Qatar seeks to bolster investment sector

by  — 29 March 2013

No matter how blessed a country is with hydrocarbon wealth, ultimately it cannot survive in a stable fashion on oil and gas money alone.

Qatar’s inability to obtain inclusion as an emerging market from global equity market benchmark MSCI, has, opines the author, somewhat thwarted its prospects of external investment, at least in the short term. (Image courtesy Qatar Exchange)

For a start, it will find itself largely hostage to the volatile fortunes of global commodities. It will also find it increasingly difficult to sterilise all the incoming cash on its capital accounts, leading to fundamental endemic domestic currency appreciation, unless that currency is pegged – and even if this is the case then excess capital inflow will eventually manifest itself in inflationary pressure.

And in the end, of course, the oil and gas will run out entirely. Qatar, of course has been quick to realise that its natural resources wealth brings with it problems as well as benefits, and is continuing to diversify its economy away from this over-reliance, but how and to what effect?

Looking at the second question first, a number of worrying signs began to emerge in its financial and investment sector in the middle of last year. Over the course of 2012, to begin with international investors withdrew a total of around US$600 million (QR2.2 billion) out of Qatari equities, with net outflows during all but two of the previous 16 months, according to data from Deutsche Bank. In each of the second and third quarters of last year, international lenders also cut their exposure to Qatar by US$11.5 billion (QR42 billion), according to data from the Bank for International Settlements. And, even more specifically, the landmark and extremely well publicised tie-up between the NYSE Euronext and the Qatar Stock Exchange suffered a major blow when the former reduced its ownership level to just 12 percent. 

Qatar has not helped either by imposing limits on foreign ownership of shares (typically only up to 25 percent of a company), which has been the main reason why Qatar failed to enter the MSCI emerging markets index on several occasions (most recently last July) when it was an attractive prospect to foreign investors. But now that its economy is looking less than stellar, being included in the index would have at least increased its prospects of attracting foreign investment flows into its stock market, should the Qataris want to do so.

Major ratings agency Moody’s highlighted the high degree of dependence of Qatar’s banking system on government related business and the domestic economy. 

Qatar’s domestic banks have been compelled to step into the lending breach, given the dearth of international finance available to Qatar. Looking at the same two watershed quarters of last year (Q2 and Q3) in fact, total lending by banks increased to represent 120 percent of deposits, according to the Qatar Central Bank, implying that Qatari banks were reliant on short-term borrowing from capital markets and other domestic banks. In its most recent judgment on Qatar’s banking system – including both the conventional and the Islamic elements – major ratings agency Moody’s highlighted the high degree of dependence on government-related business and on the domestic economy.

Worryingly as well, from even the oil and gas perspective, were a couple of major events that appeared to mark a turning point. In a research report at the end of last year, Barclays Capital’s Alia Moubayed, director of research, in London, noted in a report that Italy’s Edison (a unit of France’s EDF energy group), successfully renegotiated a 25-year contract with RasGas signed as recently as 2009, which Edison said would provide a EUR450mn (QR2.1 billion) boost to its earnings. Barclays estimates that this reflected a 10 percent dip in Edison’s unit price for gas. It also set a precedent for other buyers, implying that income at RasGas, Qatar’s country’s second-biggest supplier, could dip further. “The success of Edison in arbitration could well drive other buyers to look for discounts in the coming months,” said Barclays. 

Moreover, the chairman of Tokyo Gas, Norio Ichino, one of Qatar’s largest customers, said late last year that he believed the current system of linking gas prices with oil is inflating Japan’s import bill, and that there should be a de-linking of the two. “The risk isn’t solvency for Qatar’s banks, but they run the risk of a liquidity crunch,” says Nick Stadtmiller, head of fixed income research for Emirates NBD, in Dubai.

In response Qatar has massive foreign assets buying spree, and has also sought to attract capital inflows by upping its bond issuance, highlighting its shari’ah finance credentials and drafting new legislation to improve its corporate image both at home and abroad. In respect of the latter of these strategies, the Qatar Financial Centre (QFC) recently released a swathe of rules covering three areas – corporate governance, anti-money laundering, combating the financing of terrorism and Islamic finance windows in keeping with global regulatory standards for insurance and banking supervision.

In terms of corporate governance, the new rules seek to strengthen regulation covering governance and risk management by requiring the governing body of a QFC-authorised firm to approve and establish a formal governance framework, risk management and internal controls framework, and remuneration policy. In addition, the new rules include a controlled function for internal audit for QFC insurers, QFC banks, and QFC Islamic banks. The rules will commence on 1 July 2013. 

A new draft company law is also under discussion that seeks to boost the performance of the QSE through increasing number of the firms that would be able to list on it, according to Dr. Sayid Al Sayfi, Professor of Islamic finance at Qatar Faculty of Islamic Studies, in Doha, “It will encourage the creation of new companies and the easy flow of investment in Qatar.” 

However, he adds, some of the proposed articles need clarification. “Article (110) of the new draft law stresses that the chairman and members of the board or the directors of companies should refund the sums they had gained at the transactions they performed for their companies in which they have direct or indirect interest. The penalty should be stricter for such actions and should not be limited to just refunding the money.”   

Qatari analysts highlight that fixing the nominal value of shares at QR1 to 100 instead of at QR10 as previously would broaden out the potential investor base for stock issues. Additionally, they say, revising the norms required for establishing new companies in a single window facility will speed up the process. The law will be finalised once interested parties have voiced their views on the draft, according to HE Sheikh Jassim bin Abdulaziz bin Jassim bin Hamad Al Thani, Qatar’s Minister of Business and Trade.

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