World Cup Borrowing Binge Leaves Qatar’s Banks Grappling With Losses

It’s been almost two years since Qatar hosted the World Cup and the euphoria is fading as state-backed lenders that helped finance everything from highways and hotels to stadiums and sewage systems grapple with rising loan losses.

The Qatari government is now considering ways to shore up these banks’ balance sheets، according to people familiar with the matter، who asked not to be named discussing confidential information. The options on the table include hiring restructuring advisers، stepping in to buy struggling real estate portfolios from banks stung by defaults or forcing smaller lenders to merge.

Qatari banks

The gas-rich government has never let a Qatari bank fail، but the price this time may include placing limits on the $510 billion sovereign wealth fund just as its global profile reaches new heights. The government could cap payments from its budget surplus to the Qatar Investment Authority to help fund any help for the banks، according to separate people familiar with the matter.

“The state of Qatar’s economy is strong and well-positioned for the future، and this includes the banking sector،” Qatar’s International Media Office said in a statement، while declining to comment on the government’s specific considerations. “The average ratio of non-performing loans has remained within the expected range since Qatar hosted the World Cup in 2022.”

Deliberations are at an early stage and it’s unclear what measure، if any، the government will ultimately take، the people said. A representative for the QIA declined to comment.

Qatar shocked the world when it won the rights to host the 2022 World Cup back in 2010. The tiny country is smaller than the state of Connecticut، occupying just 4،500 square miles on a peninsula that juts into the Persian Gulf.

Gas wealth 

But a plethora of gas wealth — the nation is setting itself up to control about a quarter of all liquefied natural gas by the end of the decade — has given it outsize influence on the world stage. A global negotiator، the US has praised Qatar in recent months for being a key mediator between Israel and Hamas and helping get some hostages held by the group in Gaza released.

Much of that influence started to build in the run up to the 2022 World Cup. The final tab for the games was about $300 billion، as Qatar constructed a whole network of highways as well as a brand-new public transit system to connect the seven stadiums it built to host the games. Developers erected towering luxury hotels to house the influx of visitors. Officials even had to start an overhaul of the country’s sewage systems to handle the 1.2 million fans estimated to come through for the monthlong event. 

The government relied on hundreds of property developers and construction firms for the work. They، in turn، racked up big bills along the way، leaning on local lenders to finance the projects.  

While officials have attracted a steady stream of events since then، Qatar’s revenue per available hotel room، a key measure of profitability for the hospitality industry، plummeted last year as an oversupply of hotel rooms roils the country’s tourism industry and the country wasn’t able to top the hoards of tourists it brought in for the games. 

Some construction firms have turned to the arbitration system complaining that they’ve struggled to collect payments from the government. 

Payments for the World Cup

“Payments for all World Cup projects have been made on schedule، except in a small number of cases tied to reasons such as outstanding performance issues and commercial disputes،” Qatar’s International Media Office said in the statement. 

It’s an unusual situation. Qatar ranks as one of the richest countries in the world on a per capita basis، and it’s currently developing a new liquefied natural gas project that is expected to increase the government’s annual revenue by about $31 billion. Soaring energy revenues already handed Qatar a budget surplus of 43.1 billion riyals ($11.8 billion) in 2023، further boosting the fortunes of the country.

“Over the last five to six years، we have seen a growing trend of arbitration work in Qatar،” said Paul Prescott، a partner at the law firm Dentons، who specializes in construction and dispute resolution in the Middle East. “We have seen several heavyweight construction and engineering disputes resolved by arbitration including those between tier 1 contractors and its supply chain.”

Overcapacity Problems

Taken together، it’s all left many firms unable to keep up with their borrowings، the people familiar with the matter said. About 3.5% of Qatari banks’ loans were considered problem loans at the end of the first quarter، up from 2.6% just two years ago، according to Bloomberg Intelligence. For their peers across the Middle East، that ratio has dropped by about 100 basis points during that time to 2.95%، the data show. 

Commercial Bank PSQC has already begun trying to auction off some of its distressed real estate assets، according to some of the people familiar with the matter.

“Weakening loan performance is largely due to overcapacity in the real estate sector — shopping malls and office buildings — and in the service sector — mainly hotels،” Moody’s analysts led by Francesca Paolino said in a report. “Payment delays in the contracting segment، as well as current high interest rates have also contributed.”

In addition to Commercial Bank، mid-sized banks including Doha Bank QPSC، Qatar Islamic Bank SAQ and Masraf Al Rayan QSC have designated an increasing number of loans as Stage 2، which is reserved for those borrowings that carry an increased credit risk.

A spokesperson for Doha Bank declined to comment، while representatives for the other three banks did not respond to requests for comment.

Loans mounting

With bad loans mounting at these banks، investors have punished their share prices. That’s led to a rout that’s left Qatar with one of the worst performing stock markets. 

To be sure، at least one bank has started discussions with the Qatar Central Bank to move some of the assets it’s classified as Stage 2 back into Stage 1 — the category for performing loans — after seeing signs that the borrowers’ financial health had improved.

“We have requested approvals from QCB because a lot of them are fairly decent performing،” Gourang Hemani، chief financial officer at Qatar Islamic Bank، told investors on a conference call in April. “However QCB، as we all know، is a very extremely conservative regulator and they want to see a much longer period before which they will allow any upgrades from Stage 2 to Stage 1.”

The QCB and individual banks conduct regular stress tests to ensure that banks’ can meet the central bank’s capital and liquidity requirements “even under the most extreme conditions،” Qatar’s International Media Office said in the statement. 

As the Qatari government deliberates possible solutions to the problem of rising losses on banks’ balance sheets، it’s considering using a playbook it last used in the depths of the global financial crisis. In 2009، the government offered to purchase about $4.1 billion of real estate portfolios from local banks as it sought to support the sector.

Back then، the government also purchased about $6 billion worth of listed shares held within the investment portfolios of the local Qatari banks. 

The nation is now the biggest shareholder in some local lenders، including Qatar Islamic Bank، Commercial Bank and Doha Bank. It’s also a major shareholder in Qatar National Bank.

Government support

“Qatari banks benefit from a very high probability of government support in a crisis،” Paolino said in the Moody’s report in March، adding that the country’s “strong willingness to provide a backstop is shown by the pre-emptive support it has extended to the banks in times of stress and the fact that it has never let a domestic bank default on its debt or deposit obligations.”

Masraf Al Rayan and Doha Bank would likely be the biggest beneficiaries of any government support، analysts at HSBC Holdings Plc said in a note to clients earlier this year. The analysts estimated the government would need to buy about $13 billion of real estate in order to help the sector.

“Needless to say، such support measures would act as a positive catalyst for the sector،” the HSBC analysts said in the note to clients seen by Bloomberg، which was originally published in February. 

For now، many Qatari officials are focused on organizing a busy calendar of sports، art، design and fashion events as part of the push to reach its target of 6 million international visitors annually by 2030، almost three times the number it had in 2019. This year has started strong، with Doha clocking 700،000 visitors in January as it hosted the AFC Asian Cup soccer tournament.

“It seems to have picked up a little bit،” Alexis Neeson، group chief risk officer at Masraf Al Rayan، told investors in April. “There’s definitely a feeling that there is a bit of improvement in the hospitality sector. Whether that translates all the way through to a complete recovery — we’ll see.”