The Saudi riyal plunged sharply against the US dollar in the forwards market on Wednesday, near levels last seen 12 years ago, on liquidity concerns after the government issued local currency bonds this week, bankers and traders said. One-year dollar/Saudi riyal forwards jumped as high as 290.0 points, their highest level since March 2003, from Tuesday's close of 140.00 points. The forwards later fell to 230.00 points.
Traders said forwards were moving in response to a host of factors, including a jump in Saudi riyal money market rates after the government sold bonds worth 20 billion riyals ($5.33 billion) to commercial banks to help plug a budget deficit caused by low oil prices. The three-month Saudi interbank offered rate (SAIBOR) , essentially flat at a record low of 0.77 percent since March, climbed in the past few days to nearly 0.82 percent.
The lack of clarity from the Saudi government over the size and timeframe of its debt issue plans has raised concerns about whether the Saudi banking system has enough liquidity to absorb all the new government bonds. The International Monetary Fund estimated in June the Saudi budget deficit for 2015 could hit $150 billion, while a source told Reuters on Sunday that local banks had been told up to 40 percent of the shortfall could be funded using sovereign bonds.
The move in forwards also tracked sentiments in the emerging markets which saw stocks, bonds and currencies extend losses after China moved to allow its yuan to weaken for the second straight day, forcing some central banks to curb sharp falls in their currencies. The Saudi riyal is pegged to the dollar so, in the absence of spot trading, forward contracts are often seen as a clear indicator of market sentiment towards the region.