SAIBORSaudi Arabia Interbank Offered Rate
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History suggests there is plenty room for short-term Saudi market rates to rise further above US rates; the spread of one-year SAIBOR over one-year LIBOR moved in a range of 25 to 30 bps for most of the first half of last year.
Without an easing of liquidity pressures, which three consecutive drops in the SAIBOR between 21 and 28 June might indicate, we expect that the decline in deposits will lead banks to become more selective in their lending and customers' borrowing costs to rise.
We've already seen the beginning of this trend in the three-month Saudi Interbank Offered Rate (SAIBOR): Over the past 90 days, the three-month SAIBOR has widened by nine basis points (bps).
The Sukuk was priced at 235 bps over six-month SAIBOR for a tenor of five years maturing on June 16, 2021.
The peg with the US dollar will typically form a positive correlation between the SAIBOR and LIBOR.
Gulf International Bank's (GIB) latest bond issue met with strong demand as the bank on 19th April, 2016 successfully priced its senior unsecured SAR 2 billion 5-year Floating Rate Notes issuance at a spread of 140 basis points above three-month SAIBOR.
However, given the rise in credit, which translated into larger liquidity movements, the spread between SAIBOR and LIBOR has widened to over 70bps.
By reducing banks' need to raise more fixed deposits and long-term borrowing, it will also moderate the negative effect that tightening liquidity and rising interest rates are having on Saudi banks' cost of funding: three-month SAIBOR rose to 1.
The sukuk investors will receive an expected return of 6 month SAIBOR plus 95 basis points per annum, to be distributed semi-annually.
Three month SAIBOR rates paid on local-currency deposits in December 2015 reached 1.
However, given the rise in credit which translated into larger liquidity movements, the differential between SAIBOR and LIBOR has widened to over 70 bps.
This programme is expected to reduce competitive pressure in the market, allow banks to deploy into these higher yielding bonds and tighten local market liquidity (6m SAIBOR has risen 11 bps since end-Aug).