While for­eign bor­row­ing among com­mer­cial banks in the GCC has been on the rise in re­cent months, the trend is most pro­nounced in Qatar.

Acou­ple of months ago, Com­mer­cial Bank of Qatar an­nounced that it had se­cured a three-year $166 mil­lion in­ter­na­tional loan (which had been in­creased from an orig­i­nal tar­get of $100 mil­lion) from a con­sor­tium of pri­mar­ily Ja­panese fi­nan­cial in­sti­tu­tions. This isn't an iso­lated in­ci­dent by far and is only the lat­est in a length­en­ing list of for­eign loans is­sued to banks in Qatar. Ac­cord­ing to Qatar Cen­tral Bank data, Qatari com­mer­cial banks owed QR196.3 bil­lion ($53.9 bil­lion) to banks abroad in May this year, up 53% from a year be­fore, when the bor­row­ing started to show a marked up­ward trend. Fac­tor­ing in as­sets out­side Qatar, the net for­eign li­a­bil­i­ties of Qatari com­mer­cial banks, ex­clud­ing in­vest­ments abroad, jumped to about 13.1% of to­tal as­sets in May (one of the high­est lev­els in the past decade) from 3.6% a year ear­lier, as per a Reuters re­port.

It isn't dif­fi­cult to fathom why. The Min­istry of De­vel­op­ment Plan­ning and Sta­tis­tics noted in a re­port this year that “lower oil and gas rev­enues have caused pub­lic sec­tor de­posits in the do­mes­tic bank­ing sys­tem to shrink, tight­en­ing liq­uid­ity and driv­ing banks to raise funds abroad.” In fact, banks have ex­pe­ri­enced a slow­down in over­all de­posit growth, to 6% in 2015 from above 20% dur­ing 2012-13. This is largely be­cause of re­duced de­posits by gov­ern­ment and re­lated en­ti­ties, in­clud­ing na­tional oil com­pa­nies, which are re­spon­si­ble for di­rect de­posits be­tween 10% and 35% in the GCC.

While Moody's bank­ing out­look for Qatar is largely sta­ble, that of the fund­ing and liq­uid­ity sit­u­a­tion is “de­te­ri­o­rat­ing” and is be­ing ad­dressed by for­eign lenders ea­ger to tap into Qatar's credit mar­ket. With the largest de­pos­i­tor in the sys­tem – i.e., the gov­ern­ment – af­fected by sus­tained low oil prices, Moody's ex­pect the banks to raise

Ac­cord­ing to Qatar Cen­tral Bank data, Qatari com­mer­cial banks owed QR196.3 bil­lion ($53.9 bil­lion) to banks abroad in May this year, up 53% from a year be­fore, when the bor­row­ing started to show a marked up­ward trend.

more ex­pen­sive and con­fi­dence-sen­si­tive mar­ket fund­ing (which in­cludes for­eign bor­row­ings to some ex­tent) to sus­tain as­set growth and mod­er­ate fund­ing pres­sures, ac­cord­ing to Ni­tish Bho­j­na­gar­wala, AVP - An­a­lyst at Moody's.

And this isn't some­thing ex­pected to re­verse any­time soon, con­sid­er­ing the volatile rally in oil prices this year, which will con­tinue to re­duce the in­flow of de­posits into 2017. De­posits from gov­ern­ment en­ti­ties climbed to 42% of to­tal de­posits from 23% over the 2010 to 2013 pe­riod, but this has shrunk since then to 32% as of March 2016, con­strain­ing the banks' ca­pac­ity to fully fi­nance their lend­ing growth from do­mes­tic de­posits. While Moody's says the gov­ern­ment's re­cent jumbo debt is­suance of $9 bil­lion (pri­mar­ily placed with in­ter­na­tional in­vestors in May 2016) will par­tially ease the liq­uid­ity pres­sure in the sys­tem go­ing for­ward, Qatari banks are also us­ing their ad­di­tional bor­row­ing ca­pac­ity to sup­port projects re­lated to the World Cup and the Qatar Na­tional Vi­sion 2030. Qatar leads the GCC in in­ter­na­tional loans and this can be ex­plained to some ex­tent by the gov­ern­ment and its banks con­fi­dent about bor­row­ing (at at­trac­tive rates) from the in­ter­na­tional com­mu­nity who see Qatar as a sta­ble econ­omy and ac­cord­ingly are will­ing to pro­vide such liq­uid­ity. Un­der the cir­cum­stances, it's a good op­tion to fall back on. Es­pe­cially con­sid­er­ing how the var­i­ous World Cup projects are at a crit­i­cal stage that re­quires timely and con­tin­ual fund­ing.

