OpEd: Liquidity Landscape for Qatari Banks During COVID-19

1 Jun 2020

Qatar Financial Centre (QFC) and Bloomberg assessed the current landscape of the Middle Eastern banking industry, explored challenges in the current environment, and how to facilitate cross geographical liquidity access. Crucially, projections for Qatar showcase opportunities for growth with the advent of a market-driven liquidity mechanism.
 
Unlike the 2008 economic crisis, the outbreak of Coronavirus (COVID-19) has triggered an unprecedented economic and health crisis, with implications across the board affecting the entire world. Amidst its escalating economic and financial impacts, it is prudent to turn attention to the liquidity landscape of banks, and how well Qatar is positioned to withstand the downturn.

 

 

Macro Outlook for MENA Region

The Gulf region is facing twin shocks: the outbreak of COVID-19 and sharply lower oil prices (because of shutdowns mandated by the public health response). Although the contagious curve in the region is still on the rise, the swift containment and preventive measures witnessed in the region significantly contributed to curbing the further spread of the virus.

However, the accompanying lock-downs have been economically painful. As a point of comparison, the economic shutdown in France, for instance, has led to a contraction of economic activity by 35%. Another example can be seen in the U.S., where roughly 33 million people lost their jobs within six weeks. Undoubtedly, the Gulf region is not immune as their companies face similar restrictions to conducting business.

In response to the oil price rout, the Gulf has reacted by making current expenditure cuts and instituting hiring freezes, such as in the UAE, Oman and Bahrain, as well as paring back capital expenditures such as in Qatar. With consensus oil prices forecast to average in the mid $30s by the end of this year, there is an immediate need for many oil-dependent economies to reorient.

Qatar is no exception to dominant trends, although it is less exposed than its Gulf neighbors. It is protected by having a strong balance sheet and a greater share of non-oil exports. Qatar has abundant savings in the form of central bank reserves and assets held by its sovereign wealth fund, the Qatar Investment Authority (QIA). Qatar’s proven economic resilience, following the economic blockade imposed on it, has enabled it to withstand unforeseen challenging circumstances.

Governments have responded with stimulus packages designed to bring some economic relief by supporting the private sector and SMEs, in the process minimizing the number of bankruptcies and layoffs. To counter the COVID-19 fallout, Qatar introduced a QR 75 billion economic stimulus package, which is generous compared to its Gulf counterparts.


Liquidity Landscape for Banks During COVID-19

COVID-19 has negatively affected liquidity conditions. The Federal Reserve (Fed) system’s balance sheet, which currently stands at US $6.5 trillion, is forecast to triple from the pre-pandemic’s US $4.2 trillion. In early March 2020, the Fed substantially cut interest rates. In tandem, a US $300-billion asset purchase program was announced by the US Treasury, which was quickly increased to US $700 billion after the inclusion of non-financial institutions. Additionally, the US Congress authorized a private lending facility to non-financials, which has extended a further US $500 billion into the market. Simultaneously, the Fed moved to address short-term money market liquidity concerns. Sharply widening spreads in commercial paper, as high as 200 basis points, showcase financial market concerns for the real economy. In response, the Fed moved to buy commercial paper, which contributed spreads decreasing from 200 bp to 60 bp. All these immediate and sizeable injections and pledges into the market have eased liquidity concerns, starting with the banking sector, slowly tiering down to other sources of credit.


Qatar’s Positioning

Qatar’s economy is incredibly robust, and the nation has a strong balance sheet. The State is well positioned to navigate current turbulence, despite the expected global economic downturn. The credit rating of its banking sector remains one of the strongest worldwide, which is supported by the State’s successful recent bond issuance. Qatari bonds are of interest to a wide variety of investors, including global money market funds, and international banks seeking US dollar-backed exposure.

It is imperative to ensure the continuous operation of efficient and smoothly operating Qatari financial markets. This includes Islamic financial institutions, which require development of short-term and good quality money market products A promising example is the International Islamic Liquidity Management body, which is owned by a syndicate of central banks including QCB to issue standardized pooled products, consisting of highly-rated assets sold to Islamic funds and other central banks.


Funding strategy For Banks Through COVID-19

Many factors should be considered, when it comes to the funding strategy of the banking sector, including:

 

  • Central bank lending is the primary funding channel that banks will be able to source at this time of crisis
  • Having access to a variety of funding sources, including both short- and long-term, is vital for banks
  • Constructing a short-term funding platform will help local banks in such transitional periods

 

 

Globally, the banking industry is facing common challenges of deteriorating asset quality, reduction in demand for productive loans from customers, and lower profit margins. In the short-term, risks are minimal in places where the capital base of banks is strong. 

Relatively speaking, banks should be better positioned than the real economy in facing and surmounting this crisis. The financial sector has a track record of recovering faster, especially with liquidity injections and fiscal stimulus. This leads then to a critical question about how short-term liquidity can be optimally disbursed. With the advent of standardization, systematic issuance through regional dealers could be facilitated. Secondly, although market liquidity is not a prerequisite, regulated trading venues across jurisdictions can deliver a similar benefit.


 

Written by Thaddeus Malesa

Senior Advisor for Economics and Research at Qatar Financial Centre

Error

Field required valid data!

Cookies help us improve your website experience.
By using our website, you agree to our use of cookies.

Privacy policy
Accept all cookies