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Qatar’s Key Concern Remains on Funding Side

Capital outflows through the banking system have accounted for as much as $27 billion since the crisis.Capital outflows through the banking system have accounted for as much as $27 billion since the crisis.

Unsurprisingly, Qatar has been on the investor radar particularly with regard to the banking sector liquidity, higher cost of funds, inflation notching up, capital flight, slowing non-oil GDP growth, dent on current accounts surplus and threat to currency peg.

Although there remains a lot of positive vibes around World Cup 2022 projects, the key concerns remain on the funding side, not just the “how of it”, but the cost associated with it, Arabian Business reported.

Though the domestic situation in Qatar has broadly stabilized, with basic essentials being replenished (at higher rates, though) and alternative shipping routes having been identified, the bigger economic threat such as shortage of banking liquidity, lack of availability of dollars, and the sustainability of USD peg, continues to linger.

The foreign exchange activity has come to an abrupt halt in recent times, and the banks are less willing to part with the dollar. As a result, a bid as high as 100 bps over Libor is ignored by the local banks. A similar picture is visible as the 3-month Qibor interbank market remains elevated at 2.42%, much higher than the pre-crisis levels (1.90%).

According to recent central bank data, capital outflows through the banking system have accounted for as much as $27 billion ($15 billion in June, $7 billion in July and $5 billion in August) in total, since the crisis.

On June 5, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain cut diplomatic ties with Qatar and imposed a land, air and sea blockade on their Persian Gulf neighbor, accusing it of financing terrorism and maintaining too close of ties with Iran. Doha denies the allegations.

As suggested, Qatari riyal fell as low as 3.80 versus the dollar early this week, the weakest level in three decades in offshore currency market. While the central bank’s direct or indirect intervention to defend the peg is inevitable, it remains to be seen if the momentum can be sustained in the medium term, especially with sparse net central bank reserves of around $39 billion.

Beyond the balance sheet of the Qatar Central Bank, Doha could deploy about $340 billion of reserves resting with Qatar Investment Authority, however the extent of the liquid nature of the sovereign funds is questionable. QIA has to pump $55 billion in the medium term to keep banking sector afloat.

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