Qatar’s banks may struggle to finance $130 billion of infrastructure projects if a worsening European debt crisis prompts foreign banks to pull back their business in the country, the nation’s planning office said.
Escalation in the euro region’s debt crisis may spark a “flight from risk” and create “less-favorable conditions” for project financing, the General Secretariat for Development Planning said in a June report. The agency pointed to a 0.4 percent annual drop in deposits at banks in April as loans expanded 35 percent. Corporate deposits fell 12 percent.
Qatar is set to build a $35 billion rail and metro line, a $7.4 billion port, new roads and stadiums before hosting the 2022 soccer World Cup. As local banks try to keep up with credit demand, their loan-to-deposit ratio reached 118 percent in May, the highest in the Gulf Cooperation Council and up from 93 percent a year earlier, Bloomberg News calculations based on central bank data show. The spread between Qatar’s borrowing costs and U.S. rates widened more than 30 percent in 2012.
A mismatch in the pace of growth in loans and deposits “leaves Qatar dependent on foreign financing to bridge the funding gap,” Nick Stadtmiller, head of fixed-income research at Dubai-based Emirates NBD PJSC (EMIRATES), said by phone on July 1. “If European banks start to cut the credit they extend abroad, it could make longer term financing harder to get.”
‘Clouding the Outlook’
Qatar, home to 1.7 million people, plans to spend 10 percent of gross domestic product, or about $39 billion, on projects and infrastructure this year and next, the planning agency said in the report.
The plans face risks as syndicated lending in the six- nation GCC, which also includes Saudi Arabia and the United Arab Emirates, falls due to a retreat by global banks. Syndicated loans in the Middle East and North Africa dropped 15 percent so far in 2012 to $14.8 billion, data compiled by Bloomberg show.
“Worldwide financial upheaval” would “probably undermine financing conditions for local projects, making it harder for domestic and international banks to take part in the opportunities created by Qatar’s infrastructure investment plans,” the planning agency said. “Projects might therefore be deferred, clouding the outlook for construction specifically and for growth in the non-oil and gas economy generally.”
Qatar’s economic growth will probably slow to 6.2 percent this year, according to the department. That’s the lowest rate of growth since 2003 and follows a 19 percent expansion last year, the world’s fastest pace.
Banks in the country have boosted total loans and advances by more than 25 percent in each month since October, central bank data show, a trend that has driven up borrowing costs. The three-month Qatar Interbank Offered Rate rose to 1.23571 percent yesterday from 1.1688 percent at the end of last year. It hit a 2011 low of 0.8563 percent in September.
The rate’s spread over the three-month London Interbank Offered Rate widened to 78 basis points yesterday from 59 basis points at the end of December. Greater lending has also placed some strain on bank deposits. Commercial Bank of Qatar QSC (CBQK), the nation’s second-biggest bank, had a loan-to-deposit ratio of 108 percent at the end of March, according to data compiled by Bloomberg.
“We see credit growth moderating slightly going forward because the stimulus to the economy more generally is going to weaken,” Frank Harrigan, director of the planning agency’s economic development department, said at a June 25 press conference.
Five euro-zone nations have sought international bailouts in a crisis that prompted Europe’s leaders to agree last week to ease repayment rules for emergency loans to Spanish banks and relax conditions on help for Italy.
Even if the euro-zone crisis worsens, Qatar has “the ability to intervene and offset and add liquidity to the market,” Akber Khan, an asset-management director at Al Rayan Investment in Doha, said by phone yesterday. “The government is in a situation where it doesn’t need to borrow money from anyone. If it means they need to step in, they will.”
The nation is the world’s biggest exporter of liquefied natural gas and home to the Qatar Investment Authority, the world’s 12th biggest sovereign wealth fund, according to the Las Vegas-based SWF Institute. After the 2008 global credit crisis, Qatar injected capital in its banks from its wealth fund and bought lenders’ equity and real estate portfolios.
Still, Qatar’s revenue could be hurt by a decline in oil prices. Brent crude, the benchmark for more than half the world’s crude, fell 20 percent in the second quarter, the biggest quarterly drop since the final three months of 2008 to $97.80 a barrel on June 29. Brent was $96.64 yesterday.
“The reliance of some of the banks on wholesale funding markets is potentially a problem,” Harrigan of the planning department said. “If the euro-zone crisis gets worse and there is a flight from risk, Qatar’s access to wholesale funding markets would be restricted. That certainly would make project- finance conditions more difficult. So this is something we recognize and we flag explicitly as a risk in the economic outlook.”
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