For many government policymakers, 2012 will be a year of intense challenges. Slow credit growth, stagnant economies, rising budget deficits and high borrowing costs will all be weighing on the minds of finance ministers and central bank governors in much of the developed world.

For Sheikh Abdullah bin Saud al-Thani, governor of the Qatar Central Bank (QCB), the situation could not be any more different. Qatar’s remarkable growth over the past few years on the back of a resource boom has seen the tiny peninsula off the coast of Saudi Arabia transform itself into one of the world’s richest countries on a per capita basis.

Income from the sale of gas has left the state with surplus liquidity, and its successful bid for the 2022 Fifa World Cup means the country’s infrastructure development plans are being fast-tracked.

Qatar concerns over eurozone debt

While many other nations continue to grapple with faltering economies, Qatar’s economic slowdown will be entirely as a result of an end to increases in gas production. While the country’s economy is still expected to grow by about 5 per cent in 2012, Al-Thani is not resting on any assumptions about Qatar being isolated from the eurozone debt crisis just because of its own strong fiscal position.

“The current problems in the eurozone could create funding challenges for domestic banks,” he says. “The increased global risk aversion could also have an impact on the financing of ongoing investment projects.”

Fortunately for Qatar, only a few projects are expected to require large long-term loans. Most of the schemes being developed will be financed directly by the government, meaning the only financing required will be contractor funding. This will be required for contractors who win work from the government and have to supply performance bonds and other forms of surety. Altogether, the bonding requirements of a successful contractor could add up to around 30 per cent of the value of a contract. How much of a strain this will put on the banking system, considering that about $70bn of infrastructure is expected to be developed over the next decade, is still uncertain.

The current problems in the eurozone could create funding challenges for domestic banks

Sheikh Abdullah bin Saud al-Thani, Qatar Central Bank

Al-Thani says the local banks are at work expanding their capital bases and preparing for construction schemes required for the World Cup. The QCB is also making sure it is prepared for the massive development ahead. “Our banks are continuously expanding their outreach, while at the same time improving their risk management skills, in order to finance upcoming projects,” says Al-Thani. “As a central bank, we have been fine-tuning our regulatory and supervisory approaches with a macro-prudential focus so as to comprehensively monitor and manage systemic risks.”

Qatar’s banking sector is dominated by Qatar National Bank (QNB), which accounts for about 48 per cent of overall profits generated in the sector, nearly 52 per cent of all loans and advances, and 50 per cent of banking assets. It is also one of the largest banks in the Middle East.

Smaller banks, which account for the remaining share of the market, are looking to expand their capabilities to finance Qatar’s infrastructure plans through rights issues and bond deals.

To date, they have shown little sign of needing to slow down their lending. Credit growth in 2011 was 28.2 per cent, mostly driven by loans to the public sector. In the private sector, loan growth was driven by two sectors – real estate and consumption – up 33 per cent and 20 per cent respectively.

The increasing availability of credit in the real estate market has once again raised concerns about the sector’s long-term sustainability. However, Al-Thani remains unconcerned. “We don’t want to have bottlenecks in the supply of real estate, so some growth is better than none,” he says.

Qatari banks have already been bailed out once by the government for their real estate exposure. In June 2009, Doha announced it would spend QR15bn buying up the real estate portfolios of Qatari banks, enabling them to avoid having to account for their fall in value.

Credit growth is expected to slow in 2012 from the elevated levels of 2011. “With real GDP growth projected to be moderate in 2012, it seems likely that overall credit growth will be lower than in 2011,” says Al-Thani. “A pick up in private sector credit demand appears likely.”

Qatari banks are fairly liquid at present, although mainly in the local currency. Bank reserves at the QCB reached QR83.6bn at the end of 2010, and have since fallen to QR22.6bn at the end of November 2011. Al-Thani says this is largely because the QCB was mopping up excess liquidity during the financial crisis in order to sterilise inflationary pressures from excessive money supply growth. Now the economy is showing fewer signs of overheating, and local banks are less nervous about the financial crisis, QCB reserves are in decline.

QCB has also been working with the Qatar Exchange to help develop the domestic market for treasury bills. In January 2011, the QCB issued QR50bn in bonds and sukuk (Islamic bond) to local lenders. The primary aim was to set a benchmark for government debt in the secondary market, beginning the process of creating a yield curve for other Qatari firms to price their own debt issues. Al-Thani says the bonds and future issues, will also give the QCB an additional tool for managing liquidity and inflation.

New regulations for Qatar’s banking sector

QCB issues required new regulations to be written. Further work is now under way for regulations that permit local corporate to issue bonds. Al-Thani says talks are underway to encourage small and medium-sized enterprises (SMEs) to list on the stock exchange to boost diversification in the capital markets.

The main area of concern for Qatar in the short-term will be what impact the eurozone crisis has on its domestic banking sector. So far, Al-Thani says, Qatar has not felt any knock-on effects from the problems in Europe.

The proportion of foreign bank funding in Qatar remains high. If domestic debt issues become the primary concern of European banks, it could create issues for Qatar. Al-Thani remains unconcerned by this scenario. Several other local banks say they also expect the banking sector to remain largely unaffected by the crisis.

Closer to home, Al-Thani says the establishment of a local credit bureau will help banks better price risk. New rules that put a cap on lending rates and indebtedness will also prevent “future increases in delinquent loans”, he says, by limiting the accumulation of household debt.

Rules that have forced conventional banks to get out of the Islamic banking business are also intended to improve the resilience in the sector, even though these rules may have proven unpopular with the banks.

With such a huge development programme planned, and plenty of financial liquidity, these measures may prove critical in stemming the need for another massive bailout of Qatari banks in the future.