In June of this year, Qatar Central Bank governor Sheikh Abdullah Bin Saud Al-Thani saw his term of office extended for a further five years – recognition perhaps of his assured handling of a sometimes challenging brief over recent years.
Sheikh Abdullah played a key role ensure that the imposition of an embargo by some Gulf states last year left little collateral damage. Indeed, as he notes, Qatar’s economy has been thriving.
The latest data shows some impressive metrics. Real GDP growth expanded by 1.4% in Q1-2018, primarily driven by the strong performance of the non-hydrocarbon sector. Strong growth in construction, manufacturing and others emerged as key drivers of economic growth.
Although Qatar’s hydrocarbon sector recorded a marginal decline – a result of the production cut under the OPEC+ agreement – nominal GDP growth expanded at a much higher rate of 7% due to pick-up in global crude oil prices.
Other economic indicators also remained supportive to the overall growth performance. Leading indicators point towards a gain in momentum in Q2 2018.
“Industrial production during April and May 2018 shows successive month-on-month gains in both mining and manufacturing. Inflation has meanwhile remained benign at around 0.4% during 2018 so far. With the substantial recovery in exports and oil prices, the current account balance increased progressively and stood at 7.3% of GDP in Q1 2018,” says Sheikh Abdullah.
With the further increase in trade surplus in the second quarter of 2018, the current account surplus is set to expand.
The overall economic outlook remains positive for 2019. “In view of the present global and domestic demand conditions, real GDP growth is expected to grow higher than the trend level in 2019,” Sheikh Abdullah predicts. “Inflation is expected to remain stable and conducive to growth and development. With the recovery in global oil prices, fiscal and current account balances are also expected to improve further and will bring stability to the economic outlook.”
What explains this strong performance? The resilience shown by the economy is a combination of factors including policy measures by QCB, the recovery in oil prices and economic diversification strategy followed overyears.
“The strength of non-hydrocarbon sector growth reflects the importance of our diversification strategy to encourage the domestic manufacturing base, construction sector and others. The impact of stronger oil prices can be seen on exports, which played the major role in boosting current account surplus,” says Sheikh Abdullah.
The improvement in the current account balance has somewhat eased pressure on the fiscal balance. The governor says that the stability of banking sector mainly reflects the impact of the proactive measures taken by QCB to deal with the situation of withdrawal of non-resident deposits after the economic blockade.
Qatar’s success story reflects a variety of issues, says Sheikh Abdullah. “It is difficult to highlight one factor that played the major role in contributing to the resilient performance of the economy since the blockade imposed in June 2017.”
So has the Bank’s policy of pumping liquidity into the system now been completed? Or is further action needed to ensure the banking system and economic are sufficiently supported?
“QCB’s active liquidity management with the support of the government has brought back banking system liquidity to complete normalcy,” says Sheikh Abdullah. “The primary liquidity in the banking system (as measured by deposits of banks with QCB and excess reserves) at end-July 2018 was more than five times the level at end July 2017, when liquidity tightened sharply following the economic blockade. Provision of liquidity to banks by QCB through repo transactions has been minimal and intermittent since April 2018, with the outstanding amount being nil during the first half of August 2018.”
Dealing with the blockade
From the outset, QCB adopted a proactive approach to the embargo imposed in June 2017. First, it created a special task committee that meets daily to assess the impact of the blockade on the financial sector and the overall economy by monitoring high frequency data. However, as the impact was limited and addressable by normal conventional measures, major non-conventional measures were not adopted.
There was liquidity infusion into the banking system through public sector foreign currency deposits, while QCB provided foreign and local currency liquidity through liquidity windows including repo.
“The initial disturbance from outflows of non-resident deposits was well absorbed by the banks through proactive liquidity management with the guidance and support of QCB,” says Sheikh Abdullah. “Strong communications to market participants about our commitment to the currency peg and our deep reserves were used to ward off speculative and motivated attacks on the currency.”
Frequent stress tests were undertaken to assess the ability of the banking sector to withstand various stress scenarios. Further, banks, in consultation with QCB, drew up contingency plans to meet various stress conditions.
