Major construction projects like those associated with the 2022 World Cup are big business for Qatar’s lenders
“Stable, healthy and robust”: that was the verdict of the Qatar Central Bank when examining the health of the financial sector it regulates at the end of 2014. Asset growth has been exceptionally strong over the last few years, as high commodity prices and fast growth brought big increases in deposits. Public investment spending on infrastructure megaprojects, ahead of Qatar’s 2022 FIFA World Cup, is the highest in the region. This has been mostly financed by the country’s banks. Net interest margins are high by regional standards, while analysts from Standard and Poor’s have said that the Qatari banking sector is the region’s most efficient.
Abdulla Saleh Al Raisi, chief executive of the Commercial Bank of Qatar, appears to be quite content with his bank’s role in the Gulf state’s expansion plans. In an interview with Oxford Business Group, he said: “Private sector banks have long been associated with growth efforts in Qatar, and fair competition between the banks in Doha has been encouraged and supported to serve the interests of the economy. CBQ is committed to funding public projects and will be happy to further contribute to the Qatari economy’s growth.” table, healthy and robust”: that was the verdict of the Qatar Central Bank when examining the health of the financial sector it regulates at the end of 2014. Asset growth has been exceptionally strong over the last few years, as high commodity prices and fast growth brought big increases in deposits. Public investment spending on infrastructure megaprojects, ahead of Qatar’s 2022 FIFA World Cup, is the highest in the region. This has been mostly financed by the country’s banks. Net interest margins are high by regional standards, while analysts from Standard and Poor’s have said that the Qatari banking sector is the region’s most efficient.
But analysts worry that the banking sector may be storing up trouble for itself by extending huge amounts of credit on the back of Qatar’s infrastructure, real estate, hospitality and aviation plans. The government plans to award $200 billion in infrastructure projects over the next twenty years, as part of its 2030 Economic Vision plan, which includes hosting the 2022 World Cup.
One of the main risks is that, over the longer run, infrastructure projects will fail to make returns, which will hit banks, says Jason Tuvey, emerging markets economist at Capital Economics. “The UAE took ten to fifteen years to build up its infrastructure, whereas Qatar is doing it over five years. Banks have largely been responsible for financing a lot of the construction and infrastructure work that has taken place in Qatar,” Tuvey says.
For Sanyalaksna Manibhandu, senior research at the National Bank of Abu Dhabi, “the high infrastructure spending sounds positive, but you’re talking about 2.5 million people,” he says. “There’s only so many roads and rail links you can build before the projects stop improving Qatari residents’ quality of life.” If the expected demand for the country’s megaprojects doesn’t materialise, then “Qatar could eventually be left with significant overcapacity in public and private infrastructure, and the banks that funded it could end up with their loan books souring,” says Tuvey.
Slower-than-expected growth in population is another worry. Vodafone Qatar and Ooreedoo, the country’s two major telecommunications companies, both said in annual reports that they had missed expectations for revenues and profits because the Qatari market just hadn’t grown quickly enough. Continued deposit growth will require continued population growth, and Qatar’s planned infrastructure binge relies on there being no shortage of people to use the rails and roads under construction.
With a population of 2.5 million, and a bank account penetration rate close to 100 per cent, Qatar is in danger of becoming overbanked. When every consumer in a country has a bank account, the ability of banks to grow their deposit base lessens. Qatar’s banks have so far been seen double-digit compound annual growth rates in deposits and assets. But it’s very hard to see how they will be able to sustain this, says Manibhandu.
As the demand for credit in Qatar has exceeded the level of savings held by domestic residents, Qatari banks have begun to tap wholesale markets for financing. Government-related entities have also started to withdraw deposits from the commercial banks, further reducing the deposits on hand to continue to fuel the double-digit credit growth seen between 2009 and 2013. “This is where Qatar is especially vulnerable,” Tuvey says.
Credit from wholesale markets accounts for 140 billion Qatari rials ($38.5 billion) of banking sector liabilities, against around 570 billion Qatari rials of customer deposits, according to central bank data. Compared to using deposits to grow lending, borrowing from wholesale markets would be expensive, says Manibhandu.
Worries that Qatar’s banks could be facing a shortage of liquidity were highlighted at a sale of Qatari treasury bills in October. The central bank halved the size of an issue of treasury bills, in what analysts said was an indication that local bank appetite for government debt was dwindling. “It’s a sign that local banks weren’t willing to absorb this, because their deposit base is drying up as the government takes liquidity out,” one analyst said. Another called it “a reality check for the government, and a reflection of tightening liquidity at Qatari banks,” according to Reuters.
None of this means that the Qatari banking sector is in any danger. It is likely that the Qatari government would use its significant reserves to intervene in case of stress in the financial sector, analysts say. In the wake of the 2008 financial crisis, the Qatari government intervened decisively to shore up the sector. It guaranteed all bank deposits, bought up bank equity and troubled real estate assets, and injected capital into local banks via state sovereign wealth fund Qatar Investment Authority. But banks will certainly be hoping that their infrastructure bets are sound ones.
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