Qatar may issue bonds to mop up excess liquidity

Qatar may issue a sovereign bond to local banks and consider tweaking monetary policy in coming months if excess liquidity in its banking sector continues rising.

Banks in the world’s top liquefied natural gas exporter are already awash with deposits, which rose nearly 7% from a year ago to a record QR378.3bn ($104bn) in June, latest central bank data show.

Despite breakneck credit expansion - total loans jumped 33% on average in January-June - the overhang of unused money in the banking system has prompted some lenders to park large amounts of excess funds at the central bank’s low-yielding deposit facility.

The facility offers a 0.75% overnight interest rate but some funds placed there do not earn any interest at all, because the central bank last year introduced limits on the amount of money eligible for interest.

In June, funds deposited at the facility almost tripled from a year ago to QR142.7bn, the highest since April 2011, when the central bank (QCB) cut its overnight deposit rate as one in a series of steps to deal with excess money.

Meanwhile, loose liquidity has pushed the average three-month interbank lending rate down to a one-year low of 0.93% in June from a March peak of 1.75%, central bank data show.

The ballooning amount of money sloshing around the interbank market and kept at the central bank might eventually become a risk for the economy. Any quick shift of the funds into the stock or real estate markets, for example, could potentially destabilise them or fuel inflation. “Increasing use of the interbank market is a bit of a concern, but has not yet reached alarming levels to cause a policy action at this stage,” said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.

“Obviously, if this trend continues over the next quarter and through the end of 2012, we may see some government intervention.”

The share of interbank lending is still manageable at around 22% of non-equity liabilities as of end-June, Bantis said, but he added: “Should this level start to inch towards the 30% range, this may trigger some action.”

Philippe Dauba-Pantanacce, senior regional economist at Standard Chartered, said excess liquidity could become problematic when the economy was overheating and inflationary pressures emerged, but Qatar was not in such a situation yet.

A poll of analysts in July forecast Qatar’s economic growth would slow to a still-robust 6.3% in 2012 from 14.1% in 2011. Inflation is expected to climb to 2.7% from 1.9%, remaining far below a 2008 record high of 15%.

Qatar’s central bank is no stranger to the problem of excess funds. In December 2010, funds parked at the central bank’s deposit facility reached a peak of 634.3bn.

The rise prompted it to make a series of cuts in the rate on the facility: by 50 basis points in August 2010, and by a combined 75 bps in April and August 2011.

The central bank said it aimed to encourage the use of money for lending in the real economy, and wanted to bring its rate closer to its US benchmark, the Federal Reserve’s fed funds target range of zero to 0.25%. Since the Qatari riyal is pegged to the US dollar, the central bank can’t keep too large a gap with US rates without inviting fund inflows.