Saudi Arabia's inclusion in global equity indexes and the planned privatisation of oil company Aramco are expected to bring big inflows of overseas money into the kingdom next year. This should help Riyadh rebuild its financial reserves and fund investment plans after the 2014 plunge in oil prices that cut export earnings and deprived the banking system of funds. Reversing the trend would shift the outlook for an economy which shrank last year for the first time in nearly a decade. The interest rate swaps market, which bankers use to hedge against future fluctuations in money flows, has begun to reflect these expectations in recent weeks. The one-year riyal IRS has sunk below the one-year U.S. dollar IRS for the first time since the global financial crisis at the start of this decade - a bet that the Saudi money market will be flush with funds in 12 months' time.
"It's quite a change -- before, the issue was a shortage of liquidity. We now face a situation in which we're about to have too much liquidity," said Hans-Peter Huber, chief investment officer at Riyad Capital, a top Saudi investment bank.
"Massive inflows are to be expected over the next two years."
The one-year IRS spread was a negative 12 basis points on Thursday. Before the oil price plunge, the spread hovered around plus 60 bps, and it soared to a peak of 203 bps in 2016 during Saudi Arabia's liquidity crunch. The inflows are likely to boost foreign reserves. The central bank's net foreign assets have slid to $480 billion from a peak of $737 billion in August 2014, raising concern about Riyadh's long-term ability to support its currency. Ehsan Khoman, head of regional research for Bank of Tokyo-Mitsubishi UFJ, said they could rebound by $30-40 billion before the end of 2019. Capital inflows may also supply enough money in the banking system to support a pick-up of private investment and a gradual economic recovery in the next few years. Officials predict the sale of a 5 percent stake in Saudi Aramco will raise $100 billion. It was planned for late 2018 but after delays in preparations, bankers now expect early 2019.