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For Qatari residents: Do you prefer a summer or winter World Cup 2022?

"Bond"ing with banks

Written by  Author |   Wed, 12 March 2014 10:10

Home to the world's third largest natural gas reserves, Qatar's economy has enjoyed rapid growth in the past years thanks to rising oil and gas sales, while banking has become one of the fastest growing sectors in the world. Accounting for about 10% of the country's GDP in 2012, Qatar's financial sector has become a key element of its rapidly developing economy. Total assets of Qatari banks have increased at a compound annual rate of 30% in the last 10 years to almost $225 billion, while bank lending to domestic customers has grown by a similar amount in the same period to $130 billion.

However, the country faces funding requirements as it pushes ahead with around $250 billion worth of projects within the National Development Strategy and within its preparations for the World Cup 2022. These projects have led to considerable lending and business opportunities for the local banks that have become involved in virtually all aspects of economic activity and not just the energy sector. This is why local banks are coming together to finance these large projects. Regional and foreign banks are also increasingly coming in to get a share of the action in Qatar.

Up until 2022, Qatar will be the focus for the GCC construction industry and local banks are committed to support this growth. Although most of the infrastructure projects will be funded directly by the Qatari government, financing will be required for contractor funding.

Banks in Qatar say they have enough liquidity to provide the capital and finance mega projects in the country up to 2022 and beyond. The metro by itself has a price tag of about $35 billion and the Port project is estimated at $7-8 billion, and these projects do not include the necessary infrastructure such as roads, electricity, water and sewage not to mention superstructures like Aviation City, the World Cup stadiums, hotels, new shopping malls, Lusail City and more.

Bankers in Qatar say they expect the aggregate balance sheets of Qatar's banks to continue growing as government investment in projects flows to construction companies and other service providers.

According to The Banker, when bidding for work in Qatar, contractors are required to provide bid bonds with an average value of roughly 5% of the total value of a project. Once the tender has been awarded, clients ask the winning contractor to provide advance payment bonds, performance bonds and often retention bonds. Bid bonds are relatively easy to obtain from banks but it is the latter three that can prove difficult to acquire and they can add up to a very large sum of money, especially for multi-billion Qatari riyal projects.

Local banks have seen a marked increase of roughly 40% in requests for issuing bid bonds as of 2011. With many international firms entering Qatar and the pace of construction work set to increase over the next few years, lenders will continue to see increased demand.
The private sector is also expected to assume a bigger role in the economy in the coming years as it diversifies away from hydrocarbons. International ratings agency Moody's estimates that the implementation of projects connected to the five-year development strategy and the World Cup will fuel private sector lending growth to about 20% to 25% and upwards. 

Qatari banks have also increasingly been moving into the asset management space in light of the very large pools of liquidity being produced. QNB opened its asset management division in 2005 and has subsequently grown its asset pool from QR300 million to more than QR10 billion to become the largest asset manager in the country.

QInvest, Qatar's largest investment bank, launched its wealth management business at the beginning of 2011, while International Bank of Qatar (IBQ) is already very strong on private banking but is now moving into the second stage of wealth management.

At the start of 2010, the Qatar Financial Centre (QFC), now home to 159 institutions, changed its strategy to focus on asset management and is looking to manage up to $150 billion to $200 billion by 2020.

However, as Qatar's economic activity shifts into a lower gear, credit growth is expected to keep its pace because according to the government's expenditure pipeline, project spending will increase from $21 billion in 2012 to a respective $28 billion and $25 billion in 2013 and 2014, before falling to $17 billion in 2015.

Winning the World Cup bid combined with the sheer scale of its infrastructure development program will give a shot in the arm to the entire Qatari banking sector for many years to come.

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October / 10 / 2014
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