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How to ensure economic resiliency in times of dynamic changes?

Article - November 22, 2016

By strengthening macro oversight, implementing risk aversion strategies and ensuring that international standards are met, Qatar has acquired sufficient financial reserves to ensure market liquidity and sustain growth as its economy continues to diversify and international agencies keep their ratings positive


Wealth comes like a turtle but goes away like a gazelle, so the Arab proverb goes, and it is true that the times ahead are likely to be challenging ones for Qatar’s finance and banking sector. Regional instability, changes occurring outside the country that have a negative impact on the local economy, and a slump in international commodity prices are only some of the factors authorities have had to compensate for by intervening in key sectors of the economy and fine tuning its components to ensure maximum effectiveness and transparency.

You could hardly hope for a better stimulus package than one that comes with a steady supply of high-demand petroleum products for export and plenty of major infrastructure projects under construction for the FIFA World Cup soccer championship that Qatar is set to host in 2022. At the same time, structural and regulatory changes have been implemented to guarantee the smooth functioning and transparency of its capital markets, including a law (still in the pipeline) regulating PPPs, the public-private partnerships that the government would like to encourage.

The private sector has been assuming a more prominent role in the economy as Qatar gradually ratchets down its historic dependency on crude oil in accordance with the guidelines set out in the Qatar National Vision (QNV) 2030 Plan, which aims to make the economy’s groundwork fundamentals more diversified and resilient, particularly by encouraging and assisting small and medium-sized enterprises (SMEs).

“One of the four pillars of the plan is economic development, and that means the consolidation of a competitive and diversified economy capable of meeting the needs of all the people and securing a high standard of living for them,” says the Central Bank Governor, Sheikh Abdullah bin Saoud Al-Thani.

The QNV also outlines strategies for encouraging Qataris to join the workforce and commits to environment-friendly technological upgrades in the downstream hydrocarbon sector. With 25,244 million barrels of proved petroleum reserves, Qatar is by far the richest country on the planet, with an average per capita income of $132,000. Diversification of the economy remains the number-one priority. A few years ago, it would have been a joke to argue that by 2016, oil and its derivatives would account for less than half of total economic output. Next year that is likely to fall to 30%, if industry forecasters have got it right. Nobody’s laughing now.

Buffers and benefits

Consequences and blowback are only to be expected when you pump liquidity into a complex financial system. For the first time in 15 years, Qatar is running a budget deficit. Finance Minister Ali Shareef Al Emadi estimates that it will remain “moderate” through the end of the year and promised government spending caps that will keep it that way, but $12.8 billion is a significant shortfall by any reckoning. Perks and entitlements may need to be reduced and efficiency metrics introduced for government employees. Some individuals were annoyed when the government earlier this year withdrew its hitherto succulent gasoline and fuel subsidies. It remains to be seen what will happen in 2018 or 2019, when a uniform sales tax is introduced in Qatar and the other Gulf Cooperation Council (GCC) countries.

“Qatar has been one of the fastest growing countries in the region and the near-term macroeconomic outlook remains strong (…) The banking system in Qatar is well-placed to weather lower oil prices, weaker non-hydrocarbon growth and higher U.S. interest rates”

Christine Lagarde Managing Director, IMF

The country’s trade surplus ended 2016 in a steep decline. Growth remained positive, only there wasn’t nearly enough of it as there had been before. Accordingly, the year-on-year figure for January was down more than half, by 54%. Petroleum derivatives such as fertilizers and especially liquefied natural gas (LNG) went a long way towards making up the shortfall, but not quite far enough. Qatar is the world’s second-largest producer of LNG and dominates a third of the global market, but it will face fierce competition when fields under development in the U.S. and Australia get up to speed.

The good news is that while revenues skew to the downside, there is a fall back commodity available – Qatar’s sterling reputation in the international bond markets. When Standard & Poor’s downgraded Qatar’s Gulf neighbors Saudi Arabia, Bahrain and Oman earlier this year, it affirmed the AA long-term and A-1+ short-term ratings for Qatar and added that the outlook in the country remains stable.

Meanwhile, Moody’s confirmed its Aa2 rating, but deemed the outlook negative after taking into account probable trending vectors in global oil prices. Morgan Stanley Capital International upgraded Qatar from frontier market to emerging market status.

Given that the government holds strong financial reserves in the Central Bank and made sizable investments through the Qatar Investment Authority during the period of high oil and gas revenues, most analysts would go along with the official view that so long as commodity prices remain relatively stable, annual GDP growth between now and 2018 should average 4% yearly or possibly a bit higher.

Banking’s response

How have the country’s banks been responding to the new economic fundamentals? Central Bank Governor Mr. Al-Thani points to the cross-sector implementation of “important regulations, based on Basel III,” with particular attention to measures relating to capital standards, maintenance of the liquidity coverage ratio, net stable funding ratio and loan-to-deposit ratios, as well as capital charges for domestic systemically important banks.

“To maintain a competitive economy, monetary policy is kept accommodative, and financial stability ensured through improved regulations and macro prudential policies,” explains the governor. “Favorable tax regimes and ease of doing business, coupled with a fundamentally strong financial environment, are expected to continue to make Qatar a preferred investment destination.”

