Governor of Qatar Central Bank Sheikh Abdulla Bin Saoud Al-Thani explains the dynamic changes, both internally and externally, affecting the country’s economic and financial landscape and why it still holds great appeal to investors and ratings agencies alike.
What have been the achievements of the National Development Strategy (2011-16) and what challenges still remain?
The implementation of the Strategic Plan is being led by Qatar Central Bank (QCB), supported jointly by the Qatar Financial Markets Authority (QFMA) and Qatar Financial Centre Regulatory Authority (QFCRA). Together the three regulators, with close coordination through the Financial Stability and Risk Control Committee (FSRCC), are committed to maintaining a stable financial environment for business and investment, while also improving protection for investors and consumers. Within this favorable climate, the financial services industries continue to support the various needs of a growing private sector and to benefit from a growing population as diversification progresses.
A number of important regulations, based on Basel III, have been issued to strengthen the banking sector in recent years. In addition 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 (DSIBs), etc., are prescribed.
Further, the QCB conducts regular stress tests of banks under various scenarios, while internal stress tests conducted by banks are reviewed at our end. At the same time, macroprudential oversight is being strengthened, while work is simultaneously ongoing to develop an early warning system for the financial sector.
Rating agencies and investors have continued to have confidence in Qatar’s financial sector, as, for example, is evident from the maintenance of Qatar’s high credit rating and the upgrade to emerging market status by leading rating agencies. More recently, the establishment of Qatar as the first regional Renminbi clearing center will play an important role in developing the financial industry domestically and internationally.
Work is to continue on our macroprudential framework, supervision of insurance, deposit insurance, and domestic credit rating, among others, to enhance the business and investment environment.
What has been the economic impact of the lifting of sanctions on Iran and the Fed’s raising of interest rates on the Qatari Economy?
Developments in Qatar’s economy are influenced by the changes in oil prices, as in any other GCC economy. Major factors that contributed to the persistently low oil prices were weaker demand from advanced and emerging economies, increased supply from Iran after the lifting of sanctions, and increased production by other oil producers to retain their market share. Even though the influence of these factors continue to impact the price of oil in the first half of 2016, once the market rebalances, we expect the price of oil will reach a comfortable level. On the positive side, the lifting of sanctions will open up trade and investment opportunities in both directions.
Nevertheless, recognizing the continuance of low oil prices, the government is in the processes of making structural adjustments in expenditure without affecting the planned infrastructure developments.
Regarding domestic growth, the ongoing economic diversification strategy planned under the QNV 2030 is providing an impetus to increased growth in the non-hydrocarbon sector, which grew by around 7.8% in the third quarter of 2015. The Ministry of Development Planning and Statistics’ Qatar Economic Outlook estimates the economy (real GDP) to grow by 3.7% in 2015 and increase to 4.3% in 2016.
The US Fed Reserve’s shift from the zero interest rate regime in December 2015 by increasing their policy rate by 25 basis points has not impacted much on the domestic interest rate structure. Given the volatile global financial market conditions and not so encouraging growth prospects of the global economy, the probability of further increases in the interest rate in the near term is limited. Nonetheless, the QCB has space to act flexibly given the gap between QCB’s policy rate and that of the Fed. Furthermore, the large stock of T-bonds/bills from earlier issuances provides QCB with the flexibility in liquidity management, and thereby help ensure comfortable liquidity in the banking system and help banks meet private sector credit demand in line with strong non-hydrocarbon sector growth.
Moody’s forecasts that average real GDP growth will remain robust at around 5% until 2017. What is the strategy to ensure Qatar’s position as the most competitive economy in the region?
As noted earlier, the proactive diversification strategy initiated in 2011 is yielding positive results. The major contributor to economic growth shifted from the hydrocarbon sector to the non-hydrocarbon sector. Needless to say, infrastructure developments are providing the required growth momentum. Education, health and other services are also growing at significant pace. A business friendly environment is being developed to attract more investments as well as to increase the scope for private sector participation in the growth process.
MSCI has upgraded Qatar to Emerging Market (EM) status, which facilitates a higher access to funds from various spectra of foreign investors. The ownership of foreign investors in listed companies increased to 49% from the earlier limits of 25%. Memorandums of understanding (MoUs) with various countries are also being signed so as to improve trade and investments relations with them.
The Renminbi clearing house launched in Doha, the first of its kind in the region, will attract higher cross-border investments and trade through Qatar.
To support the competitiveness of the economy, our monetary policy is kept accommodative, and financial stability is ensured through improved regulations and macro prudential policies. 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.
How do you manage liquidity in the market?
In order to safeguard the financial market conditions, QCB has an effective liquidity management framework. The framework includes a host of instruments.
First, we have three policy rates: QCB Deposit Rate (QCBDR), QCB Lending Rate (QCBLR), and QCB Repo.
Second, since May 2011 we have introduced Treasury Bills (T-Bills), and medium-term government bonds issued in March 2013.
Third, the QCB also prescribes a Reserve Requirement that has remained at 4.75% since 2008.
The issuances of T-bills and medium-term government bonds ensure a better transmission of monetary policy, and strengthen the mechanism of coordination between monetary and fiscal policies. They also support the banking and financial system by enhancing the balance sheet liquidity position of domestic banks in line with the requirements of Basel III.
Could you tell us more about the role of financial institutions in Qatar’s diversification strategy?
The persistence of low oil prices poses challenges to all the oil and gas exporting countries across the globe. A reversal of this trend will happen when the recessionary headwinds subside and oil exporters unanimously decide to moderate the supply overhang. However in Qatar, thanks to the well-planned diversification strategy initiated in 2011, domestic growth, though moderate, remains at a strong position among its regional peers.
