Qatari government is slowly shifting from bank loans to debt market to support its mammoth public spending.
Debt issuance has been steadily increasing in Qatar over the years to support the economic activities of the country. In 2009, the government bank borrowing or bank loans were 1.25x of government bonds, while in the first half of 2014 it was only 0.6x, analysts at SICO Investment Bank said in a research note sent to The Peninsula.
According to the SICO analysts, low interest rates, ample liquidity in the system and a pick-up in economic activities are keeping bond markets active in Qatar.
The report that emphasised that the government is slowly shifting from loans to debt borrowing to support its expenditure said the government’s reliance on sukuks/bonds has risen significantly since 2011.
The growing reliance on debt is, however, negative for Qatari banks’ balancesheet growth and Net Interest Margins (NIMS). The exclusion of Qatar government bonds from the investment cap of 25 percent of Tier1 capital is indirectly encouraging domestic banks to hold more local Sovereign bonds.
“A look at the Qatari banks’ financials suggests that, despite the strong debt issuances by the government, banks have been able to grow their lending book faster than their investments. This can be attributed to the state regulation of excluding Qatari sovereign bonds from the investment portfolio limit….. Hence, we believe that banks have replaced international bonds with Qatari government bonds,”,the note said.
The Qatari government has steadily been increasing its expenditure to support the economic activities of the country. The share of development expenditure to total spending has been on the downward trend, reducing from 40 percent in 2007-08 to 25 percent in 2012-13. However, it is likely to pick up in 2013-14, and we expect it to remain between 30 percent and 33 percent.
The report that stressed the need for Qatari banks to raise capital noted: “Although all Qatari banks are well above the QCB-regulated level for Tier1 ratio of 8 percent and capital adequate ratio (CAR) of 10 percent, most are likely to boost their capital in the low interest rate environment, as the introduction of Basel III may push the CAR requirement to 12.5 percent.
Qatari banks saw mild asset quality deterioration in the first half of 2014. Aggressive lending book growth, along with increasing real estate exposure, could further push up their Non-Performing Loan (NPL).
Currently Qatar banks’ NPL converge is 92 percent compared the UAE’s 107 percent.
The SICO analysts thus expect UAE banks’ loan-loss charges to decline sharply in 2014, while Qatari banks are forecasted to report a 7-9 percent rise, except QNB.
On the lending outlook, the report said Qatar banks are stronger than UAE. The analysts expect Qatar’s banks to report 12-13 percent lending compared to 8-9 percent by their UAE counterparts at the end of 2014- By Satish Kanady© Copyright - Peninsula Qatar