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Economics & Development | Global Arab Network
Qatar stands firm in the face of global financial storm
Global Arab Network - Moin Siddiqi
Wednesday, 08 July 2009 18:29
Very few emerging market economies can match Qatar’s proved record of stellar growth in the past decade. Published country data tells the story of prudent managed economy and shrewd forward investment planning.

The rapid development and monetisation of vast gas reserves supported by outward oriented strategy, fiscal probity and good governance have made Qatar a buoyant ‘super state’ with highly sophisticated infrastructure and whose per capita income now ranks second highest in the world after Luxembourg (European Union country). The 2008 Human Development Index puts Qatar’s GDP per capita on purchasing power parity (PPP) basis at $72,969 per annum.

A small indigenous population also enjoys access to generous welfare services. 
The UK’s Standard Chartered Bank Qatar 2020 Report stated: “Qatar has become the most dynamic economy of the Gulf states. The economy has been transformed over the last decade by astute government policy, rebounding energy prices and the meteoric growth of liquefied natural gas exports.”

Predictably, Doha has absorbed well effects of credit crunches. Thus, vital liquefied natural gas (LNG) projects and an estimated $100bn construction boom have not been derailed by credit squeeze like elsewhere. The International Monetary Fund (IMF) in 2009 Article 1V consultations praised the Qatari authorities for sustained robust macroeconomic performance, which has strengthened the economy’s resilience to global downturn.

The Fund noted that sound macro-policies are supporting investment and exports, resulting in double-digit growth in both the hydrocarbon and non-hydrocarbon sectors and yawning ‘twin surpluses’ (the government budget and balance of payments), which leave Qatar well placed to withstand exogenous shocks, including weak energy prices.

While the Arab Gulf neighbours may [at best] record feeble growth, Doha is powering ahead spurred by expansions in oil and LNG production, combined with brisk growth in manufacturing, construction, and financial services. Standard Chartered remarked: “The big pick-up in gas exports is the saving grace for Qatar. To be nearing 9% GDP growth forecast for 2009 in this economic environment is quite amazing.” Qatar National Bank (QNB), the emirate’s No.1 lender, also envisages real GDP growth at 11% this year and reaching 21.5% by 2010. Indeed, output growth could exceed regional average by as much as five times. The banking giant HSBC agrees by saying: “The projects [gas-based] coming to fruition this year will keep growth high and consolidate Qatar’s position as a leading supplier of LNG.”

Recent pace of expansion is stunning by any yardstick. Between 2004 and 2008, nominal GDP growth averaged 37% per annum, meaning that in five years GDP jumped more than three-fold to $102.3bn (see Table), according to the IMF’s estimates. Last year alone, economic output before inflation was taken into account surged by whopping 44% (among the world’s highest growth rate). However, sustained era of exceptional growth creates strains on the system. This is reflected in supply-side bottlenecks (chiefly housing and human resources) and management control. At 15% in 2008, Qatar’s inflation rate was the highest among Gulf Cooperation Council (GCC) countries, with rent and food prices being major contributors.

The emirate is not completely immune from external contagions. General risk aversion is evident in lower non-oil growth and subdued corporate earnings. Concurrently, the Doha Securities Market 20 Index is down two-thirds from its June 2008 peak. While private sector credit, which grew at 53% year-on-year during 2006-08, has also fallen sharply in recent months. However, potential risk appears manageable, because the banking sector is well capitalized, and the Qatar Investment Authority (QIA) can diversify its portfolio by investing in local projects. Qatari banks comply with Basel 11 guidelines for capital adequacy requirements. Moreover, the direct impact on banks of plunging equity prices is minimal thanks to ceilings on exposure to the stock market.

The growing prosperity owes much to economic diversification, which aims to exploit comparative edge in hydrocarbons and more importantly, building a knowledge-based economy for future generations. Qatar has successfully diversified thanks to ‘two-pronged’ strategy. Firstly, it focused on energy-intensive downstream sector by exploiting the North Field (the world’s largest non-associated gasfield) for the production of LNG, which sky-rocked from 4m tonnes back in 1997 to 35m tonnes in 2008 and projected to reach 77.4m tonnes by 2011. Qatar will account for 25-30% of global LNG supply within two years.

Steel making, petrochemicals and gas to liquids (GTLs) facilities have also enhanced Qatar’s productive capacity and non-oil exports. QNB said, “Ten years ago there was only oil. Now there is piped gas, LNG, petrochemicals and GTL.” Royal Dutch Shell in partnership with state-owned Qatar Petroleum is building the 140,000 barrels a day Pearl GTLs plant costing $18bn. The dependence of GDP on petroleum has declined, from over 60% in 2003 to around 52% in 2008, reflecting the ongoing diversification drive. Doha wants to reduce the contribution of hydrocarbons to state revenues from presently three-fifths of aggregate to just one-quarter by 2015.

