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Regulation that makes a difference in Qatar

Interview - March 20, 2015

Ranked the world’s fourth largest economy, the MENA region generated a combined GDP of approximately 3.6 trillion USD in 2012 and has emerged as a major global player competing with traditional European and North American markets.

SHEIKH ABDULLA BIN SAOUD AL-THANI, GOVERNOR OF QATAR CENTRAL BANK (QCB)
SHEIKH ABDULLA BIN SAOUD AL-THANI | GOVERNOR OF QATAR CENTRAL BANK (QCB)

What role will the Middle East, and more specifically the GCC, play in shaping future investment and global economic trends in the mid-term?

As you are aware, even after six years of the global financial crisis, global recovery is still fragile and the financial system faces risks. While economic recovery continues, it has been uneven and downside risks have increased. In this environment, the steady growth and solid economic and financial  fundamentals  of  the  GCC  region  will  aid  in  global  recovery.Going  forward, the ongoing economic   diversification strategy pursued in the region   will   not   only   create opportunities for domestic private investors but also enhance scope for foreign investment in the region. The sizable outward remittances from the region along with foreign aid and investment will  continue  supporting  many  economies  outside of  GCC. Moreover, the  GCC  region will continue to benefit the global economy by supplying adequate oil and gas and thereby helping maintain stability in the global oil market. At the same time, authorities in the region should be mindful of the challenges and risks from geopolitical issues, oil demand and prices, and financial market volatilities and pursue prudent policies to stay on course.

Qatar’s prime objective is to diversify the economy and create a world class, stable financial sector. Economic momentum is growing exponentially, spurred by reinvestment of hydrocarbon wealth, economic reform and political stability. Taking  into  account the four  guiding  principles  of  Vision 2030,  and  the  nation’s  rapid development in recent years, how will the State of Qatar realize its socioeconomic aspirations?

A key strength of the inspirational Qatar National Vision 2030 is that it is subscribed to by all Qataris. The vision aims at transforming Qatar into an advanced country by 2030, capable of sustaining its own development and providing for a high standard of living for its people for generations to come. Several years into the Plan, we see real progress being made. Already, Qatar is the top achiever in the UN human development index in the region. Economically, our population has the highest per capita income. In 2014, Qatar is placed second highest in the GCC region in the Global Competitiveness Index with a world standing of 16. Equitability is a key principle of the Plan. In the World Bank’s Human Development Index for 2013, Qatar has an income gini coefficient of 41.1, which compares well with 40.8 for United States. Qatar’s infant mortality rate was 7, which compares well with 6 for the US. Other development indicators for Qatar, for example, in education and health, read very well too. Our conclusion is that Qatar is on course towards the national vision. Yet, we must not be complacent but be focused on our commitment   and achievements. Diligence under the visionary leadership that led us to our present

The  Qatari  Riyal is  pegged  to  the  U.S. Dollar,  anchoring  monetary policy for the state  and reiterating Qatar’s faith in the global currency. In addition to the pegged rate, how is the Central Bank exploring new means to fortify Qatar’s economy?

The dollar peg provides a credible anchor for our monetary policy and for most of the period in which the peg has been maintained, the Qatari economy has benefitted from the stable economic environment in the US. As in any fixed exchange rate regime, QCB monetary policy is drawn and implemented to manage the short-term interbank interest rates with a view to sustain the fixed parity between the Qatari Riyal and the US dollar. Within this policy framework, the QCB  endeavors to regulate  overall  liquidity so  as  to maintain  monetary and  financial stability.

Treasury Bills and Government Bonds are two market-based instruments available to the QCB for effective management of liquidity and conduct of monetary policy. These instruments have helped in proactively managing  structural liquidity in the system since 2011. QCB has also employed macro-prudential tools such as sectoral limits for the borrower groups and individuals, and loan-to-deposit ratio for banks, which play a complementary role to monetary policy in strengthening financial stability. Moreover, QCB has taken the lead role in implementing the Basel III  framework, strengthening financial market infrastructure, and promoting regulatory cooperation through the establishment of the Financial Stability and Risk Control Committee, all of which aims at making the financial system more resilient. We have a Strategic Plan for the financial sector, which aims at supporting the economic diversification objectives of the National Development Strategy 2011-16 and helping realize the goals of Qatar National Vision 2030.

A proposed protection system is set to launch in 2015 that will insure bank deposits from risk and protect investor confidence. Could you share with the readers these plans for regulating and insuring banks?

The Strategic Plan has six key objectives and this one is part of the goals of strengthening market infrastructure, and protecting consumers and investors. Apart from enhancing micro-prudential regulation as well as expanding macro-prudential oversight to promote sound and safe banking, protecting depositors and investors is a vital element of a well-functioning market economy. Therefore, our goal is to enhance consumer and investor protection by developing standards and codes of conduct, protecting credit information and raising public awareness and education.

We are working with the other regulatory authorities to ensure that financial services firms put in place processes that help them better understand customers’ need, as well as adequate systems to resolve disputes constructively and in a timely manner. Consumer and investor protection will be enhanced through the introduction of a deposit insurance mechanism. This is a crucial element of a  financial  safety net  that  promotes  financial  stability  and we  are  working  on  this  aspect.

