Authorities introduce new instrument to inject funds into the money market, suspend local currency bonds as cheap oil bites
Saudi Arabian authorities have taken fresh steps to ease a liquidity crunch caused by low oil prices, suspending the government's local currency bond issues 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.
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.
The Maaal financial website quoted unnamed sources on Thursday as saying the government did not plan to make its usual monthly issue of local currency bonds in October. A Saudi commercial banker familiar with the market confirmed the report.
In mid-2015, the government began offering about 20 billion riyals ($5.3 billion) of local currency bonds every month to help cover a huge budget deficit caused by low oil prices.
But this month, the central bank has not notified local banks of a bond offer, Maaal quoted the sources as saying. Finance Ministry officials could not be reached to comment.
Maaal said the government had been able to suspend domestic issuance because it had succeeded last week in raising a mammoth $17.5 billion in its first international bond sale, reducing the need to raise more funds for now.
Later on Thursday, the central bank said it was introducing a new money market instrument, a 90-day repurchase agreement, that it could use to lend money to banks when needed.
The new instrument will complement seven- and 28-day repo agreements that the central bank introduced last month. 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 issues to 3 billion riyals per week from 9 billion riyals - 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 percent last week, its highest level since January 2009, from below 1.0 percent 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.
The rate has stopped climbing this week, partly because traders believe the government is likely to deposit some of its $17.5 billion bond proceeds in local banks, improving liquidity. It made a special deposit of about 20 billion riyals for this purpose last month.
Nevertheless, bankers said rates could resume rising later this year if the government restarted domestic bond issuance. Maaal did not say whether or when this would happen, but Finance Minister Ibrahim Alassaf, speaking to reporters on Wednesday, indicated the government still considered domestic bonds as a tool to raise money.
The kingdom's debt issues will not be limited to conventional bonds, but will be followed by other instruments such as sukuk, Alassaf said without elaborating.
"They could issue bonds locally again as soon as next month," the commercial banker said.
The government has issued a total of 169.7 billion riyals of bonds to banks since mid-2015, including 83.5 billion riyals during the first eight months of this year, Maaal said.
After a record deficit of 367 billion riyals last year, Riyadh's 2016 budget plan envisages a deficit of 326 billion riyals, 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 numbers suggest it may need to borrow substantial sums domestically for at least two or three more years.
Another commercial banker in Riyadh said he believed banks were unlikely to use the new seven- and 28-day repos much to obtain funds because the instruments were so short-term, although the 90-day repo might have more success.