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Qatar rates cut to spur credit, bank sector
Cbank says cut to revive private sector credit, bank sector; Analysts see room for further cuts; Regional CDS widen on global worries; No impact on local spot and forex markets, traders say (Adds CDS spreads, quotes, background)
August 11, 2011 3:41 by p.deleon
Qatar lowered key interest rates a day earlier to spur activity in the local banking sector and revive private sector credit growth, the central bank said on Thursday.
The world’s largest liquefied natural gas exporter on Wednesday cut both the overnight lending facility and the repo rate to 4.5 percent from 5 percent previously, and reduced the deposit rate to 0.75 percent from 1.0 percent.
“It comes in line with the economic developments that the country is seeing and the expected investment spending on infrastructure projects, and future real estate projects,” the central bank said on its website. (www.qcb.gov.qa)
The cuts followed an April policy measure which the bank said was aimed at stimulating banking activities and boosting lending to the private sector.
Analysts said they saw room for even further cuts.
“There is definitely scope for a further cut, the benchmark lending rate is 4.5 percent in Qatar and the benchmark rates in the UAE and Saudi are 2 percent and in the U.S. it is 0.25,” said Khatija Haque, senior economist at Emirates NBD in Dubai.
“We could see another 25 bps cut in the deposit rate as well. It depends on how deposit growth develops in the coming months.”
Rates in Qatar are still relatively high compared to regional peers, with United Arab Emirates’ key repo rate at 1 percent after it was last cut in 2009, and Saudi Arabia holding at 2 percent after a reduction in 2009.
Qatar, like all but one Gulf Arab oil exporters, pegs its currency to the U.S. dollar. The U.S. Federal Reserve promised to keep interest rates near zero for at least two more years on Tuesday.
“The timing of the cut is also likely to have been supported by the U.S. intention to keep its federal funds target rate at exceptionally low levels at least through mid-2013,” EFG Hermes wrote in a note.
EFG Hermes said there was room to reduce the lending rates from the current 4.5 percent by another 50 bps as inflationary pressure remains muted.
Analysts polled by Reuters in June expect average inflation of 3.2 percent this year and 3.9 percent in 2012.
Private sector credit rose by 15.8 percent year-on-year at the end of June after 15.0 percent in May, central bank data showed, although still well below double-digit rates of over 20-40 percent seen in the first half of 2009.
Qatar’s five-year credit default swaps , the cost of insuring its debt against default, widened by 7.2 basis points to a four-months high of 106 bps, according to data from Markit.
“There is a widening across the board globally because of the U.S. and the euro zone problems,” a trader at a UAE bank said. “A general derisking everywhere, widening out a little bit.”
Abu Dhabi’s five-year CDS have widened by 2 basis points since Wednesday to 110 basis points on Thursday, while Saudi Arabia’s spreads have increased slightly by 10 basis points to 110.1 bps since Thursday.
“It is more likely caused by investor reaction to what is happening in the U.S. and the euro zone rather than the rate cuts by the QCB. In general Middle East CDS in general have widened materially over the last few days, although Qatar and Abu Dhabi have widened the least,” said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi.
“Investors still consider Abu Dhabi and Qatar as the blue chip sovereigns in this region and hence they continue to remain very robust and outperform other credits in this region.”
Dubai’s 5-year CDS widened by around 35 basis points to 410 bps on Thursday.
On the stock market, Qatar’s benchmark index dipped 0.25 percent to 8107.5 points at 1050 GMT.
Traders however said the impact on spot and currency markets was minimal.
“In the spot market and in the forex swap market there won’t be any impact whatsoever … There has been no material dealing,” said Lyndon Loos, head of forex trading for Middle East and North Africa at Standard Chartered in Dubai.
“The changes to the interest rates affect the onshore banks, and not the offshore. The reducing of the repo rate means the lending rate to customers locally becomes cheaper,” he said.
Qatari one-year currency forwards were quoted at -20 par, moving only slightly to the left from -15/+5 before the cuts.
Liabilities of Qatari banks to their foreign counterparts stood at 89.2 billion riyals ($24.5 billion) in June, below 100.9 billion riyals in May, central bank data also showed.
Qatar, one of the world’s top investors through its sovereign wealth fund and host of the 2022 soccer World Cup, has like the United Arab Emirates escaped unrest sweeping through the Arab world.
Analysts polled by Reuters in June expect the country’s economy to power ahead at with 16.7 percent growth this year. (Reporting by Martina Fuchs; Editing by Toby Chopra)