Qatar Central Bank’s Role in the National Economy

Presentation by H.E The Governor of QCB At Carnegie Mellon University, Qatar

October 1, 2015

1

Structure of Presentation I. Global Developments

II. Domestic Performance

III. Role of Qatar Central Bank (QCB)

IV. QCB’s Monetary Policy Framework

V. QCB’s Financial Stability Framework

VI. QCB’s Role in Market Developments

VII.QCB’s Role in Developing Market Infrastructure

VIII.Current Policy Challenges

IX. Outlook

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I. Global Developments •Uneven global growth Strong growth in the USWeakness in the Euro area & Japan Slowdown in EMEs led by China

•Divergent monetary policies Talk of US interest rate increase Continued QE in Japan/Euro area Mixed policy responses in EMEs

•Low oil prices 3

IMF’s GDP Growth Forecast for 2015

4Note: Data in the text boxes are actuals for Q2 2015.

India: 7.0%

China: 7.0%US: 3.7%

Euro area: 1.5%

Japan: 0.8%

Global Financial Stability Risks

• Volatility in exchange rates Strengthening of the US dollar

Weak Euro & Yen; depreciation of EME currencies

• Volatility in capital flows Safe haven considerations for the US market

Withdrawal of portfolio flows from EMEs

• Volatility in stock market pricesGeneral risk aversion by investors

5

II. Performance of Qatari Economy• Growth continues, although at a moderate rate, despite low oil prices

Real GDP growth (6% in 2014 – old base; 4.1% in 2015Q1 – new 2013 base) Driven by non-hydrocarbon sector (11.3% in 2014 – old base; 8.9% in 2015Q1 – new 2013 base) Reflecting economic diversification strategy (QNV 2030 – 3rd Pillar)

• Low and stable inflation (3% in 2014 – old base; 1.6% in July 2015 – new 2013 base) Softer global commodity prices; Riyal appreciation vis-à-vis other currencies Pro-active liquidity management by QCB

• Resilient financial sector Comfortable liquidity in the banking system Banks remain well-capitalized and profitable with high asset quality

• Continued high credit rating for Qatar Rated AA (stable outlook) by Standard & Poor’s and FitchRated Aa2 (stable outlook) by Moody’s

6

III. Role of Qatar Central Bank• Supporting growth Maintaining low and stable inflationMaintaining low interest rates

• Supporting economic diversification Ensuring adequate flow of credit to private sector In a cost-effective manner

• Promoting financial stability Ensuring appropriate liquidity in the systemMaking the banking system healthy and resilient Promoting market developments Ensuring an efficient and secured payments and settlement system

Now we move to QCB’s policy frameworks7

IV. QCB’s Monetary Policy Framework• Objectives (Articles 5 and 6 of QCB Law No. 13 of 2012) Stability of the Riyal exchange rate and its convertibility to other currenciesMonetary stabilityStability of prices of goods and services

• Instruments Policy rates : QMR deposit rate, QMR lending rate, Repo rate Liquidity management tools: Auctions of T-bills/T-bonds, Reserve ratios, ReposMacro-prudential tools: Playing a complementary role

• Operating procedures Managing short-term inter-bank interest rates throughPolicy rate changesManaging systemic liquidityQIBOR – Indicative role

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Where Are We Now?• Fixed exchange rate of QR/USD at 3.64

• Policy Rates unchanged QMR deposit rate (0.75%), QMR lending rate (4.50%), Repo rate (4.50%)

QIBOR has played an important indicative role for banks in determining inter-bank rates

• Liquidity management strengthened Auctions of T-bills (since May 2011), T-bonds (since March 2013)

Lengthening of maturity profile of T-bonds : 7-year bonds in April/June 2014, 10-year bonds in Sept. 2015

Prudential limits on banks’ borrowing from/deposits with QCB through QMR - bank by bank ceilings

Reserve requirements ratio unchanged (4.75%)

• Low and stable interest rates ensured General easing of inter-bank rates, T-bill rates, and interest rates on customer deposits and credit facilities

Money supply consistent with growth and inflation objectives

• Credit to private sector growing In line with growth of non-hydrocarbon sector

• Low and stable inflation maintained Supporting macro-financial stability

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Stability of Interest Rates

0.0

2.0

4.0

6.0

8.0

10.0

2010 2011 2012 2013 2014 Jun-15

%

Market Interest Rates

Overnight Inter-bank91-day T-bills rateInterest Rate on Deposits (1 Year) Interest Rates on Credit Facilities (1 to < 3 years)

10

Private Credit and Non-hydrocarbon GDP

Note: GDP growth for 2015Q1 is at 2013 base and for the rest at 2004 base and hence are not comparable.

