank allocated for economic development projects dropped by 98.8bn riyals in November and December, after barely moving for most of 2016. A Saudi construction industry executive, declining to be named, said the government had now paid its debts to his company up to April 2016. “We are waiting for the other payments – no definite timing is known, but they are working on it,” he told Reuters.

The resumption of government payments has helped to reduce speculation about any eventual devaluation of the Saudi riyal. In the one-year forwards market, the riyal has rebounded against the US dollar to the highest level seen on a sustained basis since late 2015.

Because of a sluggish Saudi economy, bank lending growth is expected to stay slow this year, which Panis said would probably prevent any fresh liquidity squeeze. But he added that money rates would not necessarily drop much more.

“Growth in deposits will also be slow as corporate profitability is low and consumers react to austerity measures,” he said. “I wouldn’t expect a further sharp drop below 2%.”

Reuters