Review of QCB Data on Net Foreign Assets Position of Qatar Banking Sector - Part 1

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Earlier Post Here

Introduction

Since the GCC 3+1 (Egypt) announced their “blockade” against Qatar, there has been a lot written about the negative economic impact on Qatar, some of it true and some of it seizing on negative news to invent imagined foreign policy successes.  For the latter read Gulf News. 

One point that has been emphasized is that Qatari banks have a negative net foreign asset (NFA) position.  On an aggregate basis Qatar’s banks are borrowing offshore to fund onshore assets.  This is a real vulnerability.

But …

Aggregate statistics can identify symptoms of diseases but further diagnosis is required to determine if the patient actually has a disease and how severe the disease is.  At times aggregate statistics can obscure diseases.  For example, if we assume that Qatar banks had a perfectly balanced position with FA = FL, aggregate statistics would suggest everything is fine.  But if the FA were in shares of GFH and Dana Gas to choose two sterling investments, there would likely be a real problem.  Or one bank had a positive NFA and the other a negative NFA, the potential demand for repayment would be the negative NFA of the second bank, not the net of their two positions as in the QCB NFA data.

What’s important then is taking a detailed look after parking any partisanship in the dispute.

This post will do just that. 

As noted in my introductory post, I’ll be looking at this topic using two main data sources:  QCB statistics and bank consolidated financial reports.  This post will focus on QCB reported NFA. 

QATAR CENTRAL BANK DATA

We’ll begin by looking at data published by the QCB in its “Monthly Monetary Bulletin” (MMB) and ”Quarterly Statistical Bulletin” (QSB).

To set the stage a discussion of aggregate statistics.   

Qatar Commercial Banks NFA
Billions of QAR
EOP	TFA	TFL	NFA
Dec-16	273	447	-174
May-17	268	471	-203
Jun-17	260	415	-155
Jul-17	249	388	-140
Aug-17	235	371	-136
Sep-17	234	368	-133
Net Chg	-39	-79	40

Qatar Commercial Banks NFA
Billions of USD
EOP	TFA	TFL	NFA
Dec-16	$75.1	$122.7	-$47.7
May-17	$73.6	$129.4	-$55.9
Jun-17	$71.5	$114.1	-$42.6
Jul-17	$68.3	$106.7	-$38.4
Aug-17	$64.5	$102.0	-$37.5
Sep-17	$64.3	$101.0	-$36.6
Net Chg	-$10.7	-$21.8	-$11.0

Technical Notes:

1. QAR amounts rounded to nearest billion.  USD equivalents rounded to nearest hundred million.
2. Conversion to USD equivalent at QAR 3.64 = USD 1.00.
3. Note that “Qatar Commercial Banks” includes all banks licensed to operate in the emirate including foreign banks. 
4. FA = Foreign Assets. FL = Foreign Liabilities. NFA = FA – FL.  T= Total, i.e., TFL = Total Foreign Liabilities.
5. Sources: Tables 3, 21, and 22 in the Monthly Monetary Bulletin and Tables 4, 22, and 23 in the Quarterly Statistical Bulletin.  The MMB is not published at Quarter end.

Comments:

1. The aggregate (note that word) NFA assets position of the Qatari banking sector seems rather modest in terms of the resources that the GOQ can bring to bear.
2. From FYE 2016 through September 2017 Qatar’s banks have reduced their negative NFA position by some USD 11 billion or roughly 22%.  If measured from May 2017, the reduction is about USD 19 billion or 33%. 
3. During this period, USD 11 billion equivalent in FA have been liquidated to meet repayments of FL and FL have been reduced the equivalent of USD 22 billion.  If measured from May, FA have been reduced some USD 9 billion and FL about USD 28 billion.

At first glance, the banks and GOQ seem to be handling matters well.  The pace of creditor flight in August and September appears to have slowed. But these two data points do not establish an irreversible trend.

