A $166 million international loan to Commercial Bank of Qatar is part of a rapid increase in foreign debt at Qatari banks as they raise money to operate in an era of cheap oil.
After a decade in which they comfortably financed themselves from domestic sources, banks and other firms around the (Persian) Gulf Cooperation Council states are coming to rely more on overseas funding as petrodollar flows into their home economies shrink, FTSE Global Markets reported.
The trend is furthest advanced in Qatar, partly because local banks need money to expand their lending more rapidly than banks elsewhere in the (P)GCC states, as the government spends heavily on projects before it hosts the 2022 soccer World Cup.
“Lower oil and gas revenues have caused public sector deposits in the domestic banking system to shrink, tightening liquidity and driving banks to raise funds abroad,” Qatar’s Ministry of Development Planning and Statistics said in a report on the economy last month.
CBQ said on Monday that its three-year loan, which had been increased from an original target of $100 million, was the first loan to a bank based in the six-nation (P)GCC (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) that was provided primarily by Japanese institutions.
Other Qatari banks have also been opening channels to borrow from Asia. In April, Qatar National Bank raised $1.1 billion by selling Formosa bonds—instruments issued in Taiwan but denominated in currencies other than the Taiwan dollar.
Qatar central bank data released last week showed Qatari commercial banks owed 196.3 billion riyals ($53.9 billion) to banks abroad in May, up 53% from May 2015, when the figure started to rise.
The other (P)GCC banks are also becoming more dependent on deposits by resident foreigners.
While the International Monetary Fund calculates Qatar is running an annual current account deficit of about $9 billion, the assets of its sovereign wealth fund are estimated at over $250 billion, giving it ample means to sustain its balance of payments position.
Debt Issuance Totaled $55b
The (P)GCC debt issuance was strong in the first half of this year, boosted by sovereign issuance. Gross issuance totaled $55 billion over the period, compared to $74 billion issued during the whole of 2015.
The stock of outstanding bonds in the region grew by 24% in 2Q16, its fastest pace in five years, to stand at $335 billion and this is only expected to rise.
In March this year, Kuwait’s specialist research house Markaz anticipated, “ On an overall basis for 2016, the financing need for (P)GCC countries to be at $151.3 billion of which $78.1 billion is expected to come from reserves (52%), $57.7 billion from domestic & international bond issuances (38%) and the rest through loans (10%).
Overall, (P)GCC governments are expected to raise between $285 billion and $390 billion cumulatively through 2020 through local and international bonds”.
With public sector financing needs expected to top $120 billion in 2016, (P)GCC sovereigns continued to tap debt markets for funding, leading the issuance of new debt in 2Q16. Sovereigns accounted for close to 75% of gross issuance during the quarter, issuing $27 billion.
Appetite for the debt was strong, with the UAE, Qatar, and Oman, comfortably selling $16.5 billion worth of international bonds. According to NBK, Saudi Arabia is looking to capitalize on this momentum and is seeking to offer international investors $10 billion in foreign currency bonds, if not more.
Tapping Markets
Financial institutions actively tapped debt and interbank markets for funding in 2Q16 on the back of declining deposits and increased government issuance.
With deposit growth slowing across (P)GCC banks, loan-to-deposit ratios have been under pressure. At the same time, competition over short-term funding saw pressures mount in the interbank market, with rates trending upwards.
Saudi Arabia’s 3-month interbank rate jumped 42bps during 2Q16 and 68 basis points year-to-date. In a bid to ease pressures, some central banks have adjusted their liquidity and reserve requirements, as seen in Kuwait, Saudi Arabia, and Oman.
