Building a stronger and more diverse Qatar

With metrics improving and GDP growth reviving, Qatar Central Bank Governor Sheikh Abdullah bin Saud al-Thani is confident that the country has emerged stronger and fitter from the recent turbulent conditions.

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Sheikh Abdullah is not one to dwell on the past. But the experienced Qatar Central Bank (QCB) Governor can be excused for a sense of satisfaction in helping steer the Qatari economy through some choppy waters over the past two years.

“Recent experience has demonstrated the strong ability of Qatar to withstand stressful conditions,” he says. “Unlike some other countries, there is internal stability in Qatar. Moreover, the Government and financial sector regulators have not only strengthened the resilience of the economy in general and the financial sector in particular, they also stand ready to proactively take corrective and supportive policy measures, whenever required.”

The economic blockade had posed one of the major challenges to the Qatari economy during the last two years. However, the experience so far has suggested that the economic blockade had no significant economic impact. “Given the surprise nature, there were temporary disturbances, but mostly confined to the second half of 2017. Through relocation/realignment of trading routes/partners, setting up of domestic production facilities in the SME (small and medium-sized enterprise) - sector and other economic diversification measures undertaken, the Qatari economy, in fact, came out stronger and more diversified,” says Sheikh Abdullah.

There are several ways in which financial stability and the resilience of the financial sector has been strengthened. On the real economy front, the demand prospects for Qatari natural gas from Qatar remain bright. Moreover, the thrust towards diversification of the economy, human capital development and ecological protection should ensure sustainable and healthy growth of the economy.

The figures appear to bear out this positive message. Total official reserves have increased by 10.05% by end July 2019 from the pre blockade position. At the end of May 2017, reserves stood at QR 128 billion ($35 billion). These reserves were used for management of liquidity following the blockade but have now fully recovered and are ruling at higher levels.. At end July 2019, reserves have increased to QR 140.9 billion ($38.7 billion).

Rather than look back, however, Sheikh Abdullah prefers to look forward. He says the economic outlook remains positive for 2019 and expects improvement in many macroeconomic indicators, especially fiscal and current account balances.

“With the complete normalisation of capital flows and strengthened macroeconomic conditions, the negative impacts of the economic blockade have diminished completely in 2019,” he says. “Even the risk of tightening global financial conditions, which we were earlier concerned about, have subsided with major central banks in advanced economies turning to a more dovish monetary policy stance. “

Recent GDP figures underscore a steady improvement underway. During Q1-2019, real GDP growth increased to 0.9% at annual basis from 0.3% in Q4- 2018.

The growth momentum is expected to pick up during 2019, especially during the second half of the year.

“There are several factors for the likely improvement in the growth outlook,” says Sheikh Abdullah. “First, energy prices are likely to remain at an elevated level, which will further improve the external and fiscal balances. Second, the contribution of the hydrocarbon sector to GDP growth will turn positive from negative, particularly with the Barzan gas field slated to come on steam towards the end of 2019. Third, the non-hydrocarbon sector will be the inherent driver of overall GDP growth, benefiting from economic diversification measures taken up the Government.”

In particular, manufacturing and services products (transport, public services and banking activities) are expected sustain the growth of non-hydrocarbon sector. Overall, the Governor expects real GDP growth to improve substantially during 2019.

So what is the Central Bank doing to ensure a stable and strong financial environment?

Maintenance of financial stability has always been a top priority for QCB, says the Governor. “We have been very proactive in adoption of international standards. We are at par with advanced economies in implementation of Basel III and Islamic Financial Services Board (IFSB) standards. In addition, we are continuously monitoring various developments on daily, weekly, monthly and quarterly basis.”

Based on the findings, suitable and timely policy actions are being taken up. “We have been continuously strengthening our on-site and off-site supervision. Various Early Warning Indicators are being regularly monitored and the  system is being developed,” says Sheikh Abdullah.

Stress tests for various risks and scenarios are being undertaken on monthly, quarterly, half-yearly and ad hoc bases to evaluate the resilience of the banks and need for policy measures, if any. QCB also publishes a comprehensive analysis of the macro-financial stability on annual basis in the Financial Stability Reviews (FSR). The FSRs through transparent and rigorous analysis enhances the confidence of consumers of the financial services, multilateral institutions, rating institutions and others.

There is a legislative mandate for inter-regulatory coordination to strengthen financial stability. The Financial Stability and Risk Control Committee (FSC) has been formed with members from the QCB, Qatar Financial Markets Authority (QFMA) and Qatar Financial Centre Regulatory Authority (QFCRA). They regularly monitor and suggest policy measures pertaining to regulation, supervision and inter-regulatory co- ordination for maintenance of financial stability across different segments of the financial sector.

Supervision is a key focus for QCB. Banks  started implementation of IFRS 9 with effect from January 1, 2018. 

