Home to the world’s third largest natural gas reserves, Qatar’s economy has enjoyed meteoric growth for much of the past five years on the back of rising oil and gas sales. The country’s liquefied natural gas (LNG) exports rose from $18.7bn in 2007 to almost $62bn in 2011.
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Income from LNG exports has transformed this tiny peninsula into the world’s wealthiest country – Qatar’s gross domestic product (GDP) per capita surpassed the $100,000 threshold in 2011 ($102,900) and is now 20% higher than Luxembourg ($84,800). But as a decade of investment in building up LNG infrastructure comes to fruition, the next 10 years will see a shift in focus to heavy investment in infrastructure and development projects.
Qatar faces sizeable funding requirements as it pushes ahead with its $185bn five-year (2011 to 2016) National Development Strategy devoted to infrastructure projects, such as roads, ports, airports, a metro, and sewage and water treatment.
Government presence
Its successful bid for the 2022 football World Cup in December 2010 has further accelerated Qatar’s growth plans – with $70bn set to be spent on infrastructure development over the next decade, according to the Washington, DC-headquartered Institute of International Finance.
Aside from the infrastructure that was already planned, the government will also build nine new stadiums at a cost of $4bn and more than 65,000 new hotel rooms, costing $12.4bn. This has led to considerable lending and business opportunities for the local banks which recorded total domestic credit growth of 28% in 2011.
The public sector has fuelled most of this growth (45%), while private sector lending, which has been muted since 2009 and lagging behind the public sector, grew by 20% during 2011. “It is the combination of large corporates, government and government-related entities that are driving the domestic economy today,” says Mohamad Moabi, assistant general manager for economics, financial analysis and research at Qatar National Bank (QNB) – the country’s largest bank by asset size with a market share approaching 40%. “They have been involved in virtually all aspects of economic activity – not just the energy sector.”
Most of the infrastructure projects being developed will be funded directly by the Qatari government, which has surplus liquidity from its gas sales. HSBC estimates that the budget surplus will widen to more than 10% of GDP in the fiscal year ending April 2012. This means the only financing required will be contractor funding, but this in itself will be no mean feat.
Ways to grow
For the next decade at least, Qatar will be the focus of the Gulf Co-operation Council (GCC) construction industry and the local banks are now starting to look at ways to ensure they have the capacity to support this growth.
When bidding for work in Qatar, contractors are required to provide bid bonds with an average value of roughly 5% of the total value of a project. Once the tender has been awarded, clients ask the winning contractor to provide advance payment bonds, performance bonds and often retention bonds. Bid bonds are relatively easy to obtain from banks but it is the latter three that can prove difficult to acquire and they can add up to a very large sum of money, especially for multi-billion Qatari riyal projects.
Local banks saw a marked increase of roughly 40% in requests for issuing bid bonds in 2011. With many international firms entering Qatar and the pace of construction work set to increase over the next few years, lenders will continue to see increased demand.
“Today, we are probably most active in the multinational contract financing and bonding space. Multinationals need bonding lines to support them to bid and then the performance bonds if they win these contracts. And we’re very active in that space – probably the most active of any bank in this market,” says Jody Sanderson, managing director and head of global banking at HSBC. “That’s probably where the biggest opportunity sits right now if you look at all the projects that are planned leading up to the 2022 World Cup. We expect that business to do very well, specifically over the next three to five years, so I’m very optimistic there.”
Bourse focus
While government revenues are expected to account for the lion’s share of this funding, much will be recycled through the domestic banking system, where maturity mismatches constrain banks’ capacity and appetite for large project finance deals that have a longer tenor. In an effort to overcome this hurdle, some of the key banks have already started turning to the capital markets as a solution. Commercial Bank of Qatar and Doha Bank recently issued five-year $500m bonds, while QNB has raised $1bn in a $7.5bn euro medium-term note programme.
Indeed, developing the Qatar Exchange is of central importance to the local banking sector’s ability to fund the unprecedented number of projects planned for the coming years. In this regard, an important milestone was achieved by the bourse in December 2011 with the execution of the first treasury bills (T-bills) trade in the secondary market. The central bank sold QR14bn ($3.8bn) in T-bills through to the end of March.
