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International ratings agency Moody's Investors Service on Tuesday downgraded Qatari banks due to weakening operating conditions and the potential weakening of Doha's ability to support its financial sectors.
Moody's downgraded outlook of Qatar banking system from stable to negative as the financial sectors continues to face funding pressure.
"The outlook also captures the potential weakening capacity of the Qatar government to support the country's banks. Qatari banks' reliance on confidence-sensitive external funding has increased in recent years due to a significant decline in oil-related revenues," said Nitish Bhojnagarwala, a Vice President at Moody's. "This leaves them vulnerable to shifts in investor sentiment."
Saudi Arabia, UAE, Bahrain and Egypt broke ties with Qatar on June 5, accusing Doha of fostering extremist groups and of ties to Iran. This resulted in severe shock to the Qatari economy which is heavily reliant on the Gulf nations for imports and exports of goods and services/.
The ratings agency predicted that the Qatari GDP growth to substantially slow down to just 2.4 per cent in 2017 from around 13.3 per cent recorded during the 2006-2014 period.
"As a result of the high spending levels and the current oil price we expect a fiscal deficit of around on per cent of GDP for 2017," Bhojnagarwala said in the report.
Painting a bleak picture of Qatari banking sector, Moody's predicted that domestic credit growth will also slow to the 5-7 per cent range for 2017 and 2018, down from 15 per cent in 2015.
Construction sector badly hit
From getting bad to worse, Moody's foresees system-wide bad loans to increase next year.
Bhojnagarwala said the gradual economic slowdown, combined with Qatar's ongoing dispute with some neighbouring countries and continued challenges in the construction and contracting sector, will lead asset quality to dip slightly.
"We expect system-wide problem loans to increase to around 2.2 per cent of gross loans by 2018, up from 1.7 per cent as of December 2016," said Bhojnagarwala.
Moody's warned that a prolonged GCC-Qatar dispute could trigger some outflows of foreign deposits and other external funding, hence, Qatari banks' high liquidity buffers - which stands at 24 per cent as of total assets as of December 2016 - would likely reduce, as domestic deposits remain tight due to reduced oil revenues.
"Against this backdrop, Qatari banks' profitability will likely decline, with return-on-assets declining to around
waheedabbas@khaleejtimes.com
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