Qatari banks’ external debt: Is the problem over?
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Qatari banks’ external debt: Is the problem over?

Qatari banks’ external debt: Is the problem over?

One of the main sources of concern for the Qatari banking system has been the build-up of external debt

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Qatari banks’ external debt

As major central banks continue to tighten monetary policy, financing conditions are becoming increasingly restrictive, with rising costs and weaker liquidity especially affecting emerging markets. Given that context, various banking systems from emerging economies such as Qatar are considered to be potentially vulnerable to changes in global liquidity.

regional banking

Tighter global financing conditions can affect banking systems directly or indirectly, with exposure to those different channels dictated by the particularities of bank funding and economies’ wider exposure to external debt.

Direct channel impacts tend to weigh on banking systems with significant net external debts, including through lower rollover rates, which could translate into depleted liquidity buffers.

Türkiye’s banks, for example, are considered to be the most exposed to this risk due to the potential for a sudden and significant decline in their ability to roll over maturing external debt. As for Qatar, the banking sector also has high, but declining external debt and there are mitigating factors to the less supportive market conditions.

Indirect effects of tighter international financing conditions tend to be transmitted to banking systems via non-bank entities with significant exposure to external debt, including corporations and sovereigns.

Indirect issues linked to corporations tend to be caused by difficulties rolling over debt on international capital markets, or, where applicable, due to currency depreciation. Sovereign issues are typically linked to refinancing difficulties that can prompt increased borrowing from local banks and is associated with currency depreciation, which results in wider economic pressures.

Main concerns

One of our main sources of concern for the Qatari banking system over the past few years has been the build-up of external debt, mostly in the form of non-resident deposits. However, in early 2022, Qatar Central Bank changed regulations, with the aim of reducing the use of external debt to grow domestic balance sheets.

That, alongside rising interest rates, led to a significant unwinding of non-resident deposits and has somewhat changed the overall structure of the country’s external debt. Over 2022, non-resident deposits fell by over $20bn, equal to about one-third of their value at the end of 2021, while interbank deposits increased by over 13 per cent, leading to an overall $17bn decline in net banking system external debt.

We expect that the reduction in net external debt will continue in the next 12-24 months, driven by the same factors as in 2022 and supported by a reduced need for external funding.

The rationale for Qatari banks’ recourse to external debt was the desire to secure low-cost funding for significant domestic investments. With the completion of some major infrastructure developments, and due to increased government revenues, spending (and funding pressures) should ease.

The concern over Qatar’s external funding stability is also mitigated by the understanding that a significant portion of the non-resident deposits are linked to longer-term investments in Qatar.

Reportedly, the funds also include deposits from Qatari companies abroad and possibly from companies partly owned by Qatar’s sovereign wealth fund. Also, funding support is expected to be available from the government and central bank if it is needed.

Dr Mohamed Damak is the senior director – Financial Services and global head of Islamic Finance at S&P Global Ratings

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