It’s been more than two months GCC countries such as Saudi Arabia, Bahrain and UAE has imposed transpotational, economical and diplomatic sanctions on Qatar such as backing out diplomatic relations, shutting land, sea and air ties, asking their people to leave Qatar and expelling Qatari nationals from GCC. Due to this disputed situation, Qatar’s Overall gradual economic slowdown is expected. International rating agency Moody’s Investors Service is expecting Qatar’s GDP growth to slow to 2.4 % in 2017 which was high and stable around 13.3% from 2006-2014.
As the dispute enters the third month of sanctions imposed by GCC. Financial System of Qatar is showing signs of instability and is further deteriorating by each passing day as the crisis are yet unresolved. Future of Qatar’s Banking system looks bleak and gloomy, according to International rating agencies, and analysts.
As the Moody’s Investors Service has rated Qatar’s Banking system as negative ( which was rated stable from 2006) has completely changed the prospect of Qatar’s Banking system. Which now looks grim due to external funding pressure (heavy dependency on foreign funding and/or MENA investments) and deteriorating operating environment and conditions.
As Qatar’s Banking sector is highly dependent on foreign funding (wholesale debt and deposits) has increased in last few years because of the significant fall in the oil revenue generation. This makes their banking system vulnerable , according to Moody’s Investors Service. According to the leading institution in MENA -Arqaam Capital, Qatar National Bank (QNB) is most dependent on foreign funding and Qatar Islamic Bank (QIB) is the worst exposed to the GCC for funding. Also, according to the analyst at Arqaam Capital, In terms of GCC exposure, Qatar Islamic Bank has 24% of funding coming from the GCC which is high and Qatar National Bank has only 5 % funding from GCC but it has the highest dependency on foreign funding at 57%.
This Prolonged dispute could result in major outflows of foreign deposits and other external funding, by GCC. According to chief executive Qatar Financial Centre (QFC) , Saudi Arabia, Bahrain and United Arab Emirates has round $18 billion deposit with Qatar Banks which will mature in 2 months. hence, if the dispute is not resolved and deposit is withdrawn, Qatari banks’ high liquidity buffers. which means 24% of total assets as of December 2016 would most likely be dropped. Since domestic deposits remains low due to reduced oil revenues. Qatari Bank’s profitability will most likely decline, with declining return-on-assets.
In this current situation, factors like deteriorating operating environment, negative credit ratings (not just Banks, but rating agency has rated leading government owned companies such Qatar’s national oil and gas company Qatar Petroleum (QP), Industries Qatar and Qatar Electricity and Water Company also negative) and Foreign funding exposure of Qatar banks (particularly GCC and MENA) could result in non-performing assets (NPAs). According to 2015 financial stability report published by the Central Bank of Qatar, GCC asset exposure of the banking system is 26.9 % of total assets and 15.9% elsewhere in MENA. The Assets quality with dip and will eventually makes the system weak.
According to Chief executive ,Qatar Financial Centre(QFC) GCC has restricted some of their construction, professional services and export companies from and with doing business in Qatar and that is affecting about $2 billion of contracts. therefore, Construction sector is expected to be badly hit, according to economist and analyst. Due to challenging conditions of construction sector Moody’s Investors Service foresees modest pressure on loans which means increase in bad loans. They expecting bad loans to increase by 2.2 % by 2018. According to Head of Research- Arqaam Capital, ”Higher interbank rates suggest a significant reduction in available liquidity, which should increase cost of funds (CoF) and compress net interest margins (NIM), resulting in tighter credit standards and higher non-performing loans (NPL) formation,” .Qatar’s Banks default portfolio of loans is most likely to increase due to the sanctions and boycott by its neighboring countries.
As Moody Investor Services changes the complete outlook and prospect of Qatar’s Banking and Financial System by rating Government owned entities and Banks as negative. This new negative credit rating shows the incompetence of Qatar’s Government to support the Banking system of the country. Also, Moody doubts the government’s capacity to support the banking system is failing, and potentially deteriorating as the time passes by.
Standard & Poor’s (S&P), Credit rating agency lowered the Qatar’s stable AA rating to AA- within few days of the sanctions imposed as Qatar’s neighboring countries boycotted due to terror funding. They were the first one to place credit watch on Qatar with negative implications. Also, Fitch did place Qatar on negative credit watch due to the political crisis.
According to the Chief executive of the Qatar Financial Centre (QFC), Saudi Arabia, the United Arab Emirates and Bahrain had about $18 billion of deposits in Qatari banks that would mature in two months and Government of Qatar is well prepared and will definitely step in to support Banks if the foreign clients withdraws deposit.
Yousef al-Jaida further said in his interview, Qatar Government support has been witnessed in the past worse financial crises as well in 2008. World has definitely seen the support Qatar’s government provided during 2008 financial crisis which was worse as this is political crisis and According to Jaida, Financial system of Qatar is stable till now and also International Banks in QFC are providing funding and loans to local Banks. He further said Banks are asked to do strict customer due diligence for new relationships.
The government during that worst financial crises of 2008 stepped in and took over all default portfolios, bad loans and real estate. If required, the government will support and enforce measures, by Yousef al-Jaida. A close look and check is kept on banks, indeed very close attention and Government as in when required will step in and will take all necessary measures, analyst QFC.