Saudi Borrowing Rate Soars in November as Bank Deposits Drop

Deep Dive: Saudi Libor Rates, Oil Prices
  • Three-month interbank rate posts biggest jump since 2008
  • Demand deposits at Saudi banks decline $14 billion in October

Saudi Arabian banks are feeling the squeeze from falling oil prices.

The rate at which banks in the biggest Arab economy lend overnight to each other jumped the most in seven years in November, the fifth straight month of increases, following a slump in deposits the previous month that forced lenders to seek more funds from each other.

"The drop in deposits in October, in absolute amount, is probably the biggest since the 1990s," Murad Ansari, a bank analyst at EFG-Hermes Holding SAE, said by phone from Riyadh on Monday. "There are payment delays from the government to contractors, which is one of the reasons for the decline in private sector deposits, and public sector deposits are shrinking as the government is running a deficit."

The jump in bank borrowing costs provides further evidence of the impact oil’s 37 percent price drop in the past 12 months is having on a nation that gets about 90 percent of government revenue from energy. Traders are already boosting bets the Saudi riyal may be devalued. Standard & Poor’s last month lowered the country’s credit rating. Now liquidity in the banking system is being squeezed, with demand for deposits dropping 4.7 percent in October as businesses, individuals and government entities withdraw cash.

The three-month Saudi Interbank Offered Rate, which is used to price some loans, climbed 13 basis points this month to 1.11625 percent on Monday, according to data from the Saudi Arabian Monetary Agency on Bloomberg. That’s the biggest gain since October 2008 and the rate is at its highest since April 2009.

S&P lowered the country’s credit rating in October, citing a budget deficit that it forecasts will increase to 16 percent of gross domestic product this year. Saudi riyal 12-month forward points climbed to 650 last week, the highest in more than 16 years, as investors bet the government would abandon its fixed exchange rate amid oil’s decline.

Saudi Arabia is ordering a series of cost-cutting measures as the slide in oil prices weighs on the kingdom’s budget, two people with knowledge of the matter said last month. The finance ministry told government departments not to contract any new projects and to freeze appointments and promotions in the fourth quarter, the people said. 

Bond Sales

Demand deposits in Saudi Arabia declined 50.5 billion riyals ($13.5 billion) in October, with deposits of businesses and individuals falling 23.2 billion riyals and of government entities receding 27.3 billion riyals, SAMA data shows.

The government has borrowed at least 55 billion riyals from local banks and institutions through bond issues this year to bridge a fiscal deficit, which the International Monetary Fund expects to climb to more than 20 percent of economic output in 2015 from 2.3 percent last year. Saudi Arabian banks’ loans-to-deposits ratio worsened to 83.8 percent in October from 82.5 percent a year earlier, indicating tightening liquidity.

"We’re also approaching the year end, when there is a little bit more volatility in funding costs as banks are more aggressive in shoring up balance-sheet liquidity," said Ansari.

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