“In the initial stage of implementation, some banks faced some problems for coverage of the Expected Credit Losses (ECL),” says Sheikh Abdullah. “The ECL was covered through the Risk Reserve maintained by the Banks. Risk Reserve is maintained by banks at 2.5% of the total direct credit facilities after deduction of specific provisions, suspended interest and deferred profits for Islamic banks with the exception of credit facilities to sovereign and credit facilities granted against cash collaterals. The Required Reserves helped banks cover the ECL requirement on first implementation of IFRS 9. After covering the ECL requirement through the Risk Reserve, banks are currently required to build-up Risk Reserve at 2.5% of the total credit facilities as earlier.”

The impact of implementation of IFRS 9 on banks were not significant, says Sheikh Abdullah, especially on the Domestically Systemic Important Banks (DSIBs), as their capital adequacy ratio was much above the minimum requirement mandated by QCB. Some small banks were affected, but no bank’s capital adequacy ratio fell below the minimum requirement mandated by QCB.

Maintaining the asset quality while continue credit to productive sectors of the economy was one of the challanges during the stressful conditions.

And, notes the Governor, during those stressful conditions, there was no impact on the high quality of assets of banks in Qatar, with the NPL ratio continuously ruling significantly below 2 percent.

Deposits have grown from the pre-blockade levels. Sheikh Abdullah says it is particularly noteworthy that non-resident deposits that had declined in the immediate aftermath of the blockade have now fully recovered and are ruling above the pre-blockade levels.

“This not only indicates total recovery of deposits, it also points towards restoration of confidence of outside investors in the fundamentals of the economy,” he says. “Since, the sources of deposits are more diversified and include U.S. and various European and Asian countries, the risks from such deposits are also much less compared to the earlier composition of non-resident deposits.”

Having demonstrated their resilience, is it now time for Qatar’s banks to become more ambitious in their lending approaches?

Domestic credit has been continuously growing and was not affected by stressful conditions. “Given the thrust on diversification of the economy and promotion of private enterprises, we expect the banks to become more ambitious in their lending and play a greater role in the economic development of Qatar,” says Sheikh Abdullah. 

QCB is now actively framing a new approach to develop the country’s financial technology (fintech) sector, an area that ratings agency Standard & Poor’s recently said Qatar was best placed to adopt in the region.

“QCB has been working on fintech for some time now. QCB’s role as a regulator in this sector definitely pushes us to be at the forefront for financial technological development,” says Sheikh Abdullah.

Recent progress has been backed up by sound economic policies that are able to withstand changes and the current regional geopolitical context that played against Qatar. Furthermore, says Sheikh Abdullah, Qatar has proved its capability to maintain a secure and resilient technological infrastructure, as shown by its stability despite the increased waves of cyber-attacks it is facing.

QCB is actively playing a key role in the development of the sector, through enacting regulations that will allow for a sustainable development of Fintech. “QCB understands that there is a real growing need to process an ever-increasing amount of data whilst always delivering new streamlined experiences to consumers and users of financial services in Qatar. These advancements require further technological developments and capabilities in the country,” he says.

A dedicated FinTech section will oversee such developments by introducing a regulatory sandbox. QCB will also rely on leveraging the existing and constantly developing technological ecosystem of Qatar to support successful fintech growth.

Fintech has been used as a digital transformation tool for financial services with a long- term development worldwide. Indeed, Qatar has also incorporated it alongside the Qatar National Vision 2030 to aid it in achieving national goals.

The National Vision involves tracking the progress with five year plans to ensure the programme’s successful completion. “The financial sector is an important sector that is heavily involved in this vision. Especially with the necessary transformation that fintech is bringing, it will create opportunities in line with the long-term goals of the Qatar National Vision 2030,” says Sheikh Abdullah.

One of the main pillars of the QNV 2030 is the economic development. Fintech has a direct hand in helping develop this aspect of the vision in a number of ways, says the QCB Governor. It will bring diversity across the sector in terms of delivering efficient services. It will also support emerging enterprises of different sizes in Qatar. Perhaps most importantly, fintech will develop new financial instruments that will support the wider inclusion of people in financial services.

The second pillar of the QNV 2030 is human development. In this regard, Fintech is important as it helps introduce and create new sets of skills required from the local workforce, enhancing and diversifying the talent in Qatar.

This will also lead to an increase in number of technologically-skilled workforce members and create a competitive labour market. 

What about the future? What are the main challenges and opportunities confronting Qatar’s economy and financial sector?

Over the medium to longer-term, as identified in the QNV 2030, there are five challenges that require a proper balance in the path to development, says Sheikh Abdullah.

They are:

•  modernisation and preservation of traditions;

•  the needs of present and future generations

•  managing of growth and uncontrolled expansion

•  the size and the quality of the expatriate labour force and the selected path of development

•  economic growth, social development and environmental management.

Economic diversification provides opportunities for creating social and physical infrastructure that will help in achieving sustainable growth and generating employment opportunities in Qatar.

“Since 2017, many new companies have registered for various business activities, and manufacturing sector has emerged as the key drivers of growth. In terms of food security, Qatar has largely become self reliant especially in case of dairy products. Domestic food supply has improved substantially and has been one important factor for benign food prices since the second half of 2018,” says Sheikh Abdullah.