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Qatar Selling Bills at Highest GCC Yields; Arab Credit

Qatar Central Bank Governor Sheikh Abdullah Saud Al Thani
The central bank of the biggest exporter of liquefied natural gas paid an average yield of 2 percent on 4 billion riyals ($1.1 billion) of notes at its monthly auction April 3, Qatar Central Bank Governor Sheikh Abdullah Saud Al Thani said by phone from Doha yesterday. Photographer: Charles Crowell/Bloomberg

Qatar is offering the highest yields on treasury bills in the Gulf Cooperation Council as the world’s richest country seeks to mop up excess funds in the banking system and deepen its debt market.

The central bank of the biggest exporter of liquefied natural gas paid an average yield of 2 percent on 4 billion riyals ($1.1 billion) of notes at its monthly auction April 3, Qatar Central Bank Governor Sheikh Abdullah Saud Al Thani said by phone from Doha yesterday. That compares with three-month-bill yields of 0.36 percent and 1.2 percent in Saudi Arabia and Bahrain, and 0.19 percent in Belgium, which like Qatar is rated AA at Standard & Poor’s, the third-highest investment grade.

Qatar is trying to establish benchmark yields, encouraging companies to raise local-currency debt and widen their funding pool as the nation prepares to spend about $88 billion on infrastructure to host the 2022 soccer World Cup. The sales also give the central bank a tool to drain funds from the banking system with inflation set to climb to a four-year high, 10 analysts’ estimates compiled by Bloomberg show.

Bill sales of about 15 billion riyals since May are a “clear indication of a drive to develop a liquid local debt market,” HSBC Holdings Plc economists Simon Williams and Liz Martins wrote in a report released April 3. “This will be positive for corporate financing as the infrastructure build-out gathers pace over the coming decade.”

The central bank, which until now hasn’t published bill yields, sold 2 billion riyals of three-month securities and 1 billion riyals each of six-month and nine-month bills at an average yield that’s more than double its overnight deposit rate of 0.75 percent.

Currency Peg

The Arab country, which surpassed Luxembourg as the world’s richest nation in 2010 according to IMF data, pegs its currency to the U.S. dollar, limiting its ability to set independent monetary policy. The fixed exchange rate means that the central bank needs to develop a “formal liquidity management framework,” the International Monetary Fund said in a report published Jan. 31, a goal treasury bills can help achieve. The nation, which posted the world’s fastest economic growth last year according to the IMF, lists the securities on the stock exchange.

The biggest challenge for the country’s monetary policy is to support credit growth “without fueling inflationary pressures” the IMF said in the report. Inflation may accelerate to 3.5 percent this year, according to the median estimate of 10 analysts compiled by Bloomberg. Consumer prices in the country of 1.8 million people jumped 11 percent in each year between 2006 and 2008.

Lending Surge

Bank loan growth to government-related entities is soaring, driven by financing for stadiums and sporting facilities. Bank loans to the public sector jumped 58 percent in the year to February, the fastest increase in more than a year, central bank data show. This has driven Qatar’s loan-to-deposit ratio, excluding overdrafts, to 116 percent in February from 94 percent a year earlier, according to Bloomberg calculations based on the data.

Lenders have turned to global debt markets this year, raising a combined $2 billion, compared with no issuance in the year-ago period, data compiled by Bloomberg show.

Commercial Bank of Qatar, the country’s second-biggest bank, sold $500 million of five-year dollar-denominated bonds this week at a coupon of 3.375 percent. Qatar National Bank, the nation’s biggest bank, issued $1 billion of dollar bonds in February with the same coupon.

‘Opportunity’ to Diversify

“Qatari banks will likely welcome the issuance of treasury bills as an opportunity to diversify their asset portfolio and reduce their loan-to-deposit ratios,” Martins of HSBC wrote in an e-mailed response to questions yesterday. Public-sector credit growth “may moderate in 2012 as banks buy treasury bills,” she said. “However, there is no funding need for the increased issuance.”

The three-month Qatari interbank rate was unchanged at 1.19375 percent today, the highest in more than a year, according to data compiled by Bloomberg. The spread over the three-month London Interbank Offered Rate was 72.5 basis points, just off a nine-month high, according to the data.

Yield Curve

Trading in the Qatar-riyal-forward contracts indicates the implied three-month interbank lending rate was unchanged at 0.5779 percent yesterday. The rate, which reflects the actual cost for banks to lend to one another, dropped 21 percent in the first quarter after advancing 78 percent in the final three months of 2011.

The yield on local-currency debt isn’t attractive enough to lure foreign investors, according to John Bates, who helps manage about $145 million as director of fixed-income at Silk Invest Ltd. in London.

“The economy is dollarized anyway because of the hydrocarbon-revenue stream and secondly the yields are so slight on a relative-value basis,” he said by phone yesterday. “This is a reflection of the credit risk.”

The central bank last reduced its key interest rates in August, cutting its overnight deposit rate to 0.75 percent from 1 percent and its overnight lending rate and repurchase rate by 50 basis points to 4.5 percent. One-year interest rate swaps, the fixed rate needed to receive floating payments for one year, was unchanged at 0.5841 percent today. The contracts declined 21 basis points in the first three months of the year.

“The development of a local yield curve is certainly something that would be a very positive evolution in the Qatari financial landscape,” Philippe Dauba-Pantanacce, senior economist at Standard Chartered Plc in Dubai, said by e-mail yesterday. “The issuance of treasury bills will help build the shorter end of the curve, while at the same time facilitate a more pro-active policy framework strategy for the management of liquidity.”

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