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An abrupt accounting change that nearly doubled Qatar's hard currency assets this month is drawing investor scrutiny as the nation prepares for a major bond sale.
Qatar's central bank said it made the shift based on 2016 technical guidance from the International Monetary Fund. Senior IMF officials were surprised when the Middle East nation implemented the change almost a year later with no warning but a six-word announcement, according to people familiar with the matter.
The confusion comes as Qatar is scrambling to shore up its finances after Saudi Arabia and other Middle Eastern nations imposed an economic blockade on the country in June. The embargo was in retaliation for Qatar's ties with Iran and its alleged support of extremism.
While the accounting change conforms with IMF protocols, Qatar's central bank made no mention of the impending change when it met with fund officials in August, and the IMF didn't review the calculations before they were announced, the people familiar with the matter said.
How investors perceive this maneuver could affect the price they are willing to pay for Qatar's new debt, expected to reach the market by year-end. Stated foreign currency reserves are key for investors purchasing bonds of most governments and help determine how high a yield buyers demand.
Despite the boost to stated assets, Qatari bond yields have risen since the change was announced, reflecting the stress Qatar's economy has endured under the blockade.
"This may be a buying opportunity," said Markus Schneider, a London-based economist for asset management firm AllianceBernstein Holding LP. He said that the country's other assets help mitigate any concerns about its reserves and that any new Qatari bond likely will yield more than those of other high-quality sovereign borrowers in the region.
Qatari bond yields are still relatively low for an emerging-market country, reflecting the country's vast oil reserves and attendant wealth. The country also owns large foreign currency assets via its sovereign-wealth fund, the Qatar Investment Authority, and Moody's Investors Service estimates governmental financial assets at $340 billion.
But the yield of Qatar's benchmark bond due 2026 has jumped to 3.54% from around 3.1% in May, while the cost of insuring its bonds against default has climbed by 70%, according to data from IHS Markit. Bond yields and the cost of credit default swaps rise when bond prices fall.
Saudi Arabia's comparable bond traded recently at a yield of 3.4%, compared with 3.38% in June, while the cost of credit default swaps on the bond has dropped about 9%, according to Markit.
Before the blockade, Qatar calculated hard-currency reserves by adding up its gold, cash in foreign banks and holdings of foreign securities, principally U.S. Treasurys. That sum fell by about 44% to $20 billion in August from $35 billion in May, as the central bank liquidated most of its foreign securities holdings to bolster the Qatari banking system.
In September, the central bank published a new set of figures that included a different category titled "other liquid assets in foreign currency" and added foreign currency liquidity to its presentation of reserves. The new assets amounted to $19 billion in August, boosting the total figure reported to investors to $39 billion for that month.
The central bank explained in a footnote to its most recent financial report that it made the change to implement recommendation from IMF technical advisers in November to improve data dissemination. IMF guidelines allow for mention of other liquid assets.
Qatar didn't discuss the matter with IMF officials during their staff mission to Doha in August, and the accounting revision caught the fund and investors by surprise, the people familiar with the matter said.
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