Cheap oil driving up interbank rates

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Saudi Arabian money rates have entered a long-term uptrend that may end only when oil prices recover, bankers say, as the money market becomes one of the conduits through which cheap oil affects every corner of the economy.
So far, most stock market investors and ordinary Saudis have focused on expectations that state spending will contract as low oil prices slash the government’s revenues, forcing it to economise.
But cheap oil is also driving up interbank rates, increasing the costs of corporate and consumer loans, and that will eventually deliver an additional blow to investment and consumption.
Rates are rising both because flows of new oil money into banks have shrunk, and because the government is borrowing money from the banks to cover a budget deficit created by cheap oil.
The three-month Saudi Interbank Offered Rate (SAIBOR), which hovered at a three-year low of 0.77 percent between March and July, hit a one-year high of 0.93625 percent on Wednesday.
Some bankers think the rate could in coming weeks hit 1.0 percent for the first time since April 2009, when the local money market was grappling with the global financial crisis.
“SAIBOR is reflecting tighter liquidity conditions in the market,” said Aqib Mehboob, senior analyst at Saudi Fransi Capital in Riyadh.
“Whilst the pressure had been building, the trigger was the government bond issuance, which cemented expectations of higher government borrowing from the local market.”
The government started issuing bonds in July for the first time since 2007, selling about SR20 billion ($5.3 billion) per month and covering roughly half of the deficit it is believed to be running with Brent oil around $50 per barrel. It is meeting the other half by liquidating foreign assets.
There’s no immediate danger of banks running out of money to buy the bonds. Commercial banks’ non-statutory deposits at the central bank plus holdings of central bank bills totalled SR228 billion in August, data from Saudi Arabian Monetary Agency (SAMA) shows.
That’s enough to cover 11 months of bond sales at the current pace without causing the banks to divert money from private sector lending.
The banks could bring money back from abroad; their net foreign assets totalled SR219 billion in August.
But several factors are causing banks to hold back funds, pushing up rates. One is the open-ended nature of the bond issuance program; the finance ministry has not set any limit for it in terms of time or size. If oil stays around $50 for years, heavy government bond issuance may become a permanent feature.
Another problem is that bond tenors of five, seven and 10 years mean Saudi banks hold more of their assets in long-term instruments yet remain heavily dependent on short-term funding. This may increase the risk of liquidity squeezes.

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