This year’s analysis of Qatar’s economy by the International Monetary Fund (IMF) covered a range of subjects comprehensively and in some depth. There is a considerable degree of overlap between the respective views of the IMF and Qatari institutions, including the Qatar Central Bank (QCB). Both agree that the role of a central bank is to be prudent, including deployment of counter-cyclical measures, to smooth out peaks and troughs in economic activity and help sustainable economic growth.
This is generally the best disposition, and especially in the case of an economy with strong exports from oil and gas. Viewing a central bank as the engine for growth risks encouraging short-term GDP growth through public sector spending, causing imbalances in the economy. Cheap money also tends to result in speculative bubbles of asset valuations, causing further destabilising effects.
Maintaining the dollar peg is another example of fiscal conservatism, where the IMF and QCB share the same policy preference. The downside of, on occasion, having to follow an increase in US interest rates owing to a rise in inflation in the US that Qatar has not experienced, is more than offset by the stability and transparency of pegging the riyal to the world’s primary reserve currency, in which oil and gas are traded.
The banking industry is well-capitalised, the IMF reported, as confirmed by a recent stress test by the Qatar Central Bank which showed the banking sector to be resilient overall, though a few of the weaker banks may have to increase capitalisation if distressed conditions arose. There has been a modest increase in non-performing loans (NPLs) at 3.8%, but provisioning coverage is high, at nearly 80%. The QCB has sought technical assistance from the IMF on stress testing.
IMF economists signalled, not for the first time, a potential risk from relatively high rate of overseas deposits to Qatari banks by non-residents. It also noted that Qatari banks’ exposure to such deposits had declined since the QCB introduced measures in 2022, and that funding needs were lower. The QCB has also refined policy measures to mitigate risks associated with banks’ short-term foreign asset-liability mismatches.
It is helpful to have diverse sources of deposits for the banking system, and what is more important than the level of deposits from overseas is their nature; the longer-term, the better. Mitigating this and other risks is further development of the domestic bond market. Commercial bonds issued in Qatari riyal are now available. A mature bond and debt market would also improve access to financing for companies, and increase the range of domestic options for investment, adding to equities and to real estate investment – the latter of which has been subject to over-supply. The real estate sector is a potential source of further increase in NPLs.
Generally, the greater the development of a domestic bond market and secondary debt market, the greater the potential to reallocate capital resources towards more profitable assets and ventures.
The IMF noted that banks had withstood the gradual exit from government financial support relating to the Covid-19 pandemic. The Qatar Development Bank has stepped in with soft loans or other forms of support where subsidies are discontinued for small and medium-sized enterprises (SMEs). It recommends vigilance, to ensure the viability of firms in receipt of support, and to monitor any increase in NPLs. It recommends regular stress testing and information sharing among financial supervisors to identify vulnerabilities.
Qatar has a strategy in place respectively for both fintech sector and green technology. The National Fintech Strategy established by the QCB has four pillars – infrastructure, regulation, capacity development and ecosystem development and the IMF recommends monitoring against international benchmarks. For green technology and environmental, social and governance (ESG) policies, Qatar has made progress on policy, reporting requirements, and risk management.
In a detail of the report, the IMF notes that the government’s level of foreign exchange holdings has not risen in line with the healthy increases in public sector surpluses. This indicates a higher level of investment by the sovereign wealth fund, the Qatar Investment Authority. The report noted a lack of detail available, but was able to report a strong reserves position, including the QIA’s sizeable overseas assets, a combination that serves to limit risks and vulnerabilities to capital flows.
Overall, a promising picture emerges of the Qatari banking and financial system featuring caution regarding macro-prudential issues assisting financial stability, alongside some innovations that help deepen and diversify domestic financial instruments and strategies.
