Should Qatar take the IMF seriously?

On the surface, there seems little reason for the authorities in Qatar to loosen their grip on the number and type of asset management firms operating in the country. However, from a more indepth structural perspective, a broader and deeper (and more international) asset management industry is arguably precisely part of what Qatar needs to ensure against an over-reliance on domestic banks to carry the weight of the country’s financing needs. And, it appears that the Qatari authorities have understood this, certainly others have.

Over-reliance on domestic bank liquidity

In its most recent report, Standard & Poor’s (S&P) specifically highlighted that a particular rating constraint for Qatar is the lack of monetary policy flexibility. “Shallow local currency debt markets constrain the transmission of policy into the financial markets, which can hamper plans to broaden non-oil output bases, diversify the sources of funding including financial small and midsize enterprises, and undertake long-term investment projects,” says S&P’s GCC credit analyst Dima Jardaneh. This overdependence on domestic banks poses potentially game-changing consequences for a country, as we saw regionally in Dubai in 2007 and 2008. 

Last year, in two watershed quarters – Q2 and Q3 - total lending by Qatar’s domestic banks increased to represent 120.1 percent of deposits, according to the Qatar Central Bank (QCB), implying that Qatari banks were reliant on short-term borrowing from capital markets and other domestic banks. This reliance on volatile short-term funding was exactly the same situation that occurred in 2008, when UAE banks were taking interbank lending from the rest of the world. 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, “The economy is undiversified and heavily reliant on the oil and gas sector, and credit-risks relating to exposures to the construction and real-estate sector,” underlined the agency.

The catalyst for Qatar to genuinely open up its investment markets may come sooner rather than later, as it needs to invest heavily in infrastructure, ahead of the 2022 FIFA World Cup.

Mindful, then, of this perhaps, the Qatar Financial Centre (QFC) has recently introduced the Collective Investment Schemes Rules 2010 and the Private Placement Schemes Rules 2010 in an attempt to enhance the QFC’s reputation as a prime jurisdiction in which to establish investment funds, although the Qatar Financial Centre Regulatory Authority (QFCRA) regulates all funds formed in the QFC. For investors, one key benefit of this new regulatory architecture is that a QFC fund is exempt from all Qatari taxes. 

The problem, here, though, is it does not go very far at all on a comparative regional basis, let alone on an international one. For example, the formation and offering of investment funds in Qatar is regulated by the QCB, with all funds domiciled in the emirate having to be licensed by the central bank – with no exemptions – and subject to a 10 percent tax rate on profits sourced in the country.

The debt ghost: Hydrocarbons

This negative state of affairs may galvanise the Qatari authorities into overhauling their system at some point, or it may take a Dubai-style meltdown to do so. For his part, Amwal International Investment Company CEO, George Shehadeh, in Kuwait City, is one of many who believes that the development of a debt market in Qatar would strengthen the position of asset managers and enable them to better serve their clients. “Sovereign issues are a critical icebreaker for debt markets as they help establish the local risk-free benchmark as well as a yield curve that can stretch into longer dated maturities,” he says, “and we are seeing increasing interest from investors in a variety of debt and debt related instruments, with the traditionally equity-biased investors in the region being ready to support a broader debt market.” 

QR87.8 billion - The amount of external government borrowing in 2011 and 2012, up from QR28.3 billion in 2008-2009.

The catalyst for Qatar to genuinely open up its investment markets to firms from abroad may come sooner rather than later, as the country’s commitment to invest heavily in infrastructure, ahead of the 2022 FIFA World Cup, has sent its external debt rocketing in the past three years, with external government borrowing having more than tripled since 2009, reaching QR87.8 billion in 2011 to 2012, up from QR28.3 billion in 2008 to 2009. 

The outcome is high reliance on global finance volatility and uncertainty, according to the Bahrain-headquartered investment bank SICO. In this respect, the Qatari government issued government bonds worth QR50 billion in January 2011, including QR33 billion through sukuk instruments, in addition to other government securities which drew surplus liquidity from the system.

A polite warning

However, a large percentage of the Qatari government’s external debt, an estimated QR87.7 billion, is maturing post 2017. This means that as long as Qatar’s balance sheet continues to grow, along with the running budget surpluses, debt roll-over risk is highly unlikely and the government will be able to refinance its debt or meet maturities. If, though, any of these factors falter, then Qatar’s sovereign standing in the global financial world will be re-assessed, and not to its benefit. This has not been lost on the IMF either, as in January it politely suggested (as it does usually before catastrophe hits) that Qatar introduces open market instruments to manage its liquidity. “We hope that this will help Qatar prevent unexpected flows of money from destabilising the banking system, and controlling inflationary pressure,” the Fund concluded.