Saudi Key Rate Climbs to 2009 High as Funding Squeeze Tightens

  • Three-month interbank offered rate up 46 bps this year
  • Reflects slower deposit growth, higher government borrowing

A key interest rate in Saudi Arabia climbed to the highest level in seven years as oil’s slump and increased government borrowing put further strain on bank funding in the biggest Arab economy.

The three-month Saudi Interbank Offered Rate, a benchmark used to price loans, advanced 1.5 basis points to 2.004 percent on Sunday, surpassing 2 percent for the first time since January 2009, according to data compiled by Bloomberg. The rate has risen 46 basis points this year, the biggest increase for the period since 2005, the data show.

Banks are feeling the squeeze as oil’s more than 60 percent decline since the middle of 2014 curbs deposits, while the government boosts borrowings to plug an $87 billion budget deficit this year. The quest for funding may get some relief this month after three people with knowledge of the deal said in March Saudi Arabia is poised to seal a $10 billion syndicated loan from international banks.

“We have seen government deposits falling in the banking system, at the same time its borrowing requirements have increased,” Monica Malik, the chief economist at Abu Dhabi Commercial Bank PJSC, said by phone. “This is reflected in the rise in interbank rates as well as Saudi Arabia turning to the international market to raise a syndicated loan to limit further domestic liquidity tightening.”

Oil’s decline pushed Saudi Arabia to post a budget deficit of about 16 percent of economic output in 2015, its biggest since 1991, according to data compiled by Bloomberg. The government raised 98 billion riyals ($26 billion) from selling bonds to local institutions last year, and will probably sell about 120 billion riyals of debt in 2016, Saudi Fransi Capital said in October.

Saudi Arabian banks’ loan-to-deposit ratio worsened to 88.1 percent in February from 86.1 percent in January, according to the monthly report of the Saudi Arabian Monetary Agency.

The central bank in February eased rules on bank lending to stimulate growth, allowing them to lend the equivalent of 90 percent of their deposits, up from an earlier limit of 85 percent.

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