Qatar May Cut Rates to Save on World Cup Expansion: Arab Credit

Qatar, host of the 2022 World Cup, may cut its benchmark interest rate by at least another half percentage point as the emirate seeks to trim the cost of building nine stadiums, roads and 40,000 hotel rooms, analysts said.

Qatar’s central bank this month reduced its overnight lending rate and repurchase rate to 4.5 percent from 5 percent. The overnight deposit rate was cut a quarter point to 0.75 percent. The move aims to boost credit for spending on infrastructure and real-estate projects, the central bank said.

Lower commodity costs and concern that U.S. and European growth is faltering may keep inflation in check globally, allowing Qatar to lower borrowing costs even as the government projects economic growth of 16 percent this year.

“There’s room for rates to come down and I believe they will come down more in Qatar given that the U.S. rates will remain low for the next two years,” said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi PJSC. “The global inflation outlook has moderated markedly in past week or two.”

The yield on Qatar’s 5.25 percent dollar bond maturing in January 2020 dropped 28 basis points since Aug. 9 to 3.53 percent at 1:41 p.m. in Qatar today, the lowest on record according to prices compiled by Bloomberg. The yield tumbled 99 basis points this year. The average yield on Middle East sovereign bonds fell 48 basis points this year to 4.71 percent on Aug. 15, according to HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index.

Fed Pledge

The interest-rate cut followed U.S. Federal Reserve Chairman Ben S. Bernanke’s Aug. 9 pledge to keep interest rates near zero through at least mid-2013. Qatar’s riyal is pegged to the dollar at a rate of $0.27.

“There still remains room to reduce the lending rates from the current 4.5 percent by another 50 basis points, as inflationary pressure remains muted and credit growth is being directed toward productive areas and not speculative,” Monica Malik, economist at EFG-Hermes U.A.E. Ltd., said in an e-mail.

Qatar sold 4 billion riyals in treasury bills Aug. 8 as it sought to provide lenders with a way to invest cash before borrowing picks up for the World Cup. The tranche includes 3-month bills, half of them Shariah compliant, and will be the fourth issuance this year, central bank Governor Abdullah bin Saud Al Thani said this month. It was the first time such debt instruments were sold.

Fastest Economic Growth

Unlike the U.S., which had its credit rating lowered by Standard & Poor’s to AA+ from AAA Aug. 5 amid rising debt and sluggish growth, Qatar projects a budget surplus of 22.3 billion riyals this fiscal year. The International Monetary Fund projects Qatar, one of the six nations in the Gulf Cooperation Council, will have the fastest growing economy in the world for the second straight year in 2011. The nation is rated AA, the third-highest investment grade, at S&P.

Qatar exported its first cargo of liquefied natural gas in 1996. The country reached its target 77 million tons of annual liquefied natural gas production early in 2011, making it the world’s biggest producer.

Qatar’s $81 billion economy will expand 20 percent this year, the IMF said in December. Non-hydrocarbon gross domestic product forecast to grow 9.5 percent in 2011, the least in five years, down from 30.6 percent in 2007, the IMF said.

Promise to FIFA

Qatar promised FIFA, world soccer’s governing body, to more than double hotel and apartment rooms to 84,000 and build a $25 billion rail and metro network. Private-sector loans grew 16.3 percent in the first half, Gokkent said.

“If you look at the expected investment ahead of the World Cup, some of this will be financed by the private sector through borrowing,” Khatija Haque, a senior economist at Emirates NBD PJSC, said in an e-mailed response to questions. “If there is scope to reduce the cost of this borrowing, then that may be something the authorities are encouraging.”

Qatar’s default risk has declined 24 basis points to 99.2 since reaching a high for the year on March 17, according to data provider CMA. It’s the lowest risk in the Middle East and North Africa after Abu Dhabi’s 99.4, according to prices by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Capital Moves

“The rate cut has more to do with avoiding intra-regional carry trades,” said Rachel Ziemba, a London-based senior economist with Roubini Global Economics. “Interest rates are still higher than in most other GCC countries, particularly in real, inflation-adjusted terms and they don’t want to have short-term capital that could flood in and flood out.”

Banks’ loans-to-deposit ratio in Qatar fell to 90 percent at the end of June from 96 percent in December as lenders added a combined 47 billion riyals in deposits, according to data posted on the central bank website.

The emirate has supported its banks through the financial crisis with cash injections and the purchase of real-estate portfolios. Consumer prices rose at an average rate of 1.7 percent in the first half after the country experienced deflation for most of 2010. Rent, fuel and power prices continue to decline.

Qatar benchmark stock gauge, the QE Index has lost 7 percent this year, compared with a 9.6 percent retreat in the Bloomberg GCC 200 Index and a 12 percent drop in the MSCI Emerging Markets Index. The Qatar Exchange Banking Sector Index is down 4.2 percent this year, compared with a 14 percent slump in the MSCI Emerging Markets/Financials Index.

“The issue here is not liquidity -- the issue here is confidence,” said Mohammed Ali Yasin, chief investment officer for CAPM Investment PJSC in Abu Dhabi. “Qatar wants to encourage investors to put this money into treasuries, bonds and equities because that’s how you help the markets through a time of volatility.”

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