By Santhosh V Perumal
Qatar’s current key interest rates are here to stay, but authorities need to address inflation associated with surging credit and consumer demand in the medium term, according to National Bank of Kuwait (NBK).
“Qatar’s key lending and deposit rates are unlikely to change from their current levels of 4.5% and 0.75% respectively, given the need for broad alignment with the US Federal Funds rate in the context of the fixed exchange rate regime,” NBK said in a report. The Fed funds rate is currently at a historic low of 0.25%.
“However, over the medium term, inflation associated with surging credit and consumer demand as well as continued monetary expansion, may need to be addressed by the authorities,” it said.
Credit growth was at a robust 18% year-on-year as of October 2013, with lending to the public sector outpacing the private sector, the report said, adding within the private sector, lending to the real estate and construction sectors slowed in 2013, while that to the consumer sector picked up.
“Overall credit growth should accelerate further as more development projects are tendered,” the report said.
Observing that total assets of Qatar’s commercial banks topped QR900bn in October, increasing by 14% year-on-year; NBK said while credit growth has been the primary driver of the increase in banks’ assets, domestic investments have also played an important part. Banks have been increasingly active in the bond markets, purchasing government-issued domestic debt.
Given that deposit growth had outpaced credit growth as of October, helped in large part by government deposits in the banking system; the report said concerns over domestic liquidity have receded.
The sector’s loan-to-deposit ratio fell from 111% at the end of 2012 to 106% by October 2013, it added.
The broad money supply (M2) continued to expand in 2013, albeit at a slower rate than in 2012, annually increasing by 15% in October, it said, adding foreign currency deposits continue to play an important part in the broader monetary picture.
Among the drivers, net foreign assets of the banking system increased significantly in 2013, on overseas investments and credit by commercial banks as well as an increase in the Qatar Central Bank’s (QCB) holdings with foreign banks, it said.
Finding that recently, the Qatari riyal, in tandem with the dollar, has been depreciating against the euro on both a nominal and real basis, NBK said “if sustained, domestic prices of imports from the eurozone may rise, adding to inflationary pressures.”
Rising rental prices as well as costs in the entertainment, recreation and culture category were the dominant drivers of inflation in Qatar in 2013, according to the report.
“Over the next two years, burgeoning consumer demand, underpinned by annual population growth of above 7%, should push headline inflation to 4% and 4.5% in 2014 and 2015 respectively,” it said, adding moreover, tight conditions in the residential market will exert upward pressure on rents in the medium-term.
NBK said the authorities will need to be cognisant of inflationary pressures associated with double-digit growth (non-oil sector), mounting public debt (35% of gross domestic product) – largely due to the issuance of bonds – and capacity constraints.
However, the QCB is committed to preserving financial stability and managing liquidity and inflation through a mix of macro prudential and monetary measures, the report said.
The authorities have launched a strategic plan for the regulation of the financial sector, extended the QR4bn-a-month programme of domestic debt issuance to bonds and sukuk with longer maturities and established the Qatar inter-bank offered rate in 2012 to develop a more liquid and transparent inter-bank market.
NBK found that average inter-bank rates for the year were also down compared to 2012, by 10 basis points in the case of the one-month facility.
