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Qatar – The fastest growing economy in the Middle East

Tuesday, 16 November 2010 21:40

Recent reports from the IMF and Qatari authorities confirm that Qatar is on track to be the fastest-growing economy in the Middle East, and may be among the fastest in the world, reports Global Arab Network according to OBG.

Qatari officials are well aware though that the broader global economic environment remains volatile and are therefore looking to make adjustments to secure steady growth; a primary part of this will be preventing a sudden surge in interest that could cause the economy to overheat.

The economies of many countries have faced the challenge of a slower than desirable recovery from the downturn of 2008-2009. However, having expanded by 8.6% last year, local officials estimate the Qatari economy will expand by between 16% and 21% this year. The IMF and other agencies support these expectations, with projections of GDP approaching an increase of 18.5%.

The most pertinent issue facing the Qatari economy is volatility in oil and gas prices. Any significant decline in hydrocarbons prices would result in a parallel drop in earnings - the country remains very reliant on these reserves for the bilk of revenue generation. Qatar’s diverse client list includes importers from Western Europe and the Far East, providing some insulation from fluctuations in the hydrocarbons market. However, the market for Qatar’s oil can also change given the macroeconomic factors at play in client’s economies. The nation’s hydrocarbons production is set to peak in 2012, with liquid natural gas output expected to reach 77m tonnes that year.

The impact of future fluctuations, it is hoped, will also be mitigated increasingly by the growing diversity of the economy. While hydrocarbons remain the largest single sector in the economy, there has been a significant shift away from this historic dependence on oil and gas, to the extent that last year the industry contributed only 45% of GDP, down from 60% in the five years up to 2008.

State spending has helped increase the projected growth of GDP, and the focus of the spending is to stimulate the economy within the parameters of broader diversification aims. The government is looking to make investments of more than $123.5bn over the next ten years inside the country, with additional investments abroad also building on the extensive progress already made.

While central banks around the world have been forced to slash interest rates in order to encourage borrowing, Qatar’s reserve bank lowered its base rates in August in an attempt discourage high levels of capital inflow, seen as having the potential to fuel overheating. In mid-October, the central bank said it was essential to manage liquidity and maintain stable conditions in the financial market, with any large interest rate differential between Qatar and advanced economies potentially encouraging these heavy inflows of capital.

In response the bank said it had adopted a “flexible approach in the conduct of monetary policy … complementing it with measures that strengthened financial stability”. Included, a part of this approach was the 50 basis point reduction in its overnight interest rate, which took its key rate to 1.5%, the first cut since May 2008.

There are concerns that inflationary pressure could be fed by this strong growth and rising consumer demand. Recent figures suggest the baseline figure, while not currently rising, could reverse and increase. Data issued by the Qatar Statistics Authority in late October showed that the consumer price index fell by just 0.9% year on year in September, the slowest rate of deflation in 2010 to date.

According to John Sfakianakis, chief economist at Banque Saudi Fransi, while inflation may be negative for the year, due to the strong deflationary trends in the first half of 2010, there will be a flattening out of any pricing troughs.

“Deflation should now begin to bottom out, given that we are seeing two consecutive months of no deflationary trends,” he said in an interview with the Reuters news agency on October 27.

Though price increases may occur in 2011, Qatar’s measured handling of what was the worst economic crisis in 60 years has showcased its strong fiscal management credentials.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Tuesday, 16 November 2010 22:00

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