With Qatar in the midst of a “bold” capital investment programme, the country’s financial sector has a vital role to play in maintaining the smooth flow of money to the domestic economy, according to Oxford Business Group (OBG).
In 2016, a liquidity squeeze resulted in a 4.6% drop in M2 money supply, while the sector’s loan-to-deposit ratio (LDR) reached 100.1%, in keeping with the Qatar Central Bank (QCB) target of 100%.
However, in March last year, the LDR had increased to 114.9%.
“It is true that the LDR is now higher than we would like, but the economy is still relatively well capitalised and both the government, and banks are able to borrow on the international markets because we have retained strong credit ratings from international agencies,” Dr R Seetharaman, Doha Bank CEO, told OBG.
“Banks have also become more selective in their loans because the cost of funding has increased by approximately 40%.”
One of the underlying causes of the 2016 decline in liquid funds was the reduction in government and government-related entity deposits in the domestic banking system, OBG noted. While these fluctuate naturally over time, total public sector deposits within commercial banks fell substantially to QR177.8bn in November 2016. However, as part of efforts to counteract the blockade placed against Qatar in June 2017, the public sector built up its deposits in the country’s banking system, reaching QR302.6bn in August 2017.
Bringing down LDRs in an environment of scarce liquidity created a double bind for banks in 2016, leading them to compete over scarce deposits, resulting in higher interbank borrowing costs and a commensurate tightening of margins.
The recovery of oil prices late in 2016 improved the situation somewhat, and even though the blockade led to international financial institutions withdrawing deposits from Qatar, the increase in domestic public deposits more than offset a 28.3% decline in non-resident deposits.
The QCB said its steps to ease liquidity in the second half of 2016 – cutting the repo rate from 4.5% to 2.25%, and reducing the pipeline in treasury bill (T-bill) auctions – were successful in heading off a serious crunch, and that banks continued to be able to meet credit demand from the private sector.
“However, the speed with which liquidity deteriorated suggests authorities need to stay vigilant,” OBG noted.
The IMF’s Article IV (January 2017) highlighted liquidity pressures as a central challenge, stating that more transparency in T-bill auctions and improved communication in the QCB’s liquidity operations “would allow banks to better anticipate liquidity conditions in the interbank market and strengthen their liquidity management”.
Going forward, the authorities appear keen to encourage the commercial banking sector to reduce its reliance on public funds and primary bond markets, although these efforts appear to be delayed for the time being, given the major injection in deposits made in response to the blockade.
According to OBG, the “secondary market for debt instruments remains relatively underdeveloped in Qatar, where a buy-and-hold mentality continues to be the dominant trend, and there is certainly room for banks to raise more of their own liquidity, through syndicated loans, for instance.”
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