Financial conditions index essential for assessing predictive potential of Qatar’s non-hydrocarbons, says IMF paper

A financial conditions index (FCI) is imperative for Qatar to assess the current state of financial conditions and evaluate the relationship between financial indicators and future growth distribution, according to the International Monetary Fund (IMF).

"The FCI is an important leading indicator of Qatar’s non-hydrocarbon growth, highlighting its predictive potential for future economic performance," said the IMF working paper, which developed an FCI for Qatar and used the growth-at-risk (GaR) framework to examine the impact of financial conditions on Qatar’s non-hydrocarbon growth.

As Qatar seeks to enhance the financial sector's contribution to growth through the third financial sector strategy (FSS3), the paper said an FCI will be essential for assessing the current state of financial conditions and evaluating the relationship between financial indicators and future growth distribution.

Highlighting that the analysis showed that the FCI is an important leading indicator of Qatar’s non-hydrocarbon growth and closely follows the Qatar Central Bank's (QCB) bank's lending survey; the IMF paper said the FCI exhibits a relatively strong correlation with real non-hydrocarbon GDP (gross domestic product) growth, highlighting its predictive potential for future economic performance. Additionally, the credit conditions component of the FCI aligns with the QCB’s bank lending survey, indicating consistency of its FCI with other surveys.

The GaR analysis highlights the importance of domestic and external conditions as indicators of real non-hydrocarbon GDP growth performance, it said, adding domestic conditions seem to offer the strongest signal in the short term, whereas the effects of external conditions are significant in both the short and medium term.

"Overall, the current downside risks to Qatar’s baseline non-hydrocarbon growth projections are relatively mild. Alternative scenario tests indicate that future non-hydrocarbon growth could improve following a reduction in the policy deposit rate. Additionally, non-hydrocarbon growth is primarily influenced by oil prices, with minimal effects stemming from global financial market uncertainty," it said.

Finding that financial conditions play a significant role in shaping business cycle fluctuations as they reflect both the feedback of current and past economic conditions and markets’ expectations about the economic outlook; it said FCIs are constructed from a broader combination of domestic and external financial conditions.

They serve as tools that facilitate a deeper understanding of macro-financial linkages, as well as enable historical assessments by comparing the current state of financial conditions against their past cycles.

Stressing that developing the FCI has become even more important as the country aims to further develop the financial sector through the FSS3. The paper, authored by Dorothy Nampewo, said in Qatar, the financial sector plays an important role in shaping economic activity, and therefore serves as a key pillar in fostering the country's sustainable economic development.

The FSS3 aims to enhance innovation and diversification in the financial sector, and to support the country’s goal to become a global financial services centre. The FCI would be important in assessing the current state of financial health, gauging the impact of initiatives aimed at fostering financial market deepening, and evaluating the nexus between financial indicators and the distribution of future growth.