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Qatar looking for investments in troubled European banks

By Nada Al Rifai
At a time when exiting European investments would seem to be in tune with the series of gloomy events chasing the Eurozone, Qatar has made a series of investments in Europe's banking sector. It is even chasing further deals, according to an official at the Qatar Investment Authority ( QIA ).

On October 7, Belgium's largest bank, KBC Group, sold KBL European Private Bankers to Qatari-backed Luxembourg-based Precision Capital for USD 1.4 billion. The deal is expected to be completed in the first quarter of 2012.

In the same month, French-Belgian bank Dexia agreed to sell its private banking unit for an undisclosed amount to a group of Qatari investors backed by the royal family. Dexia's Turkish unit, Denizbank, is being stalked by Qatar National Bank, which is half owned by the state's sovereign wealth fund.

And at a critical time for Greece, Qatar injected EUR 500 million in the merged entity of Greece's second and third biggest banks, Alpha Bank and Eurobank EFG, in August. This made Qatar a 17% holder of the new entity, which has become the biggest bank in southeastern Europe.  QIA , along with Paramount, an investment vehicle of the royal family, provided the capital.

Despite the fact that many of Europe's banks are still feeling the tremors of the 2008 crisis, and despite the doom and gloom looming over Eurozone countries, Qatar is committed to investing in the European banking sector.

"Europe is not yet finished.  There's still a depth of industry and wealth there, as well as huge political influence," Martin Thomas , Crisis Management Executive and Partner at Al-Khwarizmi Advisory, told Zawya.

The super wealthy emirate has achieved rewarding gains from investing in banks hit by the economic downturn. Qatar saw bargains in many cash-strapped European banks following the onset of the 2008 global financial crisis.

In 2008 and 2009, QIA took a 7% stake in British Barclays, an 8.9% stake in Credit Suisse Group and a 5% share in Spain's Banco Santander's Brazilian unit. Investments in Barclays and Credit Suisse alone generated around USD 2 billion of profit.

In fact, QIA and a member of Qatar's ruling family paid about USD 2.8 billion for British Barclays' stake alone, subsequently reaping a profit of about GBP 600 million on part of it.

However, the outlook for Qatar now differs in many aspects. Although Qatar's fiscal revenue will grow considerably over the next five years, it will be well below the growth rate of the previous five years, according to an EIU report in November 2011. Many analysts believe this will result in a change of investment pattern to short term, small scale investments.

Short Term

During the current global conditions of uncertainty, the ratings for the European banks are extremely short-lived.  So with the haze surrounding the outlook for the European banking sector, Qatar's investments in the sector are expected to be for the short term only.

Ahmad Mohamed Al-Sayed, CEO of Qatar Holding , the investment arm of the state's sovereign wealth fund, told German newspaper Handelsblatt that Qatar's State Fund perceives the "euro crisis as an opportunity for new investments."

In such gloomy conditions, the risk of decreasing oil demand certainly remains in the picture for a country like Qatar, whose budget surplus is highly dependent on revenues from hydrocarbon exports. Large scale long term investments in European banks would be too risky at such dark times for the Eurozone.

However, a large proportion of Qatar's exports are oriented towards Asian emerging economies which are expected to hold up, according to a Samba Financial Group report in November, despite the weak economic conditions for the US and the Eurozone. This provides Qatar with some room to still pursue an increase in its portfolio of foreign investments.



However, rather than long term investments, Qatar is targeting short term commitments. "We can only act on a short-term basis at present; longer-term assessments simply cannot be sustained on account of the precarious situation in Europe and the US. This is why we are keeping a very close eye on the financial markets and trying to mitigate our risks," the Qatar Holding CEO said.

"What we're primarily interested in is our return on investment. That's our key objective. After all, we're investing on behalf of the future generations of our country. Our mandate is to invest government funds in the private sector in order to generate a profit. If, however, this also leads to a meaningful partnership beyond the realm of earnings, all the better. Accordingly, a financial investment may certainly make strategic sense."

Al-Khwarizmi's Thomas told Zawya: "A mix of small strategic investments and perhaps a couple of majors would reap great results.  Look what its involvement with Credit Suisse has done.  There's no reason to think it can't do some of that with other European banks.