Involvement of small and medium enterprises (SMEs) in the overall growth of the economy is envisaged in the National Vision 2030 and the role of the financial sector to support this strategy is paramount. Identifying a uniform definition for SMEs across the financial institutions will ease the hurdles for SMEs to get access to credit from banks and mobilize resources from private placements and the venture capital market. Qatar Development Bank and other government agencies are actively participating in the process of promoting the SME sector.
Could you provide some information about the new law enacted in 2015 to optimize the use of public funds and Qatar’s implementation of Basel III measures?
The new law, Law No. 2 of 2015 on public finance, aims to modernize the State financial management system as well as align it with the developments in the global economic and financial system.
The law constitutes a comprehensive audit policy and intends to improve the coordination between various stakeholders in the processes of preparing and implementing the budget. The law is also expected to enhance the efficiency of public spending by tracking income and expenses accurately and continuously. A macro-economic unit is also being set up to monitor the overall economic planning and investment program.
In line with international best practices, the fiscal calendar has also been changed from April-March to January-December, starting January 2016. This will provide compatibility with the requirements of the private sector and international financial institutions.
In January 2014, QCB issued the final Basel III circular, which introduced a minimum capital adequacy ratio of 12.5%. National banks have also been evaluated on the extent to which they are domestic systemically important banks (D-SIBs). These D-SIBs are required to maintain capital charges of 0.5% to 2.5% in different D-SIB buckets. These instructions will be implemented in 2016 in a phased manner. Further, Basel III framework on liquidity is also being implemented. Banks were advised to maintain the liquidity coverage ratio (LCR) with a minimum of 60% by the end of 2014. With an increment of 10% points every year the LCR will reach the required 100% level by the end 2018. On similar lines we have advised the banks to maintain a net stable funding ratio as envisaged by Basel III liquidity framework with a minimum of 70% by the end of 2015 and to achieve 100% limit by 2018.
How do you view the launch of the Sharia-compliant exchange-traded funds in the world?
The demand for Sharia-compliant funds is an increasing trend of late. Global financial crises have changed the investment horizon of conventional investors who look for low-risk and low-cost funds. Sharia-compliant exchange-traded funds (ETF) provided investors an opportunity to explore the conventional equity markets while strictly following Sharia investment principles. Over the past few years, these ETFs, have shown low volatility and outperformed their conventional counterparts.
What are the future prospects of Islamic finance as Iran enters the market?
Over the past decade, Islamic finance has recorded exponential growth, thanks to the economic growth in GCC countries prior to the oil price downturn. It even attracted traditional conventional banks also to come out with Islamic financial products to tap a large number of the population who otherwise was underserved. Islamic finance products to support small and medium-sized enterprises were also designed by putting emphasis on asset-backed finance. Despite the increased interest in Islamic finance, most of these assets are concentrated in GCC countries, Malaysia and Iran. Based on the latest information it represents only 1% of global financial products. Accordingly, ample scope remains for Islamic finance to grow, and definitely lifting sanctions on Iran with a population of around 75 million will provide opportunities for investors as well as Islamic financial institutions.
What is the level of participation of foreign banks in the local market and that of Qatari banks in international operations?
The structure of the banking sector in Qatar remained more or less stable during the last couple of years. The share of the assets of foreign bank branches is below 4% of the total banking sector assets. They contribute to the economy through financial innovation and provide liquidity to the interbank market.
Competition in the domestic banking sector remained healthy as indicated by a stable net interest margin (NIM) of 2.5% during the last few years. In view of the healthy growth and resilience of the domestic banking system, banks are looking for global outreach strategically through cross-border transactions. Around one-fifth of the domestic banking sector assets relates to banking businesses outside Qatar. In addition, banks operate through their branches, subsidiaries and associates.
As a regulator, QCB processes the banking sector’s intentions for foreign interest on a case-by-case basis and provides necessary guidance consistent with its regulation and prevailing market conditions.
What investment opportunities are there for financing major infrastructure programs to boost the economy as the FIFA World Cup 2022 approaches?
Infrastructure development is in its full swing as we progress towards the 2022 World Cup. Along with the public sector, involvement of the private sector is also very critical for the development. The major focus of the infrastructure development includes the construction of roads, rail, and development of sea/airports, etc. This entails increased financing requirements for the real estate and construction sectors. Banks are able to support this increased credit demand, where the credit to this sector (real estate and contractors) grew by around 26.5% in 2015.
In addition, investments are also focused on industrial zones, ICT, education, health, etc. These developments are expected to stimulate the domestic economy and provide substantial investment opportunities for private sector including foreign investment.
The upgrade of Qatar from frontier market status to emerging market status by MSCI also came in the right time. The upgraded status will improve the depth and liquidity in the equity market and is expected to attract further investment flows.
Is there room for further engagement and opportunities for growing cooperation with the United States?
The economic relationship between Qatar and the US started more than two decades back with the involvement of US companies in the energy sector. Since then, the depth of the relationship has increased and flourished towards other sectors of the economy including science and technology, education and sports.
More than 100 US firms have their presence in Qatar. Around six American universities have opened their campuses to support our vision to transform the Qatar economy into a knowledge-based economy. US companies are also participating in the infrastructure developments ongoing prior to the FIFA 2022 World Cup.
Trade statistics show Qatar’s exports to the US were 0.4% of its total exports in 2014, while its share in total imports was around 11.4%. On the other side, Qatar’s investment in US is also on an increasing trend.
In short, Qatar’s relationship with US is poised to improve across the spectrum of the economy so as to benefit both the economies in their growth and development.