This effort to deepen local currency debt markets marks the first step towards listing bonds. Industry insiders believe that once a yield curve is established, banks and corporates will increasingly use the exchange to raise capital – whether through corporate or project bonds.
Growing the market
The influx of new residents on the back of the World Cup activity is also expected to provide a boost to Qatar’s overcrowded retail banking market. Today, the 500,000-strong bankable population (out of a total population of 1.7 million), is served by 18 banks that comprise seven foreign lenders, six commercial banks, four Islamic banks and one specialised bank.
“It’s a very competitive retail market here in terms of the population in Qatar in relation to the number of banks,” says Mr Sanderson. “But there’s going to be a lot of new people coming into the market to support the project activity. We focus on the premier segment and we’ve got a lot of clients abroad that are moving here who will want to continue to bank with HSBC. We’re already the largest foreign bank in the retail segment but I think we’re in a unique position to grow further and a natural product area would be credit cards and car loans.”
[Qatar] has a 45% savings rate and the highest per capita income in the world. If you extrapolate the current growth rates, you can see that asset generation is only going to increase
The private sector is also expected to assume a bigger role in the economy in the coming years as it diversifies away from hydrocarbons. International ratings agency Moody’s estimates that the implementation of projects connected to the five-year development strategy will fuel private sector lending growth to about 20% to 25% in 2012. “The pure private sector currently plays a very small role in the Qatari economy but its growth can and should be on an upward path in 2012 and 2013,” says Mr Moabi.
Accounting for a 50% share, the real estate sector was responsible for much of the private sector credit growth during 2011, while consumption lending also posted a healthy growth of 19%.
“We are still seeing growth in real estate and consumption as a lot of people are generating healthy incomes,” says Mr Sanderson. “But the key driver of private sector expansion will be the high levels of project activity and public spending. The government wants to see public companies partnering with private companies and all things being equal. A lot of private sector growth will come off the back of the overall project activity and I think we’ll see some very successful local companies.”
Asset management spike
Qatari banks have also increasingly been moving into the asset management space in light of the very large pools of liquidity being produced. QNB opened its asset management division in 2005 and has subsequently grown its asset pool from QR300m to more than QR10bn to become the largest asset manager in the country.
QInvest, Qatar’s largest investment bank, launched its wealth management business at the beginning of 2011, while International Bank of Qatar (IBQ) is already very strong on private banking but is now moving into the second stage of wealth management.
At the start of 2010, the Qatar Financial Centre (QFC), now home to 159 institutions, changed its strategy to focus on asset management. The country is currently managing between $200m and $300m in assets but is looking to scale this up to $150bn to $200bn by 2020.
Most recently, on April 30, 2012, the UK’s Barclays signed a $250m asset management deal with Qatar Asset Management Company, part of the state’s wealth fund, to invest in natural resource projects across the world. As part of the deal, Barclays Natural Resource Investments (BNRI), a division of Barclays, will locate the Middle Eastern office of BNRI within the QFC development.
“We’re looking for a long-term commitment to the country,” says Shashank Srivastava, acting chief executive of the QFC Authority. “Qatar is predicted to emerge as the second largest economy in the Gulf region after Saudi Arabia over the next few years. It has a 45% savings rate and the highest per capita income in the world. If you extrapolate the current growth rates, you can see that asset generation is only going to increase. There are a lot of asset gatherers but most assets continue to be managed outside the region. Our aim is for Qatar to become the largest asset manager in the Middle East region.”
Global liquidity impact
Mr Srivastava says that while historically wealth has been invested in Europe and the US, Middle Eastern capital is now looking for better risk-adjusted returns. However, the region is currently mainly focused on two asset classes – equity and real estate. “The size of capital in the region is currently much greater than the existing asset classes, which is why it exports capital,” he says. “We see debt as an emerging market class and there’s a lot of interest surrounding when Qatar will start issuing local currency debt. But it will take time for debt classes to grow.”
The desire for Qatar to establish a thriving debt market is linked to the broader concerns of addressing funding issues in the market. As lending growth has gained traction over the past few years, Qatari banks have become net interbank borrowers and increased their reliance on wholesale funding, primarily through attracting foreign-sourced interbank borrowings and debt securities.
