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InterviewsSeptember 1 2015

Resilient Qatar looks to further economic diversification

The drop in oil prices has not hit Qatar's economy particularly hard, and its central bank governor, Abdulla Bin Saoud Al-Thani, is looking to further diversification, a strong banking sector, infrastructure investment and closer ties with China to keep the country in the fast lane when it comes to economic growth.
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Abdulla Bin Saoud Al-Thani

Q: How would you characterise the performance of Qatar's economy in 2015?

A: Despite the recent decline in oil prices, Qatar continues to benefit from robust growth, supported by accelerating economic activity in view of the government’s diversification strategy. This growth momentum will continue to be driven by solid expansion in non-hydrocarbon activities propelled by investment spending, an expansionary fiscal stance and population growth. Services will be the largest contributor to growth, followed by construction. The real gross domestic product is expected to grow at over 7% in 2015 as the Barzan gas plant begins production, while inflation is likely to moderate supported by softer global commodity prices. 

However, risks – particularly emanating from external developments – persist. Of particular importance are the concerns about a sustained period of lower global oil prices and the normalisation of US monetary policy, which could result in a tightening of financial and monetary conditions in the region. The impact on Qatar is expected, however, to be limited, given its greater reliance on gas rather than crude oil, our sound financial system and our comfortable liquidity position. Nevertheless, the Qatar Central Bank [QCB] continues to monitor developments, and will take appropriate measures should they become necessary.

Q: What can the QCB do to mitigate any negative impacts arising from weaker hydrocarbon prices? Are there any risks from running an expansionary fiscal stance? 

A: Qatar’s economy and financial system have been resilient, despite the sharp fall in oil prices, reflecting the ongoing economic diversification strategy. While Qatar’s hydrocarbon exports have been affected by lower oil prices, the impact has been limited, given Qatar’s greater reliance on gas exports. Although this will also be reflected in government fiscal revenues, it is unlikely to affect the targeted spending plans in the near term because of the government’s commitment to the ongoing mega-infrastructure projects. This, in turn, will continue to support strong non-hydrocarbon sector growth and hence overall economic growth – and thereby the broader financial sector.

As regards the financial sector, there has been a deceleration in overall deposit growth, largely due to a decline in government deposits. Meanwhile, overall credit growth has been robust, reflecting strong growth in private sector credit, in line with the double-digit non-hydrocarbon sector growth. Despite some moderation, the banking system continues to be in a healthy primary liquidity surplus as reflected in net Qatar Monetary Market Rates [QMR] deposits and excess reserves with the QCB.

Furthermore, the overnight rates have hovered around the QMR deposit rate, while market interest rates, such as bank deposit and lending rates, have been broadly stable, suggesting that the financial condition remains comfortable. The QCB has been undertaking proactive liquidity management operations to ensure that overall liquidity in the system remains consistent with growth and inflation objectives. Moreover, the QCB has been implementing the Basel III framework since January 2014, and also further enhancing the macroprudential regulations to strengthen financial stability. In this environment, banks have remained profitable and well capitalised, while maintaining high-asset quality and strong liquidity buffers.

The expansionary fiscal stance is basically geared to meet the investment needs of the various development projects planned in line with achieving the goals of the Qatar National Vision 2030. The large-scale infrastructure investments, in turn, are expected to have a crowding-in impact on private investment, and together will support the diversification of the economy for sustainable growth. While the inflow of an expatriate population related to these projects has added to demand pressures in certain sectors, it is expected that in the long run it will help raise potential supply in the economy.

Moreover, the government is also prioritising its spending plans to improve investment efficiency, while taking initiatives to increase private participation. At the same time, the QCB has been undertaking proactive liquidity management operations aimed at ensuring monetary and financial stability. Therefore, fiscal policy may not pose any major risks at this stage.

Q: Have lower oil prices reduced the flow of deposits from government-related entities to Qatari banks – or is the banking system sufficiently liquid for this not to be a major issue?

A: A decline in fiscal surplus resulting from a fall in oil prices is expected to lead to some fall in government deposits. We have started seeing a modest reduction in the flow of deposits from government-related entities, but it is too early to say that this trend will continue going forward, especially as oil prices are likely to stabilise around the current levels. Moreover, as we expect the economy to continue growing at a healthy pace during 2015 and 2016, the impact of lower oil prices on the financial sector will be limited. Liquidity buffers in the form of excess reserves and investments in securities, a high capital-to-risk-weighted asset ratio and low asset delinquency should enable the banks to weather the impact of lower oil prices without any significant disruption.

Q: What measures is the QCB taking to ensure the banking system remains in good health?

A: In order to upgrade and strengthen the banks, promote transparency and impose market discipline, the QCB has been at the forefront in the implementation of international banking and accounting standards for the banks in Qatar. The banks were asked to comply with various Basel III capital requirements as early as January 2014. In addition, various international accounting standards are being implemented. Corporate governance among banks is being monitored and strengthened over time. In this context, some restrictions on remuneration of the top management of the banks has been imposed recently. Several prudential measures relating to capital, credit quality, liquidity, cross-border exposure, credit concentration and others are currently in place in Qatar.

Ongoing and proactive offsite and onsite supervision of banks is being done by the QCB to ensure proper functioning of the banks. Systemic assessment of the health of the banks is done through our ongoing analysis of financial stability. Credit risks, market risks, liquidity risks, concentration risks and cross-border risks in the banks are being closely monitored, and corrective steps are being taken wherever required. The assessment of the health of the banks is published once in a year in the Financial Stability Review. Stress-testing is also being done both by banks individually and by the QCB to evaluate the ability of the banks to withstand stressful situations.

Q: What does the signing of the currency swap agreement with China in 2014 mean for Qatar’s economy? 

Following the signing of the memorandum of understanding and the currency swap agreement with the People’s Bank of China in November 2014, Qatar launched the first renminbi clearing centre in the Middle East and north Africa [MENA] region on April 14, 2015. This important step has opened up China’s trade gates not only to Qatar but also to the region. In recent years, the renminbi has gained significant momentum as a trade and investment currency, driven by China’s strong economic growth and the increasing adoption of the renminbi as an international currency.

Trade between Qatar and China continues to increase beyond infrastructure and hydrocarbon sectors, having more than tripled between 2008 and 2013 to approximately $11.5bn. Chinese companies have become active partners in the Qatari market, with 13 Chinese companies operating in Qatar in addition to the 181 joint ventures with Qatari partners.

In this context, the launch of the region’s first renminbi clearing centre in Doha creates the necessary platform to realise the full potential of Qatar’s and the region’s trade relationship with China. It will facilitate greater cross-border renminbi investment and financing by businesses, and promote greater trade and economic links between China, south-west Asia and the MENA region. The centre provides access for local financial institutions to China’s onshore renminbi and foreign exchange markets, fostering cross-border use of the renminbi in the region. Banks will now be able to expand their investment portfolios of financial services and products through the facilitation and issuance of financial instruments such as the trading of debt market products, interest rates and commodity derivative products denominated in renminbi.

Abdulla Bin Saoud Al-Thani is the governor of the Qatar Central Bank.

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