Taking Initiative

How would you describe the way that the drop in oil prices has affected monetary policy in Qatar?

QCB continues to pursue its main objective of maintaining the exchange rate peg while ensuring monetary and financial stability. Although the drop in oil prices has induced a fall in export earnings and government revenues and consequently government deposits, banking systemic liquidity has been comfortable so far partly reflecting QCB’s active liquidity management operations. Given the large fiscal buffers, the decline in oil revenues has not led to significant spending cuts, rather the government has embarked on a strategy of prioritizing expenditures to improve investment efficiency, while taking initiatives to increase private participation in support of economic diversification. With growth being robust and inflation benign, QCB has continued with the easy monetary policy stance, keeping key policy rates unchanged since August 2011 to ensure a stable interest rate environment and thereby facilitating an adequate flow of credit to the productive sectors to support economic diversification for sustainable growth. At the same time, macroprudential policies have been strengthened further to promote financial stability.

How would you rate the success of the recent $4.1 billion bond issuance in September and how will this impact Qatar’s financial position?

QCB has been actively managing liquidity to ensure monetary and financial stability and thereby to support sustainable growth. The bond issuance in September 2015 is part of that broader strategy of liquidity management. Despite this issuance, the banking system liquidity was in a primary surplus position as reflected in the sum of net Qatar Money Rate (QMR) deposits and excess reserves with QCB at QAR5.4 billion at end-September 2015. Moreover, the banks’ liquid asset to liabilities continues to be stable at around 50%, while the quality of banking assets has continued to improve; the gross NPL ratio has declined to its lowest level since 2011. At the same time, reflecting the implementation of Basel III framework since January 2014, banks remained well capitalized (capital adequacy around 15%, significantly above the current regulatory requirement of 12.5%) and profitable (return on average assets at 2%). This suggests the continued robustness of Qatar’s financial sector.

In your opinion, what newly enacted laws will be the most impactful on the performance of the Qatar Stock Exchange?

Under the Strategic Plan for Financial Sector Regulation, importance is also given to the development of the Qatar Stock Exchange. In particular, attention has been given to attract foreign investment. An important achievement in this regard is the issuance of Law No. 9 increasing the foreign ownership limit to 49% for listed Qatari companies. Following the introduction of this Law, the Qatar Stock Exchange recorded high levels in traded volume and index in September 2014. The Strategic Plan also aims to maintain a conducive and investor-friendly environment. The liquidity provision scheme of 2013, together with the new rules on margin trading introduced by the Qatar Financial Markets Authority (QFMA) offer a number of advantages for the market and investors, such as increasing trading volumes and liquidity, and should help to reduce price volatility and promote confidence among investors, thereby ensuring a fair and orderly market. Such positive developments gave rise to upgrades by MSCI and S&P to emerging market status in 2014.

Considering that many Qatar-based banks are expanding their operations internationally, how would you assess the strength of the Qatari banking sector and what role do you foresee Qatar-based banks having as a development partner?

The expansion of operations of Qatar-based banks internationally is in itself an indication of the increasing strength and confidence of these banks to compete with other banks in the international arena. As a regulator, QCB is ensuring that the expansion should be prudential. Limits have been fixed on the foreign currency gap. The ratio of foreign currency asset to foreign currency liability of each bank should be at a minimum of 100%. This means that short positions are not allowed, but long are allowed. More importantly, QCB has been in the forefront in implementation of Basel III requirements. The capital adequacy is being monitored at both solo and consolidated levels. The strength of the banks is also reflected in their ability to meet Basel III requirements with excess capital buffers and low levels of NPLs despite the persistence of low oil prices. Hence, the ratings of the banks continue to remain high. Qatari banks have been playing an important role in the development of the economy. They have been extending credit to both the hydrocarbon and the non-hydrocarbon sector to meet productive needs. The current high growth in credit to the private sector reflects the support they are providing to the diversification of the economy.

What are your expectations for the year ahead?

We expect the oil price to recover in the year ahead. This recovery along with the continued thrust toward investment and diversification should lead to a healthy growth in the economy as well as the banking sector. On the regulatory policy front, since guidelines for various Basel III requirements have already been issued, the focus would be on their implementation. In the year ahead, banks will have to maintain additional capital to meet the countercyclical capital requirements. Moreover, domestic systemically important banks (D-SIBs) have already been instructed for maintenance of additional capital from next year onwards. On the monetary policy front, QCB will continue to actively manage liquidity in the system in order to ensure a stable interest rate environment and thereby facilitate adequate flow of credit to the productive sectors of the economy. If low oil prices persist for long, policy space available in terms of both fiscal buffers and QCB’s liquidity management operations could be used flexibly.