By Ziad Daoud- Bloomberg Middle East Economist
The Saudi-led economic boycott of Qatar in June raised concerns about the viability of the country’s banking industry. With estimated net foreign assets of $352 billion, the sufficiency of Qatar’s financial reserves was never in question. But the liquidity of these assets remains in doubt, particularly given the reliance of Qatari banks on short-
term foreign funding, which has started to dry up since the blockade. Yet recently published data have unveiled previously undisclosed liquid assets at the central bank. In the view of Bloomber Intelligence (BI) Economics, this should be enough to support the banking system if there are further withdrawals of foreign deposits.
The sharp decline in oil prices in mid-2014 has squeezed the liquidity of the Qatari banking system. Banks operate by collecting deposits and using them to create loans; and as oil
revenue shrank banks felt the effects on both sides of the ledger. On the deposit side, it led to the withdrawal of government deposits, reducing the liquidity available to banks.
And on the lending side, it increased the demand for loans from the government given the switch to a budget deficit, putting more strain on the reduced pool of liquidity.
To overcome this, Qatari banks have relied on foreign deposits to finance domestic lending. The foreign liabilities of commercial banks more than doubled in the three years to May 2017 to reach $129bn (75% of GDP).
But the flow of funding has reversed since the onset of the Saudi-led economic blockade of Qatar. Foreign liabilities of commercial banks in the country fell by a fifth ($27bn) between May and August. To honor their commitments and offset these outflows, Qatari banks raised $9 billion from the sale of some of their foreign assets. The central bank was the source of funds that filled most of the remaining gap — international reserves at Qatar Central Bank declined to $20 billion in August from $35 billion in May.
Back to order
Given the sharp decline in international reserves, are Qatari banks at risk of defaulting on their foreign commitments? BI Economics argues the situation has stabilized and the risk of default is now contained for three reasons.
First, the pace of withdrawals of foreign funding has slowed progressively since June. Foreign liabilities fell by $15 billion in June, $7 billion in July and $5 billion in August. The most vulnerable foreign deposits — namely those from Saudi Arabia, the United Arab Emirates and Bahrain — have probably already left and the rest could prove to be more sticky.
Second, the foreign deposit flight since June has reduced Qatari banks’ vulnerability to another round of capital outflows. While the foreign liabilities of banks exceeded their foreign assets by $56 billion in May, the difference narrowed to $37 billion in August.
Third, even if there was a renewed run on foreign deposits, Qatar has enough liquid assets to plug the gap. This was previously a matter of speculation as the liquidity profile of the sovereign wealth fund (where most of the foreign assets are held) is not known. But the implementation of a new accounting method, on the recommendation of the International Monetary Fund, has led to the addition of $19 billion of previously undisclosed liquid assets in foreign currency to the central bank’s holdings. Together with international reserves, this brings the total foreign currency holdings of the central bank to $39 billion – more than enough to cover the banking system’s remaining net foreign liabilities.
In summary, the risk of default by Qatari banks on their foreign commitments now seems to have diminished. The most vulnerable deposits appear to have left the system already and banks have lower exposure to foreign funding now than they did in June. More importantly, the unveiling of previously unreported liquid foreign assets at the central bank leaves no room for speculation about the ability of the state to intervene in case of a foreign deposit flight.