We warned previously that Qatar was running out of cash, and it appears that is very much the case as the cost of interbank borrowing (liquidity provision) hits a record high.
To boost their hard currency reserves, Qatar banks are now offering a premium of as much as 100 basis points over LIBOR to attract dollars from regional banks, some 80 bps higher compared to the rate they offered prior to this crisis. And the soaring cost of interbanking liquidity provision suggests its not working...
As Arqaam Capital analysts Jaap Meijer and Janany Vamadeva note in a recent report...
A prolonged conflict between Qatar and its neighbors may leave the country’s banking sector "vulnerable” because of its reliance on foreign funding. They reiterate underweight rating on the sector.
Arqaam doesn’t rule out renewed sanctions as Arab nations disappointed with Qatar’s response to list of 13 demands, and notes that the Qatari banking sector is "highly dependent on foreign funding (wholesale debt and deposits) with low operational relationships."
The banking sector relies on foreign markets for 43% of its funding needs, with non-resident deposits making up 46%, interbank 43% and wholesale debt 11%.
Qatar Islamic Bank has the highest share of funding coming from the Gulf Cooperation Council at 24%, Qatar National Bank the least at 5%, though has the highest dependency on foreign funding at 57%.
A benevolent government and reserves/sovereign wealth fund offer some comfort, but Meijer and Vamadeva suggest strongly underweight on the sector due to profit deterioration.
As we noted previously, despite the spike in interbank rates, S&P is confident that Qatari banks are strong enough to survive the pullout of all Gulf money and then some. The ratings agency ran two hypothetical scenarios of capital flight, and concluded that Qatar’s lenders could survive the withdrawal of all Gulf deposits plus a quarter of the remaining foreign funds the banks keep. Still, that did not prevent S&P from lowering Qatar’s long-term rating by one level to AA- last week.
Separately, Reuters reports, that the dollar shortage has also spread over to money exchange houses in Qatar on Sunday, making it harder for worried foreign workers to send money home.
"We have no dollars because there is no shipment or transportation from the United Arab Emirates. There is no stock," said a dealer at the Qatar-UAE Exchange House in Doha's City Center mall. "The shipment is blocked from the UAE" the dealer added, although it was not quite clear if it was physical cash that was being transported.
Other exchange houses in Doha also told Reuters they had no supplies of dollars. At Qatar-UAE Exchange, dozens of people - some of the foreigners who comprise nearly 90 percent of the population of 2.6 million - waited quietly in line to change money or make remittances to their home countries.
"I spoke with my wife this morning. She said, 'Send your savings to me now.' I am not panicked but my family are scared," said John Vincent, an air-conditioning repairman from the Philippines.
"I sent 2,000 riyals ($550) home but I have some more savings left here in Qatar. I will see what the situation is in coming days before I decide what to do."
Sudhir Kumar Shetty, president of UAE Exchange, which has eight branches in Qatar, said his firm was continuing to handle remittances and currency buying as usual in that country. He said the firm hadn't seen any major change in remittance volumes due to the diplomatic tension.
But he added that dollar supply was not meeting demand in Qatar and attributed this partly to flows of the U.S. currency from other Gulf countries being disrupted.
"Everywhere, all the banks and exchange houses, there are no dollars. All the exchange houses are trying to get currencies from other countries," the dealer at Qatar-UAE Exchange said, adding that his firm was hoping for a shipment from Hong Kong.
For now most Western banks with a presence in Qatar have continued business as normal, partly because they did not want to lose out on billions of dollars of building projects which Qatar plans before it hosts the soccer World Cup in 2022. But other Western banks have halted new Qatar business including interbank and syndicated lending, while continuing to service existing business, banking sources said, declining to be named because of political sensitivities.
"Everybody is shocked - they're not worried about Qatar's credit, they're worried about compliance and the risk that the local sanctions could be escalated to an international level," said one foreign banker in the region.
In a worst case scenario, bankers expect Qatari banks to borrow from the central bank's repo facility if they become short of funds. However, central bank rules limit the size of the repos to 2% of each bank's private sector deposits. Bankers speculate the central bank may lift this cap although the central bank did not respond to Reuters requests for comment.