Qatar banks can largely fend off tougher 2020

As the outlook for Qatar’s real estate, construction and hospitality sectors is delicately poised, Qatar banks should contend with challenging credit conditions in 2020. The banks’ asset quality is expected to deteriorate slightly for the coming year, but strong and timely support from the government is a mitigating factor, S&P Global Ratings noted yesterday.

The Global rating agency said in its ‘Global Banking Outlook 2020’, that Qatar will pursue prudent macroeconomic policies that support large recurrent fiscal and external surpluses in 2020. In addition, the government will continue to take proactive measures to avoid any buildup of liquidity stress in the banking system.

S&P expects a slowdown in deposit growth. Qatar’s population is small, limiting the availability of retail deposits. The government, public-sector entities, and external parties are major depositors in the local market. As external funding flows return to the system, some money that had been injected into the system over the past 18 months will be taken back, the analyst said.

Systemwide net external debt has continued to increase and exceeded pre-blockade levels in March 2019. However, most of the increase has come in the form of interbank deposits, which the S&P considers volatile. Nevertheless, the strong supportive stance of the government somewhat mitigates the associated risks.

S&P expects that investments related to the government’s sizable infrastructure program will continue to support economic activity, with real GDP growth projected at 2.1 percent in 2020. Government support continues to be key.

The rating agency expects that credit losses and systemwide nonperforming loans will increase slightly. “We see risks from banks’ high dependence on external funding. The reverse in external debt outflows is leading to a rise in risk. This increases the Qatari banking system’s vulnerability to geopolitical and event risks. “

According to S&P, new bank entrants are unlikely to emerge in Qatar. “Qatari banks’ market shares are stable, and we think the likelihood of new entrants is low. The number of local banks is relatively limited, given that the top three account for approximately 60 percent of the banking sector’s domestic assets. We see mergers as unlikely in the near term, given the fragmented shareholder structures and the limited number of players in the Qatari market.”

Globally, key risks for banks include the spillover effects on asset quality from slower economic conditions and a weaker outlook for corporate earnings. Lower-for-longer rates may avoid a global recession in 2020 but will anchor banks to lower profitability and test business models.

S&P Global Ratings expects most banks globally to be able to buffer challenging credit conditions in 2020. But there are downside risks that could disturb the relative calm. A scenario of slower economic growth–primarily driven by the US-China trade and strategic confrontation–and a weaker outlook for corporate earnings may ultimately take its toll on bank asset quality and test ratings at current levels.

Source from: The Peninsula