As the governor points out, non-resident (NR) deposits have already recovered substantially. After declining in the second half of 2017 to around QR 137bn in January, 2018, NR deposits have been secularly increasing to exceed QR 150bn by end June 2018 and are currently hovering a little below QR 170bn.
“A positive aspect of the recent rise in NR deposits has been the diversification of its sources as lot of these deposits are coming from Asia, Europe and the US. Thus, the concentration risks posed by NR deposits are less than those during the pre-blockade days. With economic diversification, the private sector deposits are also expected to pick up. In such a scenario, the share of government deposits in the bank deposits is expected to decline over time,” says Sheikh Abdullah.
Following best practice
Under Sheikh Abdullah’s watch, QCB’s focus in its regulatory actions has been to maintain financial stability through implementation of international standards and best practices.
A key part of this strategy is ensuring that the benefits are shared as widely as possible. “While the banks have the flexibility to pursue their own strategies for revenue generation, QCB is encouraging banks to pursue financial inclusion. A key element of this strategy is to nurture and promote the SME sector with the objective of economic diversification and promoting greater private participation. At the same time, QCB is focusing on developing a fintech strategy to create a ‘fintech hub’ in the country,” says Sheikh Abdullah.
Qatar’s April 2018 sovereign bond issuance met with a strong response, raising $12bn and was oversubscribed four to five times – despite the issuance of similar bonds by a neighbouring country earlier in the same week, with potential to tighten liquidity in the international debt market.
“The yields on the $12bn bonds were also lower than the similar issue by the neighbouring country and from our own expectations. Undoubtedly, it indicated international investors’ confidence on the strength of the Qatari economy despite the unjust economic blockade. Since then, our sovereign rating has also been upgraded by rating agencies,” says Sheikh Abdullah.
So will there be further approaches to the debt capital market?
“We had tapped dollar-denominated bonds from the international market to finance our infrastructure development, taking advantage of easy financial conditions and low interest rates. With the substantial rise in energy prices, there has been significant improvement in the fiscal position. Some rating agencies have even forecast a return to fiscal surplus of the general government this year itself. Thus, any further approach to the debt capital market would depend on the evolving circumstances though we are aware of the rising yields in the international debt markets,” says Sheikh Abdullah.
Sticking with the peg
Monetary policy is geared around ensuring that the exchange rate is targeted at the most appropriate framework.Given the nature of Qatari economy – still largely dependent on hydrocarbon exports – this approach has the IMF’s backing. “Our sufficient reserves and huge buffers from the past surpluses also provide comfort in adopting the framework without any constraints. The central component of our monetary policy framework continues to be maintaining the currency peg of 3.64QR = 1 US dollar so as achieve price and financial stability and support economic Growth,” says Sheikh Abdullah. Interest rates remain the main instrument of monetary policy, with which it guides short-term interbank interest rates and other deposit and lending rates of banks through liquidity management.
“While our policy rates largely respond to the policy rate moves of the US Federal Reserve, we give due considerations to evolving domestic economic conditions and try to ensure enough systemic liquidity that is consistent with the real economy,” he says.
In December 2017, QCB published the Second Strategic Plan (SSP) for Financial Sector Regulation 2017-22. The SSP will focus on guiding the State of Qatar in its future endeavours towards building a sound and resilient financial sector in order to ensure sustainable and inclusive economic growth.
Consistent with this objective, QCB has been focusing on two key initiatives. On the one hand, it is considering financial inclusion strategy that will seek to broadbase the financial sector through both supply and demand side measures.
“A key element of this strategy is to nurture and promote the SME sector, consistent with the Qatar National Development Strategy (QNDS 2) objective of economic diversification and promoting greater private participation,” says Sheikh Abdullah.
QCB is also focusing on developing a fintech strategy to create a ‘fintech hub’ in the country. “We have been continuously strengthening our regulatory and supervisory systems to ensure that the financial system remains safe, stable and solid and is resilient enough to address unforeseen challenges,” says Sheikh Abdullah.