Qatar seen taking more steps as liquidity remains tight

30/05/2016 05:53 AST

With rapid credit growth outstripping deposit growth, thanks to the falling public sector deposits, Qatar’s banking sector is facing liquidity pressure. There are possibilities for a move from the Central Bank to cut the repo rate or reduce reserve requirements, Samba’s latest ‘Qatar Chart Book’ has noted.

“Liquidity in the banking system is still tight - interbank rates are around 1.5 percent vs 1.2 percent in September 2015 despite the QCB not raising policy rates in line with the Fed”, the Financial Group’s analysts said.

Qatar banks’ aggregate credit growth stood at 14 percent year on year in February compared with deposit growth of just 4 percent pushing the Loan-to-deposit ratio to 120 percent. Public sector deposits fell by 20 percent from a year ago.

In these circumstances, banks are reportedly seeking to raise funds through private placements. There is also the possibility of the Central Bank cutting the repo rate and/or reserve ratio to help to assuage short-term financing pressures. The recent and pending government recourse to external borrowing partly reflects a desire not to exacerbate domestic liquidity constraints, and is projected to push government external debt up to $27.9bn (16 percent of GDP) this year.

The capacity of the domestic banking sector to absorb government debt was tested after the September and November bond and sukuk issuances, prompting a large spike in the interbank rate.

The ‘Qatar Chart Book” noted that LNG prices have continued to trend down in 2016 and the outlook through 2017 remains bearish. Many companies made billions of dollars of investment in LNG during the boom years and this wave of supply is set to hit the market amidst a backdrop of modest demand growth.

Qatar’s RasGas seems to have acknowledged this in the renegotiation of the long-term export contract with India, in which prices are around the $5mbtu level – this is a far cry from the circa $14mbtu levels seen in 2014. Despite the sizeable impact on revenues, Qatar’s LNG industry is well positioned to compete at lower prices.

Qatar’s budget for 2016 focuses on maintaining capital spending while consolidating expenditures elsewhere. This should support sustained growth of around 4 percent over the next two years.

The authorities have stated that the budget deficit will be funded entirely through debt issuance rather than drawing down assets held at the Qatar Investment Authority (QIA). Already the sovereign has raised $5bn in external loans and is preparing to issue another $5bn in Eurobonds.

Qatar sovereign bond yields have trended down this year after a sharp spike upwards at the beginning of the year. Likewise the 12 month forward Riyal rate has come down slightly from January levels but still remains elevated by historical standards.

The Peninsula