As of September 2011, the cumulative total of European bank lending to Qatar amounted to roughly $43bn, equivalent to 25% of the country’s $173bn annual GDP. Therefore, the deepening eurozone debt crisis and concern over US public finances has seen a tightening of global liquidity that has raised banks’ funding costs.
In a move aimed at encouraging a more active interbank market in Qatar, the central bank announced it was partnering with Bloomberg to launch the first ever Qatar Interbank Offered Rate on May 2. Interbank rate fixings are used around the world to provide a daily reference point for banks borrowing unsecured funds from other banks in the local wholesale banking market.
Qatari banks’ local currency borrowing costs rose to 1292.86% on May 2 – the highest level since January 2011 – amid signs that bank funding levels are tightening. Both the rapid growth in lending and the central bank’s sale of T-bills are behind the tightened liquidity. Such figures suggest that, unless the deposit growth accelerates, the lending boom could lose momentum.
QInvest boost
Compared with 28% loan growth in 2011, total volume of deposits rose by just 7%. Meanwhile, total deposits declined to QR348.4bn in March 2012 from QR363.6bn in December 2011. Therefore, the news on May 7 that Islamic lender QInvest will merge with Egypt’s EFG Hermes to create the Middle East’s largest investment bank, is viewed as a positive development for the country’s financial industry.
QInvest will hold a 60% stake in the new bank, which will be called EFG Hermes Qatar, while the Egyptian lender will control the remaining 40%. QInvest will also provide $250m to increase its capital.
With a market capitalisation of about $1bn, EFG Hermes is one of the region’s largest listed investment banks, while unlisted QInvest has authorised capital of $1bn and paid-up capital of $750m. “EFG Hermes is the number one investment bank in the region so it’s a great brand with a solid business,” says Shahzad Shahbaz, chief executive of QInvest. “We bring capital and access to capital to the table because we have very strong relationships within Qatar and some other GCC states. Obviously, we can also lend our Islamic finance expertise in structuring sukuk and other types of Islamic instruments.”
Mr Shahbaz says the bank is currently very active in investment banking advisory and is working on three initial public offerings and a number of debt financing transactions for a Turkish and Qatari company. Of course, the merger will give QInvest a considerable competitive edge at a time when regional competitors such as Dubai’s Shuaa Capital and Rasmala Investment Bank have scaled back their ambitions, cutting jobs and closing operations.
Banks catching breath
The Middle East investment banking industry has recorded a slowdown since the onset of the financial crisis in 2008 and the subsequent bursting of the region’s real estate bubble. Regional investment banking net revenues fell to $523m in 2011 from $590m in 2010, hitting the lowest level since 2005, according to figures from data provider Dealogic.
The retrenchment by European banks that are deleveraging abroad to try and strengthen their own balance sheets is compounding the tightened funding conditions. “There is a pressure for consolidation within the industry as a whole,” says Mr Shahbaz. “The gap will partly have to be filled by banks from the liquid-rich GCC region and part will have to come from other markets such as Asia that also has very strong liquidity. The test will be whether Asian banks get more active in this part of the world as they’re currently eyeing up a lot of distressed opportunities and growth capital needs across the world.”
However, as Qatar’s economic activity shifts into a lower gear, credit growth is expected to decline from its elevated levels in 2011. After recording real GDP growth of 19% in 2011, the International Monetary Fund is forecasting a slowdown to 6% in 2012. “We are forecasting GDP growth of 9% for 2012 and it would be good if we were able to achieve high single/low double-digit growth of 7% to 10% over the next few years,” says Mr Moabi. “Obviously this will mark a slowdown from previous years but let’s not forget that this still represents healthy growth. Besides, a pause is nice or you get bottlenecks and it will give banks a chance to catch their breath before the peak project activity in 2013 and 2014.”
Indeed, according to the government’s expenditure pipeline, project spending will increase from $21bn in 2012 to a respective $28bn and $25bn in 2013 and 2014, before falling to $17bn in 2015.
Qatar has carved out a reputation for punching above its weight since the turn of the century and the events of the past few years have only served to cement that reputation. Winning the World Cup bid combined with the sheer scale of its infrastructure development programme will give a shot in the arm to the entire Qatari banking sector for many years to come.
The demand and scope for banking services will create a market with immense potential for new and experienced players who are able to anticipate and service changing expectations and needs across all sectors.
