The Kuwaiti dinar fell sharply against the US dollar in the forward market on Tuesday, to levels last seen in 2009, reflecting a shortage of dinars in the cash market as low oil prices reduced liquidity, bankers said.
Kuwait is one of the richest of the Gulf energy exporters and can cope relatively easily with an era of cheap oil, but its markets are showing stresses that are being felt across the region.
One-year dollar/Kuwaiti dinar forwards jumped as high as 462.80 points on Tuesday, their highest level since March 2009, from Monday's close of 390 points. They remained well below their 2008 peak of 1,582 points, hit during the global financial crisis.
Bankers said that with oil prices low, some Kuwaiti government and quasi-sovereign bodies had reduced their longer-term dinar deposits in banks. This had left banks scrambling for cash.
"There is a sharp dinar shortage in the cash market due to deposit erosion from government-related entities, causing a scramble for KWD liquidity," a senior commercial banker in Kuwait said, declining to be named because of commercial sensitivities.
Another banker said: "There is a big rush to attract customer deposits among banks, but that can hardly fill the gap caused by the withdrawals, making the cash shortage inevitable."
The three-month Kuwait interbank offered rate has risen to 1.19 percent from 0.81 percent at the end of last year, while the one-year deposit rate has jumped 100 basis points.
The dinar is pegged in the spot market against a basket of currencies; in the forwards market, rising dinar interest rates are causing it to trade at a growing discount.
"The forward market is signalling a weaker KWD against USD. If interest rates in the cash market move up further, then forwards will continue to rise until the government infuses dinar liquidity," the first banker said.
Kuwait's government swung to a budget deficit in the April-August period of 1.094 billion dinars ($3.62 billion), after a deduction for the Future Generations Fund, part of its sovereign wealth fund, according to official data.
Interbank money rates are rising and currencies falling in forwards markets across the Gulf, as banking systems and markets adjust to cutbacks in flows of oil money to which they became accustomed over years.
One-year dollar/Saudi riyal forwards climbed as high as 625 points on Tuesday, their highest level since 1999.