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Capital flight from Qatar aggravates increase in funding costs

Situation weighs on Gulf nation’s credit profile, crimping its ability to raise funds

Gulf News

Dubai: The three-month long economic and political sanctions have resulted in a surge in negative foreign investor sentiment on Qatar, pushing up the cost of financing and capital outflows, according to a recent report by credit rating agency Moody’s.

Although long-term financing costs have somewhat stabilised, the risk premium on the last five-year dollar bond issuance from June 2016 has risen to around 120 basis points (bps) over US Treasury equivalents, from around 100bps before the dispute. Analysts do not expect Qatar to raise funds in the international capital markets this year and this should — to a certain extent — cushion it against higher funding costs for the time being.

Negative foreign investor sentiment has also pushed up the cost of financing and led to capital outflows. The negative sentiment is also visible on the banking system’s balance sheet, with $15.4 billion (Dh56.5 billion), 10 per cent of non-resident and private deposits, as well as $15 billion, 23 per cent of funding from overseas banks, flowing out in June and July.

“Sizeable capital outflows have also drained the foreign exchange reserves, which in June alone decreased by 30 per cent to $24.4 billion, from $34.8 billion a month earlier. We expect foreign capital in Qatar’s banks will fall further as recent reports suggest that GCC banks are not rolling over their deposits,” said Steffen Dyck, Moody’s vice-president and senior credit officer.

A significant portion of the flight of capital was covered by central bank fund injections in the banking system.

“An increase in public deposits, which grew by $18.3 billion, and $9.8 billion from Qatar’s central bank have replenished bank funding. We estimate that Qatar used $38.5 billion [23 per cent of GDP] to support the economy in the two first months of the sanctions,” said Dyck.

Weakening credit profile

Although the injection of public funding has stabilised the banking system, it will remain vulnerable to the withdrawal of non-resident deposits, which currently stand at $43.2 billion, or 20 per cent of total deposits. The government’s support of the banking system has also increased risks to Qatar’s external strength by tying up a significant portion of public funds.

Analysts say prolonged sanctions could weaken Qatar’s financial strength, via increased current spending related to higher import and funding costs. However, lower capital spending, induced by a shortage of building materials, could offset that to some degree.

 Assets

Qatar has so far been managing the crisis utilising financial assets it holds in its sovereign wealth fund, the Qatar Investment Authority (QIA).

“We estimate Qatar’s financial cushion stood at around $340 billion [including both QIA’s assets and foreign currency reserves] before the sanctions were imposed, equal to around 205 per cent of the country’s nominal GDP. However, if the situation were to persist or intensify, that would weigh on Qatar’s credit profile,” said Dyck.

Qatar has faced rating downgrade from all three leading global credit rating agencies, and its outlook have been placed under negative. Fitch lowered Qatar’s sovereign rating by one notch to AA-minus with a negative outlook in late August.

Standard & Poor’s (S&P) was the first to lower its long-term rating of Qatar to AA-, from AA, and placed the rating on credit watch with negative following the imposition of sanctions by its neighbours.

Last month it affirmed the negative outlook on Qatar’s credit rating.

All leading credit agencies expect the lack of progress in ending the economic and diplomatic embargo on Qatar will impair the country’s long-term economic prospects.

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