Why Qatar household debt jumps?

Rapid rates of borrowing have led to a large build up in estimated average household debt in Qatar, which jumped to $143,000 in 2013 compared with $40,000 in 2004, a new study has shown.

The estimated household debt-to-income ratio based on the average wage and salary income for the population as a whole stood at 107% last year, said Samba Financial Group in its latest “GCC consumer health check” report.

However, if the ratio is calculated for Qatari households alone, then this drops to 72%. And if estimated income from “transfers and subsidies” are added, then the ratio falls further to 52%, the report said.

According to Samba, Qatar’s sparsely populated economy underwent dramatic changes in recent years as hydrocarbons investments have generated considerable wealth and sucked in expatriate labour.

Given the low starting point, this has generated very rapid annual increases in various indicators, including consumer credit growth, which was running at between 35%-75% (excluding mortgages) during the period of easy credit prior to 2008.

“Similar to the UAE, this breakneck pace of borrowing then came to a crashing halt, and consumer credit actually contracted in 2009.

“Like the UAE, Qatar experienced a major real estate crash, although the authorities stepped in to preclude any debt restructurings as were necessary in Dubai. Since then, strong government intervention and healthy non-oil growth has led to a revival in consumer lending, particularly in 2011 when public sector wages were raised,” Samba said.

In Qatar, the consumer credit limit has been set by the Qatar Central Bank and followed the global credit crisis in 2008. Credit to individuals is capped at 50% of monthly salary and allowances in the country, not to exceed QR2.5mn a person (in the case of nationals).

Following the global credit crisis in 2008 there was a significant tightening in lending standards throughout the GCC (Gulf Co-operation Council), and a general pull back by banks looking to repair their own balance sheets.

This, Samba said, led to a sharp slowdown in previously extremely rapid consumer credit growth in the preceding years despite lower interest rates.

As well as income, credit growth is a very important determinant of household consumption as it commonly finances larger household purchases such as cars and home appliances, and facilitates consumption beyond household incomes.

However, Samba noted that while access to bank credit can help boost household spending, large and growing debt burdens will eventually act as a constraint on consumption, and leave households more exposed to rises in interest rates, and deterioration in economic conditions. Source: Gulf Times