Friday, 21 September 2018

In IFR this week: Qatar joins sovereign search for funds

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Qatar seeks US$10bn loan but lenders face liquidity squeeze and dollar funding issues 

Qatar is trying to raise a loan of up to US$10bn, as it becomes the latest Gulf state to try to shore up public finances depleted by low oil prices. But its efforts are being hampered by a liquidity squeeze in the bank market and US dollar funding issues faced by lenders.

Last week, IMF chief Christine Lagarde said the crude exporting countries of the GCC were expected to lose US$275bn in revenue this year because of lower oil prices.

Against this backdrop, a number of Middle East sovereigns have been in talks with banks to lock in cash. Oman, for instance, is seeking to raise US$1bn via a loan deal coordinated by Citigroup, Natixis and Gulf International Bank.

However, bankers believe Qatar may struggle to raise such a large loan.

“More Gulf banks and sovereigns are borrowing money and there is a finite amount of capacity for all of them. The concept of being able to drag US$10bn out of the market is fanciful”

With low oil prices pushing down revenues, Middle East companies are not only reducing the amount of dollar deposits held at both local and international banks but are also withdrawing dollar deposits – further depleting banks’ dollar funds.

As a result, European and Japanese lenders – as well as Gulf banks – are finding themselves relying more on the expensive wholesale markets to buy dollars, making dollar lending more painful.

“There is a big strain on the market as far as dollars are concerned,” one banker said. “More Gulf banks and sovereigns are borrowing money and there is a finite amount of capacity for all of them. The concept of being able to drag US$10bn out of the market is fanciful.”

The amount that Qatar does eventually raise will depend on how much it manages to attract from Gulf lenders. Qatar National Bank is involved in the deal, according to a second banker, and it may have some liquidity available, having itself raised a US$3bn loan back in February. However, bankers are not optimistic that other regional banks will have much appetite for the deal.

“The question is, can Qatar drag any local liquidity out of the market?” the first banker said.

Oman’s fully underwritten US$1bn loan will be a good test case for local liquidity. With pricing of 100bp over Libor, bankers predict local appetite may be limited.

“These sovereigns would like to have as much as they can as cheaply as possible. They want to access liquidity and we believe they are in a good position to service the debt. The market, not them, will decide what they get,” the first banker said.

Saudi bond?

It is not just the loan market that Gulf sovereigns are targeting. In the bond market, Bahrain has mandated banks ahead of a potential US dollar issue. Even mighty Saudi Arabia may tap the global bond market next year for the first time as it seeks new ways to cover a budget deficit that Moody’s reckons will be 17% of GDP this year.

“If it’s going to be January, June or 2017, I’m not sure,” a senior Gulf banker told Reuters. “But it’s something that’s top of their minds … It’s something that is definitely on the cards.”

Analysts are unsure whether the move should be seen as positive or negative. “Our thoughts were they would drain local liquidity before considering any such a move, which they have partially done – but we thought they would do more,” said Tim Ash, senior credit strategist at Nomura.

“The fact they are tapping the markets so soon, suggests either they are forward-thinking and don’t want to choke off the private sector completely – or the liquidity situation is worse than we think. Let’s hope it is the former – but you can never discount the latter either.”


Jean-Michel Saliba, an EEMEA economist at Bank of America Merrill Lynch, added that depressed oil prices are “likely to continue to put downward pressure on Saudi Arabia’s credit rating in the medium-term”.

Last month, S&P cut its rating of Saudi Arabia by one notch to A+, with a negative outlook. Moody’s rates the sovereign at Aa3, with a stable outlook, while Fitch has it at AA, with a negative outlook.

The Saudi Finance Ministry said S&P’s downgrade was unjustified and terminated its rating agreement with S&P, forcing the agency to classify its assessment of the Kingdom as “unsolicited”.

In July, the government began issuing about SR20bn (US$5.3bn) of domestic bonds every month – its first sovereign bond sales since 2007.

Qatar has also been active in the money markets. In October it sold QR2bn (US$549m) of treasury bills, though that was only half of its QR4bn target. That followed a QR15bn fundraising exercise in early September that took local banks by surprise after they were expecting only QR4bn to be sold.

Additional reporting by Andrew Torchia

(A version of this story will appear in the November 14 issue of the International Financing Review, a Thomson Reuters publication)

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