Seeking Alpha

Loans Growth In Qatar Adds 15.20% In August Of 2017

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Includes: QAT, QATAF
by: Alan Longbon
Alan Longbon
Macroeconomics, long/short equity, Deep Value, long-term horizon
Summary

Loans growth in Qatar adds 15.20 percent in August of 2017 and is a healthy increase on past months this year. Sanctions are not dampening credit creation.

Positive fiscal flows add to the stock of funds in the private sector and negative flows take them away.

Overall, the fiscal flows are strong at over 12%.

The recent sanctions controversy has hardly affected the ETF QAT and one could expect a recovery and more growth once the controversy has moved on. Certainly, the stock market has taken the sanctions in its stride.

A positive macro picture for a land one is looking at investing in is a real prerequisite, and the purpose of this report is to assess if Qatar has a positive macro environment within which to invest.

One can summarize the national accounts in the following formulae:

Private Sector [P] = Government Sector [G] + External Sector [X]

and

GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

These are accounting entities and are true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - Banks lend more than is repaid in loans.

  2. Externally from overseas commerce - Exports bring in more than imports cost.

  3. Government spending - More is spent than taxed.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks such as defensive sectors like consumer staples and utilities.

We will look at each inflow in turn and start with the private sector all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

This is the new data we have and can add to our fiscal flow model to see how the economy is tracking.

(Source: The World Bank)

The chart shows that credit growth is very strong at over 15% and the stock of funds is equal to over 79% of GDP. The growth rate in 2016 was higher still at 20%.

The result is stronger than the first part of the year but still down on 2016.

Private credit growth speaks to the optimism of households and businesses spending and investing and expecting to be able to pay back the loan and make more money from investments made with the loan funds.

The recent sanctions on Qatar seem to have had no effect on the private sector wanting to borrow or banks wanting to lend.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

This is the new data that we have, and it shows an improving picture. The current account has not been this good for over five years. Next quarter may well be in plus.

The chart below shows the current account balance. Qatar has a weak current account balance with more funds flowing out than in. This year is looking to be less of a drain than 2016 on overall fiscal flows and may even turn positive overall.

Government Sector

The government budget is shown in the chart below:

(Source: Gulf Times)

The government budget picture is mostly positive with a net injection of funds into the private sector.

The government budget is tracking to be less than for 2016.

Sectoral Analysis Methodology

Each nation state is comprised of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

Qatar has a currency peg against the US$ which limits its fiscal policy space.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector

and

GDP = Private Sector + Government Sector + External Sector

These are accounting entities.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Conclusion, Summary, and Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation

[P]

Government Sector

[G]

External Sector

[X]

TOTAL

[P]+[X]+[G]

2016

15% 9% -5.5% 18.5%

NOW

9.5%

8%

-5%

12.5%

(Source: Trading Economics and Author calculations based on same)

An investor wishing to have exposure to the stock exchange can do so through the following ETFs:

  • iShares MSCI Qatar Capped ETF (QAT)

  • Qatar Investment Fund (OTC:QATAF)

  • Qatar Investment Fund Plc (LON: QIF)

I last looked at Qatar in this article in early June 2017 when it was catapulted into the news by sanctions from the U.S.A and allied Arab nations. Considering the negative news headlines and ongoing controversy, the ETF has remained quite steady. One could imagine that when the controversy has gone away, there could be upside remaining with fiscal flows of over 12% one could consider a speculative buy based on a return to business as usual and a recovery to $19 per share. One can also collect a healthy 3.96% dividend. One for those with strong nerves.

Disclosure: I am/we are long QAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.