Saudi riyal falls to 6-year low in forwards market

Saudi Arabia's Finance Ministry issued government development bonds worth 20 billion riyals ($5.33 billion)  to local banks and financial institutions, the official Saudi Press Agency reported on Tuesday without giving a source.

Five-year bonds would yield a return of 1.92 per cent, seven-year bonds 2.34 per cent and 10-year bonds 2.65 per cent, it reported. It said the ministry had previously issued a 15 billion riyal bond in June and was planning to issue more in the coming period.

Saudi riyal falls in forwards market

The Saudi Arabian riyal fell to its lowest forwards market level against the U.S. dollar in over six years on Tuesday as a rare bond issue by the Saudi government tightened liquidity in the kingdom's money markets.

One-year dollar/riyal forwards climbed as high as 144 points, their highest level since December 2008. Previously this year, they had been trading almost entirely in a range of zero to 100 points.

Traders said forwards were moving in response to a jump of longer-term Saudi riyal money rates, after the government sold riyal bonds to local commercial banks this week to help cover a huge budget deficit caused by low oil prices.
The bond issue pushed the cost of two-year riyal funds in the interbank market up to 1.53 per cent this week from as low as 1.05 per cent six weeks ago.

The government sold 20 billion riyals ($5.3 billion) of five, seven- and 10-year bonds, only its second sovereign bond issue since 2007. Its first was in July, to quasi-sovereign institutions.

Bankers expect it to sell many more bonds - perhaps 20 billion riyals a month - by the end of this year and possibly next year to cover the deficit created by cheap oil, which analysts estimate could total $130-150 billion this year.

This prospect has created concern about a substantial tightening of liquidity in the banking system over coming months, as the government debt absorbs funds.

But concern about Saudi Arabia's ability to repay its debt does not appear to have increased. Five-year Saudi credit default swaps, used to insure against any sovereign default, have risen only marginally in the last few weeks and are well below their levels in 2011 and 2012.  


 

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