By Robert Tuttle, Bloomberg
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Qatar is requiring state companies to obtain Finance Ministry approval before borrowing from banks as the world’s richest country per capita seeks to rein in debt.
The central bank informed lenders last month of the new rule for government bodies and state-owned businesses, said a Finance Ministry official. The new rule excludes state-run Qatar Petroleum and its subsidiaries.
Qatar’s gross debt reached 36% of gross domestic product as of last year, the highest among the six Gulf Co-operation Council members and more than Iraq’s 34%, according to the International Monetary Fund.
The country wants to trim public debt as it invests $200bn in stadiums, roads, commuter trains and a new port in preparation for the 2022 soccer World Cup.
The decision “to control the amount of debt contracted by any public sector entity with local banks should be considered as positive,” said Montasser Khelifi, a senior manager for global markets at Quantum Investment Bank Ltd in Dubai.
“This means that an important part of the Qatari banks’ loans will be guaranteed by the government.”
Public-sector borrowers accounted for 42% of the nation’s $146bn in credit facilities at the end of June, Qatar National Bank said in a report last month. Spending on World Cup-related facilities will provide “ample opportunities for credit growth” for local lenders, according to QNB, the Middle East’s biggest lender by assets.
Ministry approval for public-sector loans “will show that the government is closely monitoring the amount of public debt,” Khelifi said. The increased oversight will “enhance” Qatar’s credit rating and make its bonds more attractive to investors, he said.
The country, the world’s largest producer of liquefied natural gas, is ranked AA by Standard & Poor’s, the agency’s third-highest investment grade.
The yield on Qatar’s 4.5% bonds maturing in January 2022 closed last week at 3.4%, down 61 basis points since September 5, when it spiked to its highest since March 2012, according to data compiled by Bloomberg.
Qatar is trimming its public debt after commercial bank credit extended to the government, state-run institutions and quasi-official institutions swelled 260% in the five years ended 2012, central bank data showed.
“If you look at bond issuance in the GCC, Qatar sovereign and Qatari government-related entities have been some of the largest borrowers in the debt-capital market,” Chavan Bhogaita, head of the markets strategy group at National Bank of Abu Dhabi, said in an October 27 phone interview.
“As much as everyone is comfortable with the robustness of Qatar Inc’s balance sheet, people don’t want debt levels to rise to a level where they may become unsustainable.”
Qatar needs to tighten control of public debt in case it faces tighter budgets in the future, said Mohamed Ramady, a visiting associate professor at the department of finance and economics at Saudi Arabia’s King Fahd University of Petroleum and Minerals.
Official revenue may decline if liquefied gas prices fall amid a surge in supply of the fuel from the US, Australia and Canada, he said.
The government imposed the new requirement after the neighboring United Arab Emirates took a similar step to reduce risk to its financial system. The UAE central bank in April 2012 barred banks from lending more than 100% of their capital to local administrations or government-related entities.
“It could be a way to achieve a similar end, but through different means,” Bhogaita said. “Instead of imposing a cap, you get the banks to seek permission. You, as the regulator, can therefore monitor the extent of the exposure.”
State-controlled QNB extended 66% of its loans to government-owned institutions last year, according to company data.
The government, if it needs to borrow more, may rely increasingly on other lenders such as Qatar Islamic Bank, Doha Bank and Commercial Bank of Qatar, Emad Mostaque, a strategist at Noah Capital Markets, said by phone on October 24.
“Moving more of the public-sector lending, which has good margins, to other banks, would be a positive move,” he said.
Bank loans in Qatar will grow about 20% in the two years ending 2014 as the economy grows 6.8% next year after 6.5% in 2013, QNB said in its report.
Qatari lenders have been raising funds in anticipation of greater regulatory oversight. QNB sold $1.5bn of three- and five-year bonds last month, while Doha Bank said on October 7 it would seek shareholder approval to sell a perpetual bond.
Commercial Bank has said it plans to raise QR2bn ($549mn) from sale of perpetual notes enhance capital adequacy ratios and to support future growth.
While the new borrowing rule “may slow the growth of lending by Qatari banks, it will remain one of the fastest rates of loan growth in the region,” Quantum’s Khelifi said.