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0.0

5.0

10.0

15.0

20.0

25.0

2010 2011 2012 2013 2014 2015Q1

Y-o-

Y (%

)Growth in Private Sector Credit and Non-hydrocarbon Real GDP

Private Credit Non-hydrocarbon Real GDP

Low and Stable Inflation

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Note: GDP growth for 2015 is for Q1 at 2013 base and for the rest at 2004 base and hence are not comparable.

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2010

2011

2012

2013

2014

Jun-

15

Y-o-

Y (%

)

Inflation, GDP and Money Supply

CPI Inflation Real GDP Growth M2 Growth

V. QCB’s Financial Stability Framework• Objectives (Articles 5 & 6, QCB Law No. 13 of 2012)

Financial and banking stability Financial sector development

• Instruments/ToolsMicro-prudential: Implementation of Basel III - capital adequacy requirements including capital

conservation buffer, Liquidity ratios (LCR/NSFR)

Macro-prudential: Leverage ratio, Liquidity buffers (high quality liquid assets), LTD/credit ratios, Exposure limits (by sectors/borrowers/country); LTV ratios; DSIB capital charges

Others: Stress testing, Early warning system, Financial Market Infrastructure (FMI)

• ImplementationRegulation of banks Supervision of banks Reporting and disclosure requirements Regulatory coordination: Financial Stability & Risk Control Committee (FSRCC)

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Where Are We Now?• Already implemented

Microprudential tools as part of Basel III implementation since January 2014 Capital adequacy requirement (12.5%), Actual reported by banks is much above (15.2% in 2015Q2)

LCR (May 2014) – 60% for 2014 and increase by 10% every year to reach 100% in 2018 (Banks reporting above)

NSFR (March 2015) – 70% for 2015 and increase by 10% every year to reach 100% in 2018 (Banks reporting above)

Macro-prudential tools: Leverage ratios (September 2014) - Tier 1 leverage ratio fixed at a minimum of 3% (Banks reporting above this) LTD ratio (July 2014) – Set at 100%, banks given 3-year to comply during which period old credit ratio is effective Exposure limits – Real estate exposure limit at150% of capital and reserves, single borrower limit at 20%. LTV ratio – Real estate finance limit in the range of 70-60% of value of mortgaged properties

Stress testing – QCB does it for banks & banks also do on their own & forward to QCB for review

Dashboard on financial stability indicators for the three regulators (under FSRCC)

Financial market infrastructure continuously being strengthened

• To be implemented DSIB charge (Circular in July 2014) - Charges at 0.5-2.5%, to be implemented in a phased manner starting 2016 Counter-cyclical capital buffers – expected in 2016 Enhancement of early warning system

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Growth in Banking Assets

0.0

5.0

10.0

15.0

20.0

25.0

0

200000

400000

600000

800000

1000000

1200000

2010

2011

2012

2013

2014

Jul-1

5

Y-o-

Y (%

)

QR

Mill

ion

Commercial Bank Assets

Asset Size Asset Growth (RHS)

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Performance of Banks

16

0510152025303540

0

1

2

3

4

2010 2011 2012 2013 2014 Jun-15

%

%Soundness Indicators of Banks

Net Profits/Avg. Total Assets NPL Ratio

Regulatory Capital/Risk Weighted Assets (RHS) Liquid Assets/Total Assets (RHS)

VI. Bond Market Development• Auctions of T-bills

91-day: May 2011182-day: August 2011273-day: August 2011

• Auctions of T-bonds & Sukuks3-year: March 2013

5-year: March 2013

7-year: April/June 2014

10-year: September 2015

• Outstanding Amounts T-bills: QR 21 billionIssuances and maturity are now same at QR 4 billion every month

T-bonds & Sukuks: QR 87.8 billion17

Yield Curve

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0.850.870.96

2.25

2.75

3.25

3.75

0.0

1.0

2.0

3.0

4.0

0 1 2 3 4 5 6 7 8 9 10

Yie

ld (%

)

Maturity (Years)

Yields on T-bills and T-bonds

Jan-14 Jun-14 Sep-15

Note: Less than 1 year maturities relate to T-bills.

