Turmoil in the Saudi Arabian money markets suggests that financing the government’s budget deficit in an era of cheap oil may not be smooth as banks worry about the risk of a liquidity squeeze.
The government sold 20 billion riyals ($5.3 billion) of riyal bonds to banks last Tuesday to help cover a huge deficit caused by low oil prices. It was only the second sovereign bond issue since 2007; the first, placed with quasi-sovereign institutions, occurred in July, Zawya reported.
Cash-rich Saudi banks easily absorbed last week’s issue, but money market moves show concern about their ability to absorb the multi-year series of issues that may become necessary if oil prices remain low.
Adding to the jitters is officials’ secrecy about their bond plans. Authorities have privately told banks no more than 40% of the deficit will be financed with bonds; the rest will be covered by running down fiscal reserves.
But authorities have not released a bond issuance calendar or detailed figures for the government’s borrowing requirement.
This has left banks in the dark about how many more bonds they might be asked to buy in coming months and years.
Bankers, therefore, are scrambling to hedge against the risk of a liquidity crunch a year or two from now, causing the Saudi money curve to steepen even as the US curve flattens in anticipation of an interest rate rise this year–an unusual divergence.
The cost of two-year riyal deposits in the interbank market shot up to 1.53% last week from as low as 1.05% six weeks earlier. The cost of swapping fixed for floating payments with a one-year interest rate swap jumped 30 basis points from July.