Consumers  and  investors  will  also  be protected  from  unauthorized  and unlicensed financial service providers through strict enforcement of the law. Confidentiality of customer information also needs to be maintained and the rules of information-sharing will be clearly spelt out.

Qatar Central Bank continues this week its policy of monthly issuance of QR 4 billion to absorb the excess liquidity in the banking system. How long do you expect this policy to continue?

QCB has been conducting auctions of Treasury Bills (since May 2011) and Government Bonds (since March 2013) for effective management of systemic liquidity and conduct of monetary policy. These instruments have helped in proactively managing structural liquidity in the banking system. At the same time, it is expected that auctions of these instruments along with their transactions in the secondary market will facilitate the emergence of a proper yield curve, which will help in the efficient pricing of other debt instruments in the market as well as help banks in managing their liquidity more effectively. Regarding the continuance of this auction policy, we would like to mention that it would depend upon the evolving macroeconomic conditions, credit growth and  overall  liquidity conditions in  the  banking  system  as  also the  monetary policy objectives.

Foreign direct investment in the Qatari economy peaked in 2009, contributing 8% of the overall GDP of the country, but has depressed in the past 5 years. Many economists have clashing views on the benefits and challenges of FDI, some emphasize the “crowding out” effect, whereas others underline FDI’s central role in promoting economic growth and international integration. How is recent legal framework that meets both local and international standards set to encourage foreign direct investment?

According to the World Investment Report 2014, FDI flows to the GCC region have maintained a downward trend since 2009 and persistent tensions in the region continued to hold off foreign direct investors in 2013. Nevertheless, the GCC countries made significant strides to facilitate FDI flows into the region by improving their business environments and such progress is reflected in the gains made by GCC countries in the World Bank’s Doing Business rankings.

For  Qatar, the  favorable  tax regime  coupled  with strong  macroeconomic  fundamentals and robust growth outlook supported by growing non-hydrocarbon sectors and large infrastructure investments  have aroused much interest from international investors. In fact, in 2014, Qatar Stock Exchange has been upgraded by leading rating agencies (MSCI and Standard & Poor’s) to emerging market status, which is considered the A-list of growth markets and should attract equity portfolio investment inflows. In addition, Law No.9 of August 5 2014 increased foreign investors  ownership  limit  to 49% for listed  Qatari  companies.  And more recently, the establishment of Qatar as the first regional Renminbi clearing and settlement centre and the two- way line of currency swap agreement between Qatar Central Bank (QCB) and the People's Bank of  China  are  expected  to  facilitate  trade  and  investment  activities.   The  Strategic Plan  for Financial Regulation aims to create and promote a conducive and investor-friendly environment.

Some important steps were taken recently to enhance the liquidity in Qatar Exchange, such as the allowance of margin trading and liquidity providers. Do you see the effect of such steps on expanding the values of trading in QE? And as a Chairman of the QFMA, how do you evaluate the performance of Qatar Exchange in 2014?

In 2013, Qatar Financial Markets Authority (QFMA) approved the liquidity provision scheme that  can  be  carried  out  by  the  financial  services firms,  which  are  members  in  Qatar  Stock Exchange (QSE) after obtaining the required regulatory licensing. This scheme together with the new rules on margin trading offer a number of advantages for the market and investors, such as increasing trading volumes and liquidity. These measures will assist in reducing price volatility, promoting confidence among investors, fostering the listing of new companies and ensuring a fair and orderly market.

In 2014, following the official upgrades to emerging market by MSCI and Standard & Poor’s, and  the issuance of  Law  No.9  increasing  foreign ownership limit  to  49%  for  listed  Qatari companies, QSE recorded all time high levels in traded volume and index, the benchmark index passed the 14,000 mark in September. At end-October 2014, market capitalization increased by 37%  year-on-year, the  dividend-yield  ratio  was  3.4%,  while the  price-earnings  (P/E)  ratio increased by 21% reflecting the strong financial results of QSE listed companies.

Islamic Banking has an increasingly substantial presence in terms of market share here in Qatar as well as global financial trends. The sector in Qatar continues to expand, reflecting strong capitalization, liquidity and funding profiles across several institutions, becoming a leader of the QISMUT nations. With 41% of global Islamic banking presence in Europe, and several cities vying for second place behind Kuala Lumpur as an Islamic finance centre, what role can Doha hope to play in this ever developing sustainable finance field, and how could an increase in Islamic finance ties with London act as a bridge between London and Doha?

Islamic finance  has  been  gaining  momentum  globally  and  Islamic  financial  institutions and markets have somewhat better weathered the recent global financial crisis. In the case of atar, promoting  Islamic financial institutions and  markets  is  among  the  critical  goals under  the Strategic Plan for Financial Regulation. In Qatar, Islamic banks represent almost one fourth of total assets of the banking system. Moreover, Qatar has emerged as a leader in the issuance of Sukuk instruments to further develop Islamic debt and equity markets.