Market Development Prospects• T-Bills and bonds are listed in the Qatar Stock Exchange for

secondary market trading

• They are also expected to help banks manage their own liquidity.

• T-bond yields, being risk free, can serve as benchmarks for issuancesof other financial products including corporate debt instruments

• Setting up of a Domestic Credit Rating Agency will help indeveloping the corporate debt market

Work is underway at the QCB

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Development of Broader Financial Sector• Qatar Development Bank (QDB): Developing private sector through project

financing, SME financing• Finance Houses (3): Promoting Islamic financing• Investment Companies (2): Offering services like asset management,

investment banking and real estate investment• Exchange Houses (20): Meeting foreign currencies requirement for the

purposes of tourism, education and personal transfers (remittances byexpatriate population).

• Insurance companies (5): Five listed insurance companies regulated by QCB,primarily involved in the non-life segments such as property, casualty, marine,engineering motor and medical insurance.

• Credit Bureau: Established in 2011 and is playing an important role inproviding credit information of customers and helping reduce credit risks andstrengthening soundness of financial system.

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VII. Developing Financial Market Infrastructure • QCB has been consistently bringing about significant improvements in the

financial infrastructure of the country.• The payment and settlement system has been modernized, the governance

system has been streamlined, the liquidity infrastructure upgraded and theregulatory infrastructure strengthened to meet the demands of a modern marketeconomy.

• Liquidity infrastructure is becoming increasingly market-oriented with banksresponding to QCB signals.

• Regulatory and governance infrastructure are being developed in line withinternational best practices. They are being strengthened and modified,consistent with the broad objectives outlined in the NDS 2011-16.

• Developments during 2014 indicate little systemic risks to the payments andsettlement systems in Qatar.

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Financial Market Infrastructure – An Overview • Payment and settlement infrastructureQatar Payment System (QPS): Designed on the concept of RTGS and based on SWIFT network.GCC Net: A single ATM network linking all the GCC National Switches.National ATM & POS Switch (NAPS): Hosts and settles all retail electronic transactions

flowing between local banks.QMR Transactions: Allow member banks to deposit with and borrow from QCB overnight funds.QPAY: Qatar national payment gateway (QPAY) is the consolidated electronic payment gateway

that connects all issuer banks in Qatar centrally with the participating merchants.

• Regulatory infrastructure Strategic Plan for Financial Sector being implemented (jointly by QCB/QFCRA/QFMA)IBAN: International Bank Account Number (IBAN) mandatory in Qatar for processing of

remittance related transactions. QPAY: Implementing one-time password (OTP) on QPAY; Personal Identification Number

(PIN) based authorization for card transactions; Use of Anti-theft technology at ATMsRMB Centre: RMB clearing and settlement centre established in Qatar

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VIII. Current Policy Challenges• Global financial market uncertainties Talk of US interest rate changes

Tightening of external financing conditions due to hardening of interest rates

Implications of slowdown in EMEs

If low oil prices also continue

• Central Bank’s Role in Managing liquidityEnsuring comfortable liquidity in the system

Ensuring stability of domestic interest rates

Maintaining the health of the financial system

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Moderation in Growth of Bank Deposits

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-20.0-10.0

0.010.020.030.040.050.060.070.080.0

2007

2008

2009

2010

2011

2012

2013

2014

Jun-

15

Y-o-

Y (%

)

Customer Deposits

Total Private Public

Volatility in Overnight Rates and Surplus

0.000.501.001.502.002.503.003.504.004.505.00

0.300.380.450.530.600.680.750.830.900.981.05

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5

%%

Policy Rates and Overnight Rates

QMRD Interbank-Overnight

QIBOR-Overnight QMRL/Repo Rate (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

0.00

0.20

0.40

0.60

0.80

1.00

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

QR

Bill

ion

%

Primary Surplus and Overnight Rates

Primary Surplus (RHS) Interbank-OvernightQIBOR-Overnight

25

IX. Outlook

•Carefully watching global developments Possible spillover from changes in US policy rates Low oil prices

•Take appropriate actions, if and when required To maintain monetary and financial stability

• Coordination between monetary and fiscal policy

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Thank You

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