Saudi Borrowing Costs Rise to 10-Month High as Lending Picks Up

Saudi Arabia’s one-year and six- month treasury bill yields rose to 10-month highs after loan growth reached the fastest pace in almost three years, lifting borrowing costs in the world’s largest oil exporter.

The Persian Gulf nation paid 0.58 percent on one-year notes at its weekly auction today, up four basis points from last week’s sale, data compiled by Bloomberg show. The yield, which has risen in the last four auctions, is up six basis points this month to the highest level since May. The yield on six-month notes gained two basis points to 0.456 percent, also the highest in 10 months.

Borrowing costs are rising in the largest Arab economy as it pursues plans to spend more than $500 billion to develop infrastructure, build homes and create jobs. Claims on the private sector grew 12.1 percent in February, the fastest pace since March 2009, according to central bank data. Treasury-bill sales rose 3.8 percent in February to 130.8 billion riyals ($35 billion), the first monthly increase since May.

“It might suggest that the government is drawing out some liquidity due to potential concerns over inflation,” Paul Gamble, head of research at Riyadh-based Jadwa Investment, said by phone today. Annual inflation accelerated to 5.4 percent in February from 5.3 percent in January, central bank data show.

Rates Rise

The three-month Saudi interbank offered rate known as Saibor, the reference rate used by banks to lend to clients, rose three basis points to 0.87375 percent at 1:30 p.m. in Riyadh, the highest level since May 2009. The spread over the three-month London Interbank Offered Rate widened to 40 basis points today, the most since June, and has doubled this year, data compiled by Bloomberg show.

“The yield would go up in line with interbank rates, and Saibor has gone up consistently over the last six months,” said Gamble.

Trading in currency forwards indicates an implied one-year interbank lending rate fell 0.6 percent to 1.0205 percent, according to data compiled by Bloomberg. The rate, the actual cost for banks to lend to one another, climbed in the previous four days.

In the United Arab Emirates, the second-largest Arab economy, the implied yield based on three-month currency forwards rose to 0.4806 percent from 0.4758 percent. Most Gulf currencies, including the Saudi riyal and U.A.E. dirham, are pegged to the dollar and central banks typically mirror monetary policy of the U.S. Federal Reserve.

Default Risk Drop

The Saudi central bank, which fixes the riyal at 3.75 a dollar, has held the reverse repurchase rate, its key deposit rate, at 0.25 percent since June 2009.

One-year interest rate swaps, the fixed rate needed to receive floating payments for one year, rose for the first time in six days, gaining 1.8 basis points, or 0.018 percentage point, to 0.909 percent, data compiled by Bloomberg show.

The cost of insuring Saudi Arabia’s debt against default using five-year credit default swaps is down 19 basis points this month to 118 on March 23, the third-lowest level in the Middle East, according to data provider CMA, which is owned by CME Group and compiles prices in a privately negotiated market. The contracts pay the buyer face value if a borrower fails to meet its obligations.

The most-populous Gulf country has largely been spared popular unrest that toppled leaders in Egypt and Tunisia last year and spread through other countries in the Middle East. Default swaps for the U.A.E. capital Abu Dhabi were at 117, while for the U.S. they were 31.

To contact the reporters on this story: Arif Sharif in Dubai at asharif2@bloomberg.net; Daliah Merzaban in Dubai at dmerzaban@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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