Corporate sentiments in Qatar is slated to improve in the second half (H2) of this year and the sovereign and public sectors' footprint will remain highly visible in the local economy, according to Standard & Poor's (S&P), a global credit rating agency.
Expecting the subdued private sector to show signs of recovery; S&P said overall credit growth in Qatar's private sector, at under 5% over first half 2021 (excluding lending to the sovereign but including other public sector entities), indicates much more subdued activity against 8% over the same period last year and an annual average growth rate of 14% over 2019-20.
The brisk expansion in consumption lending, which has increased by the same amount as it did annually in 2019 and 2020, indicated that retail confidence has improved faster than corporate sentiment.
"However, we expect the latter will improve over H2, with momentum behind a recovery building. We maintain our private sector growth estimate of about 8% for the year," the credit rating agency said.
In the case of the public sector, S&P said activity is highly visible on both sides of the balance sheet as Qatar's public sector accounts for at least one-third of total credit directly and more indirectly.
Credit extended directly to the government increased to 15% of total credit at the end of June 30, 2021 against less than 10% the year-ago period, and accounted for nearly 60% of total credit growth.
The overdrafts to the Ministry of Finance comprised the majority and increased nearly 80%, or $15bn, easily offsetting a decline in loans.
"We believe these facilities made up most lending for some banks in the first half, including a significant proportion for the biggest lenders," the rating agency said.
The government's fiscal position remains solid and public sector deposits in the system increased almost $8bn to total about $80bn over the same period, according to the report.
The private sector deposits remained flat, meaning the public sector accounted for almost all domestic deposit growth.
"We expect the government and wider public sector's footprint will remain highly visible in the local economy, and that lending to the government will continue to account for a significant portion of total credit.
Although this will help to contain NPL (non-performing loans) formation (expect a system-wide NPL ratio peak of about 3.3%-3.5% from 2.7% in 2019), related margin is likely lower than when funding private sector activity, it said.
"We view an increase in these overdraft facilities as less likely, following relative stability in the second quarter, and because we expect improving demand to support earnings," S&P said.
As the pandemic's effects continue, it expects the real estate sector and exposures outside Qatar – particularly in Turkey – to maintain credit losses at an elevated level this year and next.
Coupled with weak operating conditions over first-half 2021 and continued low interest rates, the rating agency expects "that Qatari banks will exhibit lower profitability this year and narrow interest margins through 2022."
Nonresident deposits increased roughly the same amount as domestic deposits over first-half 2021, but there are "signs of stabilisation", S&P noted. Nonresident deposit levels fell slightly in the second quarter, after a "significant" increase in the first quarter, which was likely in part linked to normalising relations with the GCC neighbours.
Still, on aggregate, nonresidents fund nearly 40% of domestic loans and, given limited domestic sources of funding outside the public sector, more volatile foreign liabilities could continue to fund larger proportions of local lending. The pandemic-related risks remain, although the country has made good progress in terms of vaccination rates, the rating agency emphasised.