Saudi Arabian authorities have taken steps to ease a liquidity crunch caused by low oil prices, suspending the government’s local currency bond issue and introducing a new instrument to inject funds into the money market. The steps could, temporarily at least, ease upward pressure on Saudi money market rates, which have been rising sharply, threatening economic growth, as government debt sales soak up funds from the banking system, Arab News reported.
But some bankers said the upward trend in rates was unlikely to end unless the government succeeded in slashing its budget deficit, allowing money to flow back to the private sector.
Saudi Arabian Monetary Agency (SAMA)
Meanwhile, Saudi Arabian Monetary Agency (SAMA) said it was introducing a new money market instrument, a 90-day repurchase agreement that it could use to lend money to banks.
The new instrument will complement seven-day and 28-day repo agreements that the central bank introduced in September. Previously, it had typically only used repo agreements with one-day maturities.
The central bank also said it was lowering the maximum volume for its treasury bill issue to SAR3 billion riyals per week from SAR9 billion — a signal to banks that they would not face large drains of short-term funds.
Because of tightening liquidity, the three-month Saudi interbank offered rate shot up to 2.386% in the third week of October, its highest level since January 2009, from below 1% a year ago.
This threatens to squeeze companies’ finances and hurt the economy, which has already been slowing because of government austerity measures introduced in response to cheap oil.
Proceeds of $17.5 billion bond sale
The rate has stopped climbing since the last week of October, partly because traders believe the government is likely to deposit into local banks a part of the proceeds of the $17.5 billion bonds it sold in international market in October.
After a record deficit of SR367 billion last year, Riyadh’s 2016 budget plan envisages a deficit of SR326 billion, a step on the way to balancing the budget by 2020.
Bankers expect another big international bond issue from Saudi Arabia next year, and it may also tap the international loan market.
But the deficit volume suggests that it may need to borrow substantial sums domestically for at least two or three more years.
A commercial banker in Riyadh said that it is believed banks were unlikely to use the new seven-day and 28-day repos much to obtain funds because the instruments were so short-term, although the 90-day repo might have more success.
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