Qatar's banking system is slated to see a reduction in net external debt in the next 12-24 months and the concerns over its external funding stability is mitigated by non-resident deposits' linkage to long-term investments in the country, according to Standard and Poor's (S&P), a global credit rating agency.
"We expect the reduction in net external debt to continue in the next 12-24 months, driven by the same factors as in 2022 and supported by a reduced need for external funding," S&P said in its report.
In early 2022, the Qatar Central Bank changed regulations, aimed at reducing the use of external debt to grow domestic balance sheets. That, alongside rising interest rates, led to a "significant unwinding" of non-resident deposits, and has somewhat changed the overall structure of the country’s external debt, the rating agency said.
Over 2022, non-resident deposits fell by more than $20bn, equal to about one third of their value at the end of 2021; while interbank deposits increased by more than 13%, leading to an overall $17bn decline in net banking system external debt.
An increase in resident deposits of $23.2bn (up 12.3%) - 41.5% from the public sector and 58.5% from the private sector - offset the decline in non-resident funds.
Highlighting that the rationale for Qatar’s development of an external debt imbalance was the desire to secure low-cost funding for significant domestic expenditures; S&P said with the completion of some major infrastructure developments, and due to increased government revenues, "we expect spending (and funding pressures) will ease."
Moreover, the credit rating agency said its concerns on Qatar’s external funding stability are mitigated by its understanding that a significant portion of the non-resident deposits are linked to longer-term investments in Qatar.
Reportedly, the funds also include deposits from Qatari companies abroad and possibly from entities partly owned by Qatar’s sovereign wealth fund.
Also, "we expect funding support would be available from the government and central bank if needed," it said.
In this regard, S&P noted that in 2017, the banking system experienced outflows of about $20bn, which were more than compensated by a more than $40bn deposit injection from the government and its related entities.
"Indeed, one of Qatar’s strengths is its external finances, which are in a strong net asset position, bolstered by the government’s substantial wealth fund," the report said.
Qatar’s banking system, which still carries a "significant" amount of net external debt, is unlikely to expand much this year 2023, implying a lower need for external funding, it said.
Although Qatari banks benefit from geographical funding diversification, some of these external sources are less stable. As on March 31, 2023, the equivalent of almost two-thirds of the domestic funding gap was covered by capital markets and due to branches and head offices, while the remainder was covered by interbank deposits.
Amid scarcer and more expensive global liquidity, "we expect Qatari banks to continue mobilising domestic resources to meet future growth", the rating agency said.
However, S&P do not expect the latter to materially pick up until a major new investment programme is implemented by the government.