Largely as a result of this determination to weather out the downturn steady as she goes, during the third quarter of 2015, total assets held by Qatar-based banks grew by an annualized 11.3%, finishing ahead of their counterparts in the UAE, Saudi Arabia and Kuwait. Many see this as a result of the steep capital adequacy ratios required by the Doha authorities.

Even in a country with only 18 banks licensed to do business, the competitive environment in which they operate has encouraged lenders to seek new revenue streams in previously untapped market segments. The result can be perceived in the range of new products and services being offered. The recent establishment in Doha of an official clearing and settlement center for China’s renmibi.

New products and services

One of those new product niches is occupied by a thriving Islamic banking sector that, according to Bassel Gamal, CEO of Qatar Islamic Bank (QIB), has shown such strong growth momentum that Sharia-compliant assets have become the fastest growing of Qatar’s financial products. As of this year, they represent 27% of total banking assets, while their share of deposits stood at 30% in December 2015, he says. (Four of Qatar’s 18 licensed banks are Sharia compliant, seven are local players, and seven more are big-ticket foreign banks.)

Besides pitching to a Sharia-sensitive customer base, QIB’s team of financial professionals are keen to connect with value-seeking clients looking for products and yields comparable to those available through conventional banks, says Mr. Gamal, who credits the Central Bank for providing solid legislation and a proper regulatory platform for Islamic banks to grow and succeed.

“Favorable tax regimes and ease of doing business, coupled with a fundamentally strong financial environment, are expected to continue to make Qatar a preferred investment destination”

Sheikh Abdullah bin Saoud Al-Thani, Governor, Qatar Central Bank

“Sharia-compliant banking, as part of our values, requires complete transparency and commitment,” he emphasizes. “Customers come to us with trust in the values we represent, and we ensure that those values are maintained and strengthened in all our dealings.”

QIB is also the principal stakeholder in QInvest which, like its retail sector parent, conducts its business strictly in accordance with Islamic best practices. “The same way that you would consider borrowing in dollars or borrowing in yen, why not look into borrowing inside the framework of Islamic banking?” asks CEO Tamin Hamad Al-Kawari.

QInvest’s 2015 balance sheet shows consistent performance throughout the year, despite challenging global economic conditions and regional volatility. It culminated in an increase in both revenue and net profit of 32% and 76% respectively, leading the directors to recommend doubling the dividend to shareholders.

“We strive to be a destination of choice for both international and local investors, providing access to listed companies of undoubted quality, which are both financially sound and poised for further growth”

Rashid bin Ali Al-Mansoori CEO, Qatar Stock Exchange

“QInvest is unique in the region, in that investment banks here either have the capital but not the right culture, or have the right culture but lack the capital. Our uniqueness comes from the fact that we have the right culture and the right expertise, a blend of local knowledge and world-class experience,” says Mr. Al-Kawari.

Another close observer of Islamic banking trends is Adel Mustafawi, Group CEO at Masraf Al Rayan bank. “Islamic assets are based on real assets supported by risk and profit-sharing fundamentals,” he says. “Connecting those to the real economy creates a natural hedge and better control over the financial system, compared to conventional banking assets that could outstrip real assets by many multiples, especially when derivatives are taken into account.”

Under the principles of Islamic finance, selling short is not permitted, notes Mr. Mustafawi, who emphasizes that “fair treatment and dealings with customers at all times – especially during times of financial difficulties– underpin the unique partnership we share with our customers.”

The Qatar Development Bank (QDB) is government-owned and operated, and focuses on providing access to capital for SMEs through a range of innovative formulas. “All core activities that contribute to people’s wellbeing are considered,” says Abdulaziz Bin Nasser Al-Khalifa, the bank’s CEO. He points out that as a private sector support arm of the government, the focus is on market gap rather than market share.

QDB’s services include help to support and advise, as well as finance, local SMEs as they strive to qualify for listing on the Qatar Exchange Venture Market (QEVM).

At various stages of its QEVM program, QDB works closely with the Qatar Stock Exchange (QSE), whose CEO Rashid bin Ali Al-Mansoori considers the share market’s key function is to serve as the intermediary that brings issuers and investors together for their mutual benefit. “We strive to be a destination of choice for both international and local investors, providing access to listed companies of undoubted quality, which are both financially sound and poised for further growth,” says Mr. Al-Mansoori.

Highest yields

It is no small source of pride for the CEO that even in troubled times like these, the Doha bourse has been able to offer investors consistent and attractive dividend yields that are among the highest in the region.

“We are also intent on attracting new issuers, particularly family-owned companies,” says Mr. Al-Mansoori. “We know there are many successful companies in the non-hydrocarbon sector owned by families and we need to demonstrate to them the advantages of being listed.”

In Mr. Al-Mansoori’s view, an invitation can be extended to all those looking for promising business opportunities and a welcoming, fascinating venue in which to carry them out. “Qatar is an open and inclusive society, one that is investing heavily in modern technology, transportation and basic infrastructure,” he points out. “The government has established the Qatar Financial Center, with its own internationally recognized legal framework, through which international investors can establish a regional presence and partner with local companies.”

It was that same confidence that must have been at the back of IMF chief  Christine Lagarde’s mind when she remarked not long ago that “Qatar has been one of the fastest growing countries in the region and the near-term macroeconomic outlook remains strong (…) The banking system in Qatar is well-placed to weather lower oil prices, weaker non-hydrocarbon growth and higher U.S. interest rates.” And that is saying a lot.