As a consequence of the increasing scale of operations of the Islamic financial sector, unprecedented challenges emerged for supervision entities as financial sectors are interrelated worldwide, creating genuine complexities especially in times of crises. Thus, QCB has taken a number of measures including enhancing the licensing criteria for Islamic financial institutions in line with Sharia standards, strengthening corporate governance standards, enhancing prudential standards and reporting on capital adequacy, solvency and liquidity, and also developing the

framework  for  liquidation  of Islamic  institutions. The  increase  in  Islamic  finance ties  with London has already been used to act as a bridge between London and Doha. Islamic finance has funded several major developments in the UK, including Harrod’s department store, The Shard skyscraper and the 2012 Olympic Village. And close cooperation will be increasingly relevant given the potential opportunities  for development  and the  close relations between  the finance  and business communities in Qatar and Britain as well as the wish to benefit from development opportunities in the Islamic services field, noting that the largest Muslim community in Europe exists in Britain.

Qatar  has  a  flourishing  banking  sector,  which  has  survived global  instability.  How  has the implantation of BASEL  III  and  the  Qatar  Central Bank’s  combination of  it with directives specifically geared for the Islamic Finance sector encouraged/enforced regulatory reform?

Indeed, the  Qatari banking  system  has been  mostly  unaffected  by  global  financial  turmoil.

Supported by strong macroeconomic fundamentals and sound regulation, banks remain resilient with adequate capital, comfortable liquidity positions, high asset quality, and good profitability.

In addition, significant progress has been achieved under QCB’s financial regulatory agenda as envisaged in the Strategic Plan and conforming to international standards. Since January 2014, all banks in Qatar are mandated to accomplish new capital requirements based on Basel III standards. Basel III guidelines on liquidity coverage ratio and liquidity risk monitoring tools are also   in effect   since   early 2014.   Although   stress-testing results   showed   no significant vulnerabilities,  QCB  maintains  a  close monitoring  of  developments  in the  entire financial industry.  The  Financial  Stability  and Risk  Control  Committee  has  been  established  since February 2013 to facilitate regulatory coordination and augment management of systemic risks.

Qatar has in recent years been a prolific investor in London, the best financial capital in the world. With investments ranging from Harrods, The Shard, to Heathrow Airport. But in 2013 relations were taken to another level after The Financial Times reported that the State had allotted 10 billion pounds for British infrastructure investments. Why do you think Qatar has had this flourishing attraction to investments in the UK?

The excellent Qatar – UK relations have been historical, dating back to the time when Qatar was a British protectorate and earlier, and since to the time that the UK recognized Qatar as an independent nation. Quite apart from the fact that this good relation partly motivates Qatar to invest  in  the  UK, London  and  the  rest of  the  UK  make  excellent  investment  destinations.

London’s real estate market, infrastructure, consumer business are all areas that attract investors. The UK’s investor friendly policies, labor relations, and legal protection available to investors make the UK one of the best investment destinations in the whole of Europe.

Lord Howell stated in 2011 that the UK and Qatar shared a multitude of investor opportunities from infrastructure development projects related to the 2022 World Cup, to the augmentation of both country’s education and health sectors. UK Trade and Investment have also prioritized Qatar by putting them on the ‘High Value Opportunities Programme’, seeking to support business to business engagement bilaterally. Which do you see as the greatest investment or partnership opportunities for British companies in Qatar today?

British companies are already among the largest investors in Qatar. Shell’s investment in Ras Laffan makes  it  one  of  Shell’s  largest investment projects  overseas.  The  World Cup  2022 projects present good opportunities for specialized UK firms. While some projects have already been awarded, subcontracts are also likely to be available as the required infrastructure projects gather pace. For non-industrial firms, hospitality, health and education are among sectors that have good potential. Many areas now benefit from the availability of 100% foreign ownership, which include industry, agriculture, health, tourism, education, energy, and mining & services.

As a man involved not only as Governor the Central Bank but also as Chairman of the QFC Regulatory  Authority,  QFMA,  Qatar  Development Bank, Managing Director  of  the QIA, and Chairman for the Gulf Monetary Council 2014, you have a wealth of knowledge like few of your contemporaries. But as one of the world’s leading and successful figures in finance, please share with the readers of The Times— what has motivated you to achieve such phenomenal growth for your country’s finance sector?

 

What Qatar  has achieved has  been possible  because  of visionary leadership and  firm commitment  by  our  people to  work  resolutely  towards  our aspirations.  Under overarching guidance, it is not only the financial sector that has made such remarkable progress but also many other sectors in line with the economic diversification strategy. In the financial sector itself, we have been always watchful of looming risks and have been prompt in our actions whenever  needed.

This  bode well  for us  –  our financial  sector  remains  strong and  well- capitalized, and we were less affected during and following the recent global financial crisis. Our financial regulatory regime conforms to the Basel standards. These policies are motivated by a desire to ensure that our financial system remains stable and safe, enabling financial institutions and businesses to go about their businesses as well as help Qatar to be a leading financial centre in the region.

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