Small Scale

With an extremely expansive fiscal policy anticipated for the years ahead, Qatar's cash flow into Europe's banking sector is expected to be lower than the outward cash influx witnessed in 2008 and 2009.

Qatar is currently pursuing ambitious spending programs with large budgeted capital spending.  Rising public infrastructure investment is expected with the execution of the USD 226 billion 2011?16 National Development Strategy (NDS).  The strategy involves large amounts of public spending on infrastructure, education and health. Around USD 16 billion are allocated for "mega projects", according to Samba.





As a range of projects related to the 2022 football World Cup are commissioned, construction is expected to  involve a lot of fiscal spending, particularly in the second half of the 2014-16 period.

There is an additional factor for Qatar's sovereign wealth fund to keep in sight. Qatar has usually used loans and bonds to finance economic development projects, and major Qatari firms have been able to feed refinancing and expansion needs by tapping the credit markets. However, the government would still have to draw on its sovereign wealth fund, in case any of the major projects face financing constraints.

In fact, the high likelihood of support from the Qatari government, in case of need, is a basic positive factor considered in the ratings for Qatar's financing programs developed for the purpose of foreign acquisitions. Qatar National Bank, for example, has developed a Euro Medium Term Note Program with a total amount of USD 7.5 billion, in order to finance its foreign investments.

Costly Decrees

National public sector and military wages and pensions witnessed large increases this year. In an effort by the emirate to maintain political stability and absorb any dormant dissatisfaction with the ruling authorities, Qatar raised the wages and pensions for Qatari citizens employed by the public sector and the military by 50% to 120% in a September 6 royal decree.

Samba roughly estimates that this decree will add USD 2 billion (a bit over 1% of GDP) to the annual wages and salaries bill, with Qatari nationals making up 58% of the work force in government departments. The full effects will not be felt until the 2012/13 budget with perhaps USD 1 billion added to the USD 6.9 billion budgeted for this year (2011/12), Samba noted.

In addition to that decree, the government implemented a cut in corporation tax to 10%, in line with its strategy to globalize its business atmosphere and attract more foreign investment. This cut came as a re-evaluation of the reform measures it adopted during the global recession.

"Given the large percentage of working Qataris, the pay raise decree is simply a ploy to stave off any hint of the Arab Spring dissent. The emirate has also cut the corporate tax because it still wants to attract foreign direct investment, along with its investments abroad. Qatar targets to be a genuine hub to MNCs and to globalize its local business base," said Thomas.

In 2010/11, with the rise in current expenditure and the decrease in tax revenues, Qatar's official budget surplus narrowed sharply to USD 3.7 billion, or 2.7% of GDP, according to EIU. However, most LNG revenue is excluded from the official fiscal account, and if this were to be included, EIU's estimate would be a surplus of 17.6% of GDP.

"Although the emirate's budget surplus in the upcoming years may not be as big as in the previous five years, especially with such decrees, it's still hugely cash rich and its gas reserves are only going to get more valuable," said Thomas.

For the upcoming 2011/12, after taking into account the costs of the salary increase, EIU expects the surplus to widen to 12.5% of GDP, on the narrow official method of recording revenue, owing to increases in oil prices, oil export volumes, tax revenue and investment income from the QIA .

However, for the forecast period 2012-2016, EIU projects the official budget surplus will average to 8.5% of GDP, as the revenue will grow more slowly.



Samba forecasts Qatar's growth to moderate from 2012 onwards. This would mainly be attributed to the shift towards the non?hydrocarbons sectors with the completion of major hydrocarbons projects.  For 2012, it expects real GDP growth at around 5.5%.

Conclusion

"Qatar is really seeking to find a place as the respectable future face of financial probity in the region.  I'd say some well-chosen European investments in small but respectable banks and a couple of big name buys from struggling behemoths could give them just the platform they need to be the banker of choice for the rump empire of the old EU," said Thomas.

EIU predicts income on foreign assets will remain substantial over the next five years for the wealthy emirate, providing a cushion for the public finances if energy prices prove weaker than forecast.

"Qatar will remain plenty rich enough to indulge itself, deal with its expansive fiscal spending and still make some strategic investments in banking,"  said Thomas.

© Zawya 2011