Hopefully, there is more than one reader out there (that’s meant in more than one sense) who is thinking and, thus, thinking of saying: “Wait a minute, AA, the Qatar banks don’t owe the Net FA position, they owe the total of foreign liabilities, some USD 101 billion.  That’s a much bigger amount and would strain the GOQ’s resources a lot more.  That’s the measure to use.” 

Keep this straw man’s comment in mind as it will be a recurring theme in what follows.

Let’s turn to that topic and look at Total Foreign Liabilities (TFL) as a percentage of Total Liabilities and Equity (TLE).

Qatar Commercial Banks
TFL as Percent of TLE
EOP	TFL	TL	%
Dec-16	447	1,272	35%
May-17	471	1,323	36%
Jun-17	415	1,316	32%
Jul-17	388	1,313	30%
Aug-17	371	1,328	28%
Sep-17	368	1,347	27%

In light of the negative NFA position, these ratios are concerning.  More importantly they understate the relative importance of TFL as a percent of market funds.   To correct this let’s remove equity from the denominator.

Qatar Commercial Banks
TFL as Percent of TL  (No Equity)
EOP	TFL	TL	%
Dec-16	447	1,093	41%
May-17	471	1,131	42%
Jun-17	415	1,124	37%
Jul-17	388	1,119	35%
Aug-17	371	1,134	33%
Sep-17	368	1,153	32%

1. Note:  In adjusting TLE for equity I deducted QAR 25 billion in perpetual subordinated debt which is Tier 1 Capital, but is not accounted as capital in the QCB statistics.
2. TL also includes “Other Liabilities” which average about QAR 4 billion.  However excluding these does not materially change the percentages. So I have not.
3. The ratios are higher.  So even more cause for concern. NPA fairly dramatic picture of dependency on foreign funding. 

While this sharpens the analysis, it doesn’t provide a complete answer.

Diagnostic Questions

To get that answer ideally we need to answer at least the following questions.

Foreign Assets 

1. What are the foreign assets composed of? For example, if the banks foreign assets are substantially in liquid high credit quality instruments, then the absolute net additional funds they require to settle all foreign liabilities are much smaller, approaching the NFA position. 
2. Which banks in Qatar own the assets?  Because the QCB statistics are for the entire Qatari banking sector, they include foreign banks operating in Qatar.  How big is their share of the FA?  List of licensed banks in Qatar.

Foreign Liabilities

1. What are the foreign liabilities composed of?  How much is bank-provided funding (typically expected to be more volatile), customer deposits, and debt instruments?
2. Which banks, local or foreign, are responsible for paying these liabilities?  How does this compare to their shares of FA?  For example, if foreign banks have borrowed foreign currency to fund their QAR denominated local operations and this is a significant amount of total FL, then the problem for Qatar is less because these banks are unlikely to be affected by creditor flight.  And if it does occur, then their parents are likely to step up.  But, if this is the case, then which foreign banks hold the large FL and do they have access to funding?   There’s a difference between HSBC, Stan Chart, and BNP on the one hand and Bank Saderat on the other, though we might reasonably expect Bank Saderat to be a “samak saghir” in Qatar.
3. To whom is the money owed?   For example, if much of the TFL funding is intercompany, it is likely to be more “sticky”, unless the overseas units are under pressure themselves  On the other hand, if a significant portion of the TL are owed to GCC3+1 entities, then the problem is greater.

Additional Foreign Assets and Liabilities

1. Are there foreign assets and liabilities of the Qatari banks that are not recorded in the QCB data? These are most likely those of subsidiaries.  If contagion spreads to foreign subsidiaries, then the Qatari parents may have additional foreign currency burdens, unless they “walk away” from these subsidiaries.  On the other hand, a foreign subsidiary may be induced to make a timely deposit to help out a parent.  

Individual Bank Positions

1. As noted earlier, what are the individual positions of local Qatari banks?  Qatar Bank A which has a positive NFA position is highly unlikely going to bail out Qatar Bank B which has a negative one.  Therefore, we need to disaggregate the local banks’ TFA and TFL to individual banks.

We can answer some but not all of these questions from the QCB data. And will start doing that in the next post.