DUBAI: Qatar’s plan to issue local currency government bonds every quarter should help it tackle three key issues at once: Managing liquidity in the banking system, developing as a financial centre, and financing huge infrastructure projects.
Managing liquidity is the most pressing need, as the $185bn economy gears up to spend about $140bn on infrastructure projects in the run-up to Qatar’s hosting of the 2022 World Cup soccer tournament.
Big flows of project-related money through the banking system could destabilise banks and push up inflation. Qatar is vulnerable to inflation partly because it pegs its riyal currency to the US dollar, limiting how much it can raise interest rates without attracting speculative money.
The country of 1.9 million people is no stranger to economic overheating; before the global credit crisis struck, a boom fuelled by expanding gas output and rising property prices drove its inflation rate to a record 15 percent on average in 2008, the highest among Gulf states.
“It is pretty critical that Qatar does develop the local debt market in order to deal with the local liquidity that has been building up in the banking sector,” said Farouk Soussa, Citigroup’s chief economist for the region. “That liquidity throughout last year has seen a very fast growth.”
REGULAR PROGRAMME
On Sunday, Qatar’s central bank issued QR1bn ($300m) of local currency sukuk (Islamic bonds) and QR3bn of local currency conventional bonds. A senior commercial banker said the debt was allocated directly to local banks, comprising a three-year tranche yielding 2.75 percent and a five-year tranche at 3.00 percent.
Qatar had issued local currency debt to drain excess money from the banking system in the past; in January 2011, the central bank issued a QR50bn, three-year bond directly to local banks.
In addition, the central bank launched monthly auctions of 91-, 182- and 273-day Treasury bills in May and August 2011 to soak up excess funds; it now drains 4 billion riyals a month through this method.
But Sunday’s medium-term debt sale broke new ground because it was designed as part of a regular programme of bond issues, putting Qatar at the forefront of wealthy Gulf states in developing its local currency debt market.
The central bank said in a statement that local currency debt would now be issued every quarter, half with three-year maturities and half with five-year. It did not give specific dates or sizes for future issues, saying they would be announced later. “The aim of issuing these bonds is to develop monetary policy and the implementation of a mechanism of coordination between monetary and fiscal policy, and support the strength of the banking system and financial and market tools,” it said.
A more active monetary policy is likely to be needed in coming years. In the wake of the 2011 interventions in the money market, total available liquidity dropped to a mere QR5.8bn at the end of that year from QR73.2bn a year earlier, the central bank has said.
But excess liquidity has begun building again. Funds parked by banks at the central bank’s low-yielding deposit facility climbed to QR151.3bn last December, the highest level since April 2011; their average level in May-December 2012 was double the level in the previous eight months.
Loose liquidity pushed the average three-month interbank lending rate down to 0.76 percent in November, the lowest since June 2011. It rose again to 1.05 percent in December but is still well below the March 2012 peak of 1.75 percent.
In January, the International Monetary Fund said Qatar’s central bank needed to start managing liquidity fluctuations more finely through more flexible open market operations. The central bank told the IMF that its ability to engage in open market operations was limited by a shallow interbank market and the lack of an active secondary market in T-bills.
OPEN MARKET OPERATIONS
The new bond issue programme takes a step towards remedying this deficiency by providing banks with instruments that they could trade with each other and with the central bank.
Ultimately, the central bank could buy and sell the bonds in short-term repurchase deals - a common way which authorities use to adjust money market liquidity in developed financial centres.
“You want these bonds to be traded regularly to have a liquid market so that you can use them for repo and reverse repo purposes, so that the central bank can actually carry out open market operations,” Soussa said. For now, issuance is unlikely to be enough to stimulate much secondary market trade.
“Just one issuance at the moment on a standalone basis is not enough to support trading, and this issuance will most likely be held by banks as assets,” another Qatar-based commercial banker said.
But in the long term, a deeper debt market will give the central bank additional options in adjusting liquidity and market interest rates. It will also help Qatar develop as a regional financial centre, providing foreign financial institutions with more instruments to park funds.
The central bank’s statement on Sunday noted local banks could use the new bonds to meet Basel III banking standards that are being phased in around the world, requiring banks to hold minimum amounts of safe, liquid instruments. A lack of such instruments is a concern for many banks in the Gulf.
And by developing a local currency market in government debt, Qatar is creating a potential source of funding as it prepares to finance its infrastructure plans. With massive reserves and a big budget surplus, the government is expected to be able to finance the projects comfortably, but the local debt market could make a significant contribution. “I see that as a very positive step forward. The economy is growing and there is a huge amount of infrastructure financing needed for the local economy,” said a Doha-based economist.
Reuters