The second element of diversification policy involves supporting ‘value-added’ projects in information, communication technology (ITC), higher education, financial, tourism, cultural, private healthcare and environmental services, among others. The main goals are to enhance society’s well being through human resource development and job creation, as well as attracting private investment beyond big-ticket oil/gas and petrochemicals projects. As one official put it: “We want projects that add value to the economy and to society.”

The continuing development of newly mega projects such as Qatar Science and Technology Park, Education City, Qatar Financial Centre and Energy City, should help improve future capabilities and attract foreign companies. Also, Qatar wants to capture large share of regional tourism trade by investing some $17bn over the next five years.

In fact, Qatar is among rare markets where contractors can still expect new work. The government has pledged to implement committed investments in both hydrocarbon and non-hydrocarbon sectors, which will sustain fiscal expansion.
Manufacturing (aluminum, steel, power, water, petrochemicals), transportation (airways), building and construction (Lusail, Pearl, Barwa), and other infrastructure projects (ports and new airport), for which financing has already been secured would continue. QNB explained: “There will be some drop-off in the timing of when projects come online but the general consensus is that major projects will go ahead, and of course many of them are already well under way.”
The planned Qatar-Bahrain causeway will be the longest bridge in the world. 

Inward foreign direct investment (FDI) is key to diversifying into non-energy intensive sectors, which require significant foreign expertise. Khaled Alderbesti, senior official at the Ministry of Economy and Commerce, said: “We don’t need it [FDI] for the money, although capital is always welcome. We want the transfer of systematic know-how. Local companies can bring in individuals, but companies bring institutional knowledge and that is the biggest plus.” Qatar is keen to attract foreign investors in consultancy, banking, tourism and ITC.

The emirate plans to raise further $70bn to fund its expansion ambitions. The latest $3bn sovereign bond issue rated Aa2 by Moody’s Investor Services was well received by global investors. “Qatar’s Aa2 issuer rating was supported by the country’s high level of prosperity, wide external current account surplus, strong balance sheet and the rapid expansion of gas exports that will significantly boost government revenues over the coming years,” Moody’s confirmed. Doha is seeking $55bn in syndicated loans and $15bn in bonds over the medium-term. Presently, there is no country-risk given Doha’s large net creditor position, but the authorities should oversee debt build-up by forming a dedicated monitoring unit and maintaining a regulatory oversight, the IMF advised. Total debt has soared by 300% from $15bn in 2004 to $61bn in 2008.

Qatar’s medium-term outlook is bullish, with continuing brisk growth, gradually declining inflation, and the twin surpluses – albeit at lower levels. By contrast, it suffered from chronic deficits throughout much of the 1990s. The Qatar Financial Center Regulatory Authority projects real GDP growth in 2010 at 23.8%, with inflation easing to 8.1% thanks to freeze on rent hikes and price controls on basic commodities and raw materials. Domestic interest rates are broadly linked to the US’s Federal Funds rate (currently 0.25%), and therefore, real deposit and lending rates will remain negative in the near-term.

The IMF is forecasting an average annual growth rate of 17% between 2010 and 2013, with nominal GDP poised to surge from an expected QR546.47bn ($150bn) in 2010 to QR761.94bn ($209bn) by 2013. The major contributing factors are doubling of gas-based exports and (related industries), coupled with increases in knowledge-based sectors associated with the Qatar Foundation. Financial services, construction, manufacturing, transportation and telecoms are all likely to maintain their robust expansions going forward. The key word here is economic diversification and fostering the growth of higher value-added sectors.

The abundance of industrial projects in the pipeline will underpin economic activity. Doha has committed investments of $150bn until 2012, of which $100bn is in the hydrocarbon and related downstream sectors. Youssef Kamal, the Finance Minister and chairman of the Qatar Financial Centre (QFC), boasted:  “Everything we have will be double.” Adding: “By 2012, our energy production from all sources will be the equivalent of six million bpd,” From 2012, export receipts from natural gas will replace crude oil as the major government earner.

The IMF, however, believes the key challenges facing the authorities are to lower high inflation rate, continue to shield the economy from regional growth slowdown and reduce overly reliant on hydrocarbon production and exports.

With expected recovery in world energy markets in 2010 and beyond, Qatar is strongly placed to benefit from increased economic activity, thereby recording double-digit growth into the next decade. In sum, Doha provides a worthy example of competent resource management and financial prosperity for those
energy-rich but poorly governed countries where citizens have not benefited from oil-price boom of recent years, hence the risk of political instability.

Global Arab Network

MOIN SIDDIQI, Economist, This report was first published in The MiddleEast magazine

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