DOHA – Qatar plans to issue local currency sovereign bonds with three and five-year maturities this year as part of efforts to build a yield curve for its debt market, an International Monetary Fund (IMF) official said Monday. “They are going to issue three- and five-year domestic government bonds in 2013. They did not mention the timing of the issuance but there will be more than one issuance and the objective is to build a domestic sovereign yield curve," A.Prasad, the IMF's mission chief for Qatar, told Reuters. He said the government did not disclose any specific amounts or other details of the bond sales to the IMF, which concluded regular consultations with Qatar earlier this month. The bond issues could be a big step in the efforts of the tiny, gas-rich state to attract investment to its debt market, helping fund its massive infrastructure building plans while increasing its attractiveness as a regional financial center. Qatar has issued local currency bonds before: in January 2011, the central bank (QCB) issued a QAR50 billion ($14 billion), three-year bond directly to local banks as a step to drain excess money from the banking system. However, “the previous bonds were one-off issuances, and there has been no secondary market trading. Now, they want to build the domestic bond yield curve, so the new issuances will be tradable instruments," Prasad said. Central bank officials could not be reached to comment. Prasad said the timing of this year's bond issues was likely to revolve around maturities of previously issued debt, so that Qatar could refinance the debt. Some QAR19 billion worth of short-term government notes of up to one year are set to mature this year, according to Thomson Reuters data. Qatari authorities did not mention any plans for issuing dollar-denominated sovereign debt in 2013, Prasad said. In recent months, Qatar-related debt denominated in dollars has drawn strong demand from international investors; majority state-owned Qatar Telecom saw heavy bids for a $1 billion bond sale last week. This year's sovereign riyal bonds could attract similar interest given the riyal's peg to the US dollar and the possibility they would offer a higher return than dollar bonds. An IMF report this month found the riyal was “undervalued" in terms of its real effective exchange rate against a range of other currencies; this is not likely to prompt Qatar to change the peg - especially since the IMF predicted the undervaluation would narrow over the medium term - but the inherent firmness of the riyal is positive for investors. A big issue for Qatar's small but wealthy domestic economy is how to prevent big flows of money from destabilizing the banking system. In addition to the bond issue in 2011, the central bank launched monthly auctions of 91-, 182- and 273-day Treasury bills in May and August that year to soak up excess funds. As a result, available liquidity dropped to a mere QAR5.8 billion at the end of 2011 from QAR73.2 billion a year before, the QCB has said. But liquidity began building again last year with bank deposits soaring to a record QAR448.9 billion in November, a 30.5 percent jump from a year ago, latest QCB data show. Loose liquidity has pushed the average three-month interbank lending rate down to 0.76 percent in November, the lowest since June 2011, from a March peak of 1.75 percent. Meanwhile, funds parked at the QCB's low-yielding deposit facility more than doubled in May-November 2012 from the previous seven months. The QCB has been draining a constant QAR4 billion in its monthly T-bill auctions, but the IMF says the central bank must now start managing liquidity fluctuations more finely through more flexible open market operations. “We have recommended to the QCB that... if there are liquidity movements and fluctuations in the short term, it would be useful to have a reverse repo instrument to absorb liquidity; they see merit in these suggestions," Prasad said. “They want to move into more open market operations, but it will take some time," he said, adding that cooperation between the central bank and the finance ministry would be necessary. The QCB told the IMF that its ability to engage in open market operations, which would help keep the interbank lending rate near the policy rate, was limited by a shallow interbank market and the lack of an active secondary T-bill market. A newly established debt management office at the Ministry of Economy and Finance should help modernize policies and financing strategies, the IMF said. Overall, Qatar's current policy mix looks appropriate with monetary policy expected to remain accommodative for some more time, Prasad also said. The QCB cut its overnight deposit rate by a total 75 basis points in April and August 2011 to the current 0.75 percent to discourage banks from parking excess money at its accounts, support lending and bring the rate closer to its US benchmark. The riyal's peg to the dollar means the QCB needs to keep rates aligned with US benchmarks to avoid excessive capital inflows. Qatar's infrastructure plans are gigantic; the country of 1.8 million people plans to spend $11 billion on a new international airport, $5.5 billion on a deep-water seaport, and $36 billion on rail projects over the next decade or so, partly in preparation to host the 2022 World Cup soccer tournament. The government plans to boost spending by around 5 percent to QAR178.6 billion in the fiscal year that ends in March, including spending on wages, services and infrastructure. However, the government still expects to post a comfortable budget surplus of QAR27.8 billion, and Prasad said the IMF's studies suggested Qatar was not in danger of running out of money. The government's fiscal policy is prudent with its international reserves, including the sovereign wealth fund, estimated at $215 billion, he said. Because of Qatar's gas earnings and rising non-oil revenues, that is projected to rise to around $485 billion by 2017 or 2018, according to the IMF. “We have done a fiscal sustainability analysis that over the medium term shows that the government has space to spend more...but they are still saving," he said. The IMF estimates Qatar will be able to keep saving about $50 billion each year until 2017 via its sovereign wealth fund. Prasad said the Qatari economy's ability to absorb heavy infrastructure spending was an issue, but added: “At this point of time, there are no overheating concerns." — Reuters
