JEDDAH – Despite an overall sound Qatari economy, Standard & Poor's Ratings Services said in its “Banking Industry Country Risk Assessment” report about Qatar that “high exposure to real estate, banks' aggressive expansion abroad, (and) material, although recently decreasing, reliance on cross-border funding” pose as “weaknesses” of the country. However, S&P noted that the country's strengths are Its “strong oil- and gas-based economy, banking sector's high stability… strong efficiency and profitability.” S&P classifies the banking sector of Qatar (AA/Stable/A-1+) in group 4 under its Banking Industry Country Risk Assessment (BICRA) criteria. Other countries in group 4 include Brazil, Kuwait, Mexico, Oman, and South Africa. The report said economic risks for the Qatari banking sector remain average in a global comparison. Qatar has made some progress toward diversifying its economy although it still depends heavily on oil and liquefied natural gas (LNG) production, adding that the economy will continue to show strong, although slowing, momentum, reflecting Qatar's robust private consumption and the significant infrastructure development program. It noted that the country's real estate market will recover from its sharp decline since 2009, although the commercial sector still remains more vulnerable than the housing segment. “This is one of the main risks faced by the Qatari banking sector… given its high concentration in lending to cyclical sectors like real estate and construction,” S&P said. Moreover, after a few years of robust asset expansion, and even though Qatari banks' risk appetite remains high, S&P forecast that lending growth will decelerate to about 15 percent in 2013 and the years ahead. Moreover, growth will be driven to a large extent by exposure to the government, government-related entities, and a handful of major local groups involved in government-backed projects, where the risks are more limited. Lower lending growth should also slow recently rising funding needs. The report further said Qatari banks' risk appetite remains elevated, with high exposure to real estate lending, and ambitious expansion abroad. The recent improvement of the domestic deposit to loan ratio (94 percent in May 2013, compared with 87 percent in 2012) also reflects an increase in public sector deposits. The report also said share of domestic public sector deposits in total deposits rose to a record of almost 40 percent in early 2013. These government-related entity deposits display short-term contractual maturity but are fairly stable and have significantly reduced the reliance of the banking system on cross-border funding. Although Qatari banking regulations are in line with international standards, supervision has room for improvement, the report noted. The central bank could have taken more proactive measures during the global 2008-2009 crisis, although the authorities identified potential problems relating to real estate or equity exposures and acted quickly to fix them. Additionally, the official nonperforming loans (NPL) ratio in Qatar was 1.7 percent of total loans in 2012, which, according to S&P, underestimates the banks' impaired assets ratio, “as it doesn't include other substandard loans, not reported as official NPLs.” Yet the trend for Qatar's economic risk as stable, S&P said. reflecting the strong momentum of the economy. Political risk, however, weighs on S&p's assessment of Qatar's economic resilience, as the country faces geopolitical risk. It expects material but moderating lending growth over the next few years. Qatar's central bank is currently tightening regulation, which may further limit business and lending growth in the short to medium term. Thus the trend for industry risk in the Qatari banking sector as stable. The Qatar banking industry has an adequate share of core deposits, strong efficiency, and, recently, increasingly stringent lending practices. Qatar is one of the wealthiest economies, with GDP per capita estimated at $98,000 in 2013. Relative to peers, real GDP per capita growth has been strong in recent years, but slowed sharply in 2012. S&P forecast it will contract by about 0.5 percent on average over 2013-2016 as the large investment program to boost LNG production capacity to about 77 million tons annually tails off. – SG