While Qatar and its banks have had their credit rat­ing down­graded in the last cou­ple of years, they are still able to raise debt eas­ily in the in­ter­na­tional mar­kets be­cause of strong marco-eco­nomic fun­da­men­tals. How­ever, “an in­creased de­pen­dence on mar­ket fund­ing (in the case of Qatar, cur­rently 28% of to­tal fund­ing as of March 2016) will raise re­fi­nanc­ing risks and leave

An in­creased de­pen­dence on mar­ket fund­ing (in the case of Qatar, cur­rently 28% of to­tal fund­ing as of March 2016) will raise re­fi­nanc­ing risks and leave banks more vul­ner­a­ble to shifts in in­vestor sen­ti­ment.” NI­TISH BHO­J­NA­GAR­WALA AVP, An­a­lyst Moody’s

banks more vul­ner­a­ble to shifts in in­vestor sen­ti­ment,” Bho­j­na­gar­wal says, even though the bank's stocks of liq­uid as­sets (at 25% of to­tal as­sets as of De­cem­ber 2015) is ex­pected pro­vide a solid buf­fer against liq­uid­ity pres­sures.

Mod­er­ate bor­row­ing

While the cur­rent level of bor­row­ing doesn't pose any sys­temic risk, there are signs that au­thor­i­ties may act to re­duce fund­ing pres­sures on banks as they in­creas­ingly chase more price-sen­si­tive and po­ten­tially volatile non-res­i­dent de­posits to make up the short­fall. Ac­cord­ing to Moody's Bank­ing Sys­tem Out­look for Qatar, Qatar Cen­tral Bank's an­nounce­ment in 2014 that it will cap banks' loan-to-de­posits ra­tios at 100% by end-2017 might be relooked at or de­layed, con­sid­er­ing “this guid­ance com­bined with re­duced flows of de­posits will ex­ac­er­bate the pres­sure on banks' lend­ing ca­pac­ity, par­tic­u­larly given that: the cur­rent loan-to-de­posit ra­tio is cur­rently 102% sec­tor-wide; and that we ex­pect lower ( but still high) credit growth of around 10% for 2016”. As men­tioned in the Qatar Eco­nomic Out­look 2016-2018, “now, the de­posit side of the ra­tio in­cludes only cus­tomer de­posits and not long-term whole­sale funds, which have re­cently been the pri­mary source of fund­ing. Banks are still in ne­go­ti­a­tion with reg­u­la­tors to amend the loan-to de­posit for­mula to in­clude longterm whole­sale funds in the de­nom­i­na­tor. The dead­line for com­pli­ance may be post­poned un­til end-2018, given liq­uid­ity is­sues faced by Qatar's banks.” Ac­cord­ing to gov­ern­ment sources, the cen­tral bank could if nec­es­sary use un­con­ven­tional mea­sures to as­sist banks, such as di­rect pur­chases of com­mer­cial bonds and spe­cial loans to or eq­uity in­jec­tions in them. “At cur­rent lev­els it would seem the reg­u­la­tor is com­fort­able, no spe­cial mea­sures have been an­nounced,” says Bho­j­na­gar­wala, also cit­ing the loan to de­posit ra­tio. “The re­fi­nanc­ing risks re­lated to in­creased mar­ket fund­ing can be mod­er­ated by keep­ing a high stock of liq­uid as­sets. This cur­rently stands at around 25% of to­tal as­sets and pro­vides a solid buf­fer against these pres­sures,” he adds.

Pivot to Asia

The afore­men­tioned multi mil­lion dol­lar­loan to Com­mer­cial Bank of Qatar was re­port­edly the first loan to a bank based in the six-na­tion Gulf Co­op­er­a­tion Coun­cil that was pro­vided pri­mar­ily by Ja­panese in­sti­tu­tions. The seven lenders in the deal in­cluded Mizuho Bank as sole co-or­di­na­tor and bookrun­ner, as well as Gunma Bank, Shizuoka Bank and Fuyo Gen­eral Lease. Agri­cul­tural Bank of China, State Bank of In­dia and Bank of Tai­wan also par­tic­i­pated. In­creas­ingly, other Qatari banks have also been open­ing chan­nels to bor­row from Asia.

From in­vest­ments to en­ergy part­ner­ships, Qatar (and the Mid­dle East, to a larger ex­tent) has been de­lib­er­ate in de­vel­op­ing deeper re­la­tion­ships with Asia and this is no dif­fer­ent when it comes to rais­ing loans. For Asian in­sti­tu­tions as well, the re­gion and its fi­nan­cial in­fra­struc­ture are an im­por­tant link to the emerg­ing economies of Africa. It is this mu­tu­ally ben­e­fi­cial en­vi­ron­ment that is fos­ter­ing new credit links.

Some anal­y­sis also sug­gest that this move also en­sures min­i­mum ex­po­sure to the debt cri­sis in Europe which has tra­di­tion­ally been a favourite mar­ket. “Euro­pean banks are still in the process of de­liv­er­ing and fo­cus­ing on core do­mes­tic mar­kets which mod­er­ates some of the high lev­els of lend­ing that his­tor­i­cally came from Europe, leav­ing pro­por­tion­ately more for liq­uid Asian/Ja­panese banks,” says Bho­j­na­gar­wala

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