Perhaps more than anything, Qatar’s government must be thankful for the huge savings it had built up before this year. The economy was faced with a potentially destabilising shock in early June, when Bahrain, Egypt, Saudi Arabia and the UAE imposed their boycott. Imports fell sharply and customers withdrew bank deposits in large volumes. However, Doha’s willingness to reach into its own pockets meant nerves were soothed and banks stayed liquid.
The shock to the system is still being felt, but unless the boycotting states impose more stringent measures, it looks as if the worst may be over. “The blockade on Qatar dealt a blow to its economy in June, but more timely data suggests the worst has passed,” says Jason Tuvey, Middle East economist at UK-based Capital Economics. “That said, any recovery is likely to be slow-going.”
One of the main pressure points on the banking system was the withdrawal of non-resident deposits. Whether they were nervous foreign investors or perhaps individuals or entities from the other GCC states and Egypt falling in line with their governments’ policy, the impact was rapid and potentially damaging for local banks.
Non-resident deposits fell more than 7 per cent month-on-month in June and July, and have continued to drop since, albeit at a slower pace. Overall, non-resident deposits in the banking system were down 22.7 per cent at the end of September compared with the end of May, just before the crisis began, falling from QR184.6bn ($50bn) to QR142.8bn. Over the same period, local private sector deposits fell 6.6 per cent, perhaps due to local and expatriate residents moving their money to somewhere perceived to be safer.
The saving grace for Qatar’s financial institutions was the government’s willingness to step in and act as a depositor of last resort. Public sector deposits surged 21 per cent in June and increased more than 10 per cent in the following two months. By the end of September, they stood at QR302.6bn, compared with QR200.2bn at the end of May. Whereas public sector deposits accounted for 26 per cent of all bank deposits prior to the crisis, by September the proportion had risen to 38 per cent.
The situation will not recover until the crisis passes. Non-resident investment flows stood at $45bn in 2016. Garbis Iradian, chief economist for the Middle East and North Africa region at the Institute of International Finance, says he expects the flows will vanish this year due to the sharp decline in non-resident deposits. However, at least it may not get much worse. Qatar National Bank (QNB), the country’s largest bank, said in its third-quarter results presentation that it was not anticipating further disruption.
The government has funded the new deposits by using its international assets. Qatar Central Bank’s (QCB’s) foreign assets declined from QR125bn at the end of March to QR60.6bn by the end of September. The good news for the government is that banks’ demand for support looks to be easing.
“The fall in private sector deposits abated [in September] and public sector deposits posted their smallest rise in four months as pressure on the government to provide support to the banking system eased,” says Tuvey.
Banks themselves insist they and the wider economy are resilient. “Doha Bank was able to manage its funding well in June, when there was [a] knee-jerk reaction,” its CEO, Raghavan Seetharaman, told an Institute of Directors conference in London on 25 October. “Its treasury, wholesale, international and retail banking departments worked in an integrated manner.”
QCB data offers support for such claims of resilience. Private sector credit facilities were growing steadily before the boycott and have continued to do so since. And while interest rates have fluctuated, there has been no consistent pattern of rates rising sharply.
However, for anyone hunting for signs of economic strain, the country’s stock market continues to offer evidence of problems. The Qatar Exchange Index fell sharply in early June, and has continued falling since, dropping below the 8,000-point mark on 7 November.
This cannot simply be ascribed to the boycott, however. The market hit a high in September 2014 and – barring some short-lived rallies – has been in decline ever since. The regional diplomatic dispute has done nothing to help the situation, of course, and the index has fallen in four of the five months since the boycott was imposed. Overall, the index has lost 17.5 per cent of its value since the end of May, and 16 per cent of the entire market’s capitalisation has gone.
Another warning sign came in early November, when US credit ratings agency Standard & Poor’s ranked Qatar among a group of countries it termed the ‘fragile five’, alongside Argentina, Egypt, Turkey and Pakistan. These countries are most exposed to tightening global financial conditions, said the agency – something that could gather momentum following the recent interest rate rises in the US and UK.
Indeed, given that Qatar’s trade with the boycotting countries represents just 3 per cent of its GDP in terms of exports and 3.1 per cent in terms of imports, it is global macroeconomic conditions that could present the bigger test for policymakers in Doha in the future.