Qatar Makes Sudden Accounting Change Ahead of Bond Sale
October 21 2017 - 8:29AM
Dow Jones News
By Matt Wirz
An abrupt accounting change that nearly doubled Qatar's hard
currency assets this month is drawing investor scrutiny as the
nation prepares for a major bond sale.
Qatar's central bank said it made the shift based on 2016
technical guidance from the International Monetary Fund. Senior IMF
officials were surprised when the Middle East nation implemented
the change almost a year later with no warning but a six-word
announcement, according to people familiar with the matter.
The confusion comes as Qatar is scrambling to shore up its
finances after Saudi Arabia and other Middle Eastern nations
imposed an economic blockade on the country in June. The embargo
was in retaliation for Qatar's ties with Iran and its alleged
support of extremism.
While the accounting change conforms with IMF protocols, Qatar's
central bank made no mention of the impending change when it met
with fund officials in August, and the IMF didn't review the
calculations before they were announced, the people familiar with
the matter said.
How investors perceive this maneuver could affect the price they
are willing to pay for Qatar's new debt, expected to reach the
market by year-end. Stated foreign currency reserves are key for
investors purchasing bonds of most governments and help determine
how high a yield buyers demand.
Despite the boost to stated assets, Qatari bond yields have
risen since the change was announced, reflecting the stress Qatar's
economy has endured under the blockade.
"This may be a buying opportunity," said Markus Schneider, a
London-based economist for asset management firm AllianceBernstein
Holding LP. He said that the country's other assets help mitigate
any concerns about its reserves and that any new Qatari bond likely
will yield more than those of other high-quality sovereign
borrowers in the region.
Qatari bond yields are still relatively low for an
emerging-market country, reflecting the country's vast oil reserves
and attendant wealth. The country also owns large foreign currency
assets via its sovereign-wealth fund, the Qatar Investment
Authority, and Moody's Investors Service estimates governmental
financial assets at $340 billion.
But the yield of Qatar's benchmark bond due 2026 has jumped to
3.54% from around 3.1% in May, while the cost of insuring its bonds
against default has climbed by 70%, according to data from IHS
Markit. Bond yields and the cost of credit default swaps rise when
bond prices fall.
Saudi Arabia's comparable bond traded recently at a yield of
3.4%, compared with 3.38% in June, while the cost of credit default
swaps on the bond has dropped about 9%, according to Markit.
Before the blockade, Qatar calculated hard-currency reserves by
adding up its gold, cash in foreign banks and holdings of foreign
securities, principally U.S. Treasurys. That sum fell by about 44%
to $20 billion in August from $35 billion in May, as the central
bank liquidated most of its foreign securities holdings to bolster
the Qatari banking system.
In September, the central bank published a new set of figures
that included a different category titled "other liquid assets in
foreign currency" and added foreign currency liquidity to its
presentation of reserves. The new assets amounted to $19 billion in
August, boosting the total figure reported to investors to $39
billion for that month.
The central bank explained in a footnote to its most recent
financial report that it made the change to implement
recommendation from IMF technical advisers in November to improve
data dissemination. IMF guidelines allow for mention of other
liquid assets.
Qatar didn't discuss the matter with IMF officials during their
staff mission to Doha in August, and the accounting revision caught
the fund and investors by surprise, the people familiar with the
matter said.
Qatar's finance minister met with bond fund managers in London
on Wednesday to highlight measures taken to strengthen the
country's finances and addressed questions about the accounting
change during his presentation, people in attendance said. The
central bank and the QIA have bolstered the domestic banking system
by shifting billions of dollars of foreign currency into deposits
with local banks, they said.
--Nicolas Parasie contributed to this article.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
October 21, 2017 08:14 ET (12:14 GMT)
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