Saudi Arabia's biggest commercial bank cut its quote for three-month money in the interbank market on Sunday in a signal that rates could fall further as a liquidity crunch in the banking system eases.
Saudi interbank offered rates soared this year, pressuring companies and banks seeking to raise funds, as low oil prices slashed flows of petrodollars into banks and forced the government to issue bonds domestically to fund a big budget deficit.
Three-month SAIBOR hit a seven-year high of 2.386 percent last month, from below 0.80 percent in August 2015. In a sign of unusual stress on the system, it rose above the central bank's repurchase rate of 2.00 percent, which the central bank uses to supply funds overnight to banks caught short of money.
In the past four weeks, however, rates have been falling by around 1 or 2 basis points each day, with three-month SAIBOR dropping back to 2.134 percent on Sunday from 2.148 percent at the end of last week.
In a signal that rates could drop further, National Commercial Bank, the biggest bank, quoted three-month SAIBOR at 2.10 percent on Sunday, down from the 2.15 percent which it had quoted throughout this month. The government is the biggest shareholder in the bank.
An international banker familiar with the Saudi money market said rates appeared to be returning to more normal levels, though liquidity would not become loose again as long as oil prices stayed low. He suggested three-month SAIBOR might drop in coming weeks below the repo rate.
"For many years, SAIBOR has rarely if ever been above the repo rate for a significant amount of time. This was an extraordinary situation," he said. "Now to some extent the situation is normalising."
Several factors are fuelling the downtrend in rates. In September and October, the central bank launched seven-, 28- and 90-day repurchase agreements that it could use to supply banks with funds; previously it had typically only used one-day repos.
The international banker said the central bank appeared to have tweaked regulations for the new repos to make them easier for commercial banks to use than the overnight repo.
Pressure on liquidity has also been eased by the finance ministry's decision not to make a monthly issue of domestic bonds in October. It has not yet said whether it will resume issuance this month.
The need for the government to sell debt domestically has been reduced, for now at least, by the government's success in issuing $17.5 billion of bonds overseas last month in its first international bond sale.
A central bank official said last week that the proceeds of the foreign bond sale had not yet been deposited in local banks. Bankers believe that if they are, that could provide a big boost to liquidity.
The government has also improved liquidity conditions in the banking sector by releasing payments of money that it owed to private sector companies and delayed paying for months.
Fahad al-Hammadi, chief of the National Contractors' Committee at the Council of Saudi Chambers, a business association, was quoted as saying by Sunday's Arab News that the government has made payments of 40 billion riyals ($10.7 billion) in the past two weeks.
Companies had been forced to draw down existing credit facilities from banks to keep operating during the government payments drought; now that state money is flowing again, the pressure on banks' resources may ease. Hammadi said more payments were expected in coming weeks.
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