Although banks in Qatar have recently been successful in raising funds from abroad, the sharp increase in their external debt raises their vulnerability to the risk of a shift in investor sentiment or change in global liquidity conditions, S&P Global Ratings said in a report "A Sharp Rise In External Debt Leaves Qatari Banks more Vulnerable" published Monday. Some of the leading Qatari banks sought external liquidity when deposits of government and government-related entities (GREs) decreased when oil prices started to decline in the second half of 2014. "The banks have managed to attract a significant amount of external funding, mostly denominated in US dollars and mostly short-term debt of about six months, according to our understanding," said S&P Global Ratings credit analyst Mohamed Damak. "On the other hand, Qatari banks have used a large portion of this funding to finance typically long-term local projects denominated in Qatari riyal, resulting in a significant open position in US dollars." "Although we consider that external funding is a factor to watch for Qatari banks, we don›t believe it is an imminent threat to the health of the system or the creditworthiness of Qatar National Bank (QNB; A+/Negative/A-1)." Several factors are protecting banks from the risks of significant external funding: n The expected stability of the peg between the Qatari riyal and the US dollar, which could otherwise inflate the value of external debt. n Qatari government highly supportive toward its banking system, especially QNB n The Central Bank of Qatar introduced regulation in 2016 that caps, among other things, a bank›s foreign currency open position in US dollars at 25% of capital and reserves. Nevertheless, we expect implementation of this circular to take some time given that the Qatari banking system is starting off with an even higher open position. n We believe that global liquidity will remain relatively abundant in 2017, thanks to the European Central Bank›s quantitative easing program. On March 3, 2017, S&P Global Ratings revised its outlook on the sovereign ratings on Qatar to negative from stable on mounting risks to its external position. Following revision to the outlook on the sovereign rating, S&P revised the outlook on QNB›s long-term rating to negative on March 6, 2017, given the status of QNB as a GRE and the four notches of support we incorporate in QNB›s ratings. — SG
