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ViewpointSeptember 3 2012

Qatar Central Bank moves closer to its goal

With the same proactive approach that allowed the country to steer clear of the worst of the global economic crisis, Qatar's central bank is preparing the country's banks sector for regulatory pressures ahead, while ensuring they can meet the large-scale funding requirements that come with the country hosting the 2022 FIFA World Cup.
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Qatar Central Bank moves closer to its goal

With a strong macroeconomic environment underpinned by the government’s efforts to diversify the economy as envisaged in its Qatar National Vision 2030 report, the Qatari financial sector is poised to benefit from tremendous opportunities in the coming years. From the central bank’s perspective, it will be our responsibility to ensure an adequate flow of credit to the productive sectors of the economy. In the run up to the 2022 FIFA World Cup, project financing requirements and other related financial intermediary services will act as a catalyst for strong growth for the sector. Needless to say, the banking sector has to fine-tune itself to rise to these challenging opportunities.

Qatar’s economic outlook remains positive for 2012 and 2013. According to the International Monetary Fund’s Regional Economic Outlook, the country's real gross domestic product (GDP) growth is projected at 6% and 4.6% in 2012 and 2013, respectively. Even though hydrocarbon GDP growth is expected to slow in 2012, on account of a self-imposed moratorium on the development of new hydrocarbon projects, large infrastructure investment and increased production in the manufacturing sector will maintain real non-hydrocarbon GDP growth at a rate of 9% in 2012.

On the inflation front, during 2011 average annual inflation stood at a modest 1.9%. Going forward, inflation is expected to remain low on account of excess capacity in the housing sector as well as subdued pressures from imported inflation in 2012.

The Qatari banking sector remains profitable, well capitalised and efficient, with very low levels of non-performing loans. The sector has been able to successfully withstand headwinds from the global recession and the upheavals of the Arab Spring. The first half of 2012 recorded a high credit growth of about 36%.

This sizeable growth in credit was mainly on account of a high demand from the public sector, while private sector credit also recorded double-digit growth. With project financing opportunities opening up along with developments in infrastructure projects, credit demand is expected to record robust growth in the medium term. In order to cope with increased demand for financing, banks have been taking proactive steps to improve their risk management skills. From a regulatory standpoint, we have been continuously fine-tuning our regulatory and supervisory framework with a macro-prudential focus so as to comprehensively monitor and manage risks.

Forward thinking

Qatar was not immune to the global financial crisis and the economic slowdown that followed, although the impact on our economy was marginal compared to other countries. Government support came in the initial stages of the crisis as a proactive measure aimed at strengthening confidence in the banking sector.

The first of such measures saw the government make equity injections by purchasing up to 20% of the equity capital of domestic banks in several phases in order to maintain a healthy capital position in the banking sector. This move was made at the peak of the crisis, in October 2008. The decision provided positive signals to the market, while the actual equity injections provided the relevant cushion to banks periodically.

The second and third measures were aimed at supporting the asset side of the banking sector. The ripple effect of the global meltdown impacted the Qatari economy in two ways: through our equity markets and a slowdown in our real estate sector. The volatilities observed in the stock market started to impact the trading book of the banking sector. Taking these concerns on board, in March 2009, the government purchased the equity investment portfolios of local banks.

In June 2009, the real estate portfolios including investment and credit portfolios of domestic banks, which were spread both domestically and abroad, were purchased. These proactive measures helped the banking sector to strengthen its balance sheet and ensured that it could continue its financial intermediary role.

Staying liquid

In order to meet the capital and liquidity requirements set out in Basel III, we have advised the domestic banks to study the principles and standards of Basel III and respond to us with any comments. Accordingly, the process has already shown us that all the banks will be able to meet the requirements well in advance. It may be noted here that the banking sector has a solid capital base – among the highest in Middle East – with capital adequacy ratios increasing by more than 4% during 2011. The leverage ratio also improved, indicating the increase in capital adequacy ratios are mainly on account of the increase in core Tier 1 capital. Accordingly, the sector is on the right path in the run up to accomplishing Basel III requirements.

Liquidity management has received a remarkable level of attention from policy-makers and central banks across the globe in recent times. The global financial meltdown has ignited a debate on the importance of liquidity management. Given the country's high levels of capital, effective liquidity management and ensuring orderly financial market conditions is of paramount importance to us as well. The significance of liquidity management is augmented further in the wake of higher capital inflows to emerging market economies and the Gulf Co-operation Council region.

In light of the fact that a well-planned approach to liquidity management is essential to avoid any systemic risk to the financial sector, we have taken an array of measures to manage liquidity. In the aftermath of the financial turmoil and in line with a general trend observed in the financial markets globally, the Qatari banking sector also experienced an element of tightened liquidity towards the end of 2008.

On the ball

We have resolved this issue without delay by introducing a special liquidity window for the banking sector in addition to the existing borrowing channels. By mid-2009, a liquidity surplus returned to the banking sector. However, the existence of an interest rate differential appears to have attracted capital inflows through the banking channel. In order to moderate this situation, as well as to align ourselves with the low interest rate regime in the rest of the world, the central bank reduced the overnight Qatar money rate (QMR) by 50 basis points (bps) in 2010. At the beginning of 2011, liquidity management was further strengthened by imposing a ceiling on each bank’s total holding of certificates of deposit and QMR deposits.

Furthermore, the QMR deposit rate was reduced twice more in 2011 to reach the present level of 0.75%. To signal a low interest rate regime, since April 2011, the QMR lending rate was also reduced in two phases by 100bps to 4.5%. While the reduction in the QMR lending rate stimulated credit flow to the private sector and supported growth momentum, the reduction in the QMR deposit rate reduced the scope of interest rate arbitrage and moderated inflow of speculative capital.

Another major initiative taken by the Qatar Central Bank in 2011 was the issuance of treasury bills in local currency on behalf of the government. This new initiative was taken with a view to managing the liquidity by providing a new set of liquid instruments to the banking sector. In addition, this will also serve as a starting point towards the development of a benchmark yield curve in the short end of the maturity and accordingly will help fulfil the overall strategy to develop a domestic debt market.

We have since moved one step ahead in this strategy by listing the treasury bills in the domestic stock market. Development of the domestic debt market, in particular a corporate debt market in the foreseeable future, is of great importance in light of the large-scale funding requirements associated with the FIFA 2022 World Cup.

Abdullah Saud Al-Thani is the governor of Qatar Central Bank

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