Doha – Decypha: Gas-rich Qatar is crippled by challenges to keep business as usual as the diplomatic rift imposed by Saudi Arabia, UAE, Egypt and Bahrain included sea, land and air blockade, caused a negative influence on the credit rating of some Qatari institutions.
While the ability of Qatar to keep market stability amid pressure on imports was in question, rating and research were more concerned about the Qatari banking sector, which is significantly depending on foreign funding. Around 36% of the total liabilities in Qatari banks recorded in May were to foreigners, as reported by Reuters.
High reliance on foreign funding impose threat on banking ability
Few days after the rift decision, which came out on 5 June, S&P Global Ratings said the Qatari banks are “strong enough” to maintain business even after Gulf clients withdrawn their money out of its banks.
“We believe the recent developments might result in an outflow of external funding for Qatari banks over the next few months, depending on how the situation evolves,” S&P stated in an 11 June release, stressing that Doha banks will be in a good position if that happened.
But the dependence on foreign funding could leave the banks “vulnerable” in case financial sanctions continued, Dubai-based Arqaam Capital said in a June report. It, however, stated 4 percent
A prolonged conflict between Qatar and its neighbors may leave the country’s banking sector “vulnerable” because of its reliance on foreign funding, Arqaam Capital Ltd. said in a report last month. “However, only 4 percent of Qatar National Bank’s (QNB) deposits come from the four countries, excluding QNB Egypt, which is a standalone operation,” analysts Jaap Meijer and Michael Malkoun said.
Moreover, external financing conditions to deteriorate, London-based Capital Economics’ Middle East economist Jason Tuvey said in a 14 June report, expecting Qatari banks to reduce their balance sheets and squeeze their credit condition to offset external debt risks.
If the crisis continued, Qatari banks will face higher risks and less foreign funding, which may result to higher funding costs, Cyprus-based think-tank CI Ratings said in a 21 June research note.
“The ability to raise additional sovereign financing may well be impacted, although Qatar has large financial resources on which it can draw,” CI Ratings added.
The level of impact on the banking system will be measured by the level of deposits in Qatari banks coming from other countries, CI Ratings said, expecting the impact to differ from bank to bank.
Negative outlook puts more burdens on banks
The reaction of international rating agencies to the cut in ties between Qatar and some GCC countries was immediate. Two days after the move, S&P lowered Doha’s long-term rating from 'AA' to 'AA-' , and Moody’s and Fitch also said lowering Qatar’s rating is also possible.
Moody’s Investors Service was more concerned with the banking sector. Despite keeping long-term ratings of nine Qatari banks, while lowering their outlook from stable to negative.
“The rating action reflects Moody's expectations that a prolongation of the current dispute could lead to some outflow of external funding, which would reduce the banks' liquidity buffers. Domestic funding sources remain tight due to current oil prices,” the rating agency said on 5 July.
The move came after it reduced Qatar’s outlook as well from stable to negative a day earlier, while affirming the long-term issue and senior unsecured debt ratings at Aa3, which still reflects low credit risk.
Signs of resistance
Qatar’s central bank believes in the ability of the banking sector to overcome any challenge. Doha holds $340 billion in reserves that could help the country buffer any blockade, Sheikh Abdullah Bin Saoud al-Thani said on 10 July.
Speaking to CNBC news, Al-Thani said that cash outflow from the banks is not significant, stating that even if the banks have seen more funds withdrawals from the non-residents’ side, the banking system will be able to face “any kind of shock”.
"We find our banking sector well-capitalized, meeting Basel III as they have high liquid assets, plus they have very good inter-banking activity inside and outside, and they are very stable at this moment. So we don't believe there is anything to worry about at this moment," he said.
In an attempt to look for new markets had the four Arab states imposed more sanctions, the Middle East’s biggest bank QNB is eyeing expanding to Asia, with a plan to cut the income generated from its domestic market to 50 percent by 2020 from about 63 percent.
“We didn’t see any abnormal increase in the cost of funding,” CEO of QNB Ali Al Kuwari told Bloomberg TV on 13 July, adding that the diversification of the markets in which the bank is operating helped them overcome in potential crisis.
While Saudi Arabia, the UAE and Bahrain have already halted their dealings with Qatari banks following orders from their central banks, the Qatari banking sector has a lot of work to do over the coming period to cut reliance on foreign funding to keep stability of their promising sector and rebound the stable outlook of international rating agencies.
By: Doaa Farid
