Doha economy continues to shine

27 October 2009

Qatar is forecast to be the world’s fastest-growing economy this year, driven by strong sales of liquefied natural gas

Widely anticipated to be the world’s fastest-growing economy in 2009, Qatar has continued to record impressive growth despite the global economic downturn.

In the middle of the financial troubles that have descended on the Gulf region since late 2008, Qatar has emerged as the region’s bright star. While the other GCC states are all expected to post contractions in their economies this year, the International Monetary Fund (IMF) predicted in October that Doha’s real gross domestic product (GDP) will grow by 11.5 per cent in 2009, compared with 16.4 per cent growth in 2008.

Regional banks have been more conservative in their forecasts, predicting an average of 9 per cent real GDP growth. Meanwhile, Qatar National Bank, the largest bank in the country, with 40 per cent of  all Qatari banking sector assets, is forecasting 6 per cent GDP growth.

Although Qatar’s growth has slowed this year, its performance remains impressive given the prevailing financial climate. For example, the Saudi and UAE economies are predicted to have shrunk by 0.9 per cent and 0.2 per cent in 2009 respectively.

Steady revenues

The main driver behind this growth is Qatar’s systematic exploitation of its gas reserves, the world’s third largest after Russia and Iran. Today, Qatar is the world’s largest exporter of liquefied natural gas (LNG).

In 2008, Qatar’s economy reached a significant milestone when the gas sector overtook oil as the largest contributor to GDP, at 30.8 per cent, accounting for QR112.6bn of overall GDP, compared with QR100.2bn from the oil sector.

Doha has been investing heavily in its gas sector, having started exports in 1997, with capacity forecast to nearly double from 43 million tonnes a year (t/y) in April 2009 to 77 million t/y by 2010-11. 

While Doha’s oil-dependent neighbours have been hit hard by the oil price volatility in the spot market, where producers make one-off sales priced on the day, Qatar has benefited from the fact that about 75 per cent of its LNG exports are sold under long-term contracts that offer guaranteed revenue streams. 

 “Only around 25 per cent of Qatar’s LNG is sold on the spot market, which gives it a distinct advantage over an economy like Saudi Arabia,” says Kapil Chadda, head of global banking for HSBC Bank Middle East in Qatar.

Furthermore, unlike oil, gas exports are not subject to Opec production quotas, which constrain the hydrocarbons production of other GCC states. Consequently, Qatar’s combined crude oil and natural gas liquids output of 1.4 million barrels a day (b/d) is higher so far this year than it was in 2008. These export receipts of almost $50bn, which contributed to a state budget surplus of $12bn in 2008, have enabled the government to continue to pursue an expansionary fiscal policy during the ongoing slowdown, and inject cash into public projects to stimulate the economy.

Key facts

  • 30.8 per cent - Gas sector contribution to Qatar’s gross domestic product in 2008
  • QR426bn - Total value of Qatari banks’ assets in August 2009
  • 11.5 per cent - Predicted growth in Qatar’s gross domestic product in 2009

Sources: International Monetary Fund; Qatar Central Bank

Doha has adopted a multi-pronged strategy to shore up its banking system, marking it out as arguably the most interventionist government in the region.

The government was spurred into action in February 2009, when ratings agency Moody’s Investors Service changed its credit outlook on Qatar’s banking sector from stable to negative.

The rating reflected the impact of the global economic slowdown on the banking sector, which was suffering from a rapid drying up of liquidity, falling share prices, plummeting property prices and rising bad debts.

The same month, the sovereign wealth fund Qatar Investment Authority (QIA) injected $5.3bn into the banking sector by acquiring 5 per cent stakes in seven of the nine Qatari banks listed on the Qatar Exchange. The QIA is now considering increasing its equity stake to 10 per cent by the end of the year.

In March, Qatar Central Bank (QCB) announced it was buying some of the banks’ equity portfolios, provided they were invested in listed Qatari companies.

This helped free up capital for finance houses, reducing selling pressures in the stock market. Finally, in May, the QCB announced a further $4.1bn package for buying the banks’ real estate portfolios. This support has enabled Qatari banks to continue strong growth in 2009, with assets rising in value by 5.2 per cent from QR405.5bn at the end of 2008 to QR426.5bn at the end of August this year.

Meanwhile, customer deposits grew by 10.7 per cent from QR212.5bn to QR235.2bn over the same period.

However, while growth has been recorded in both assets and deposits, Qatari banks have experienced an erosion of profitability as a result of lower fee income and a rise in provisions against bad debts. For example, non-performing loans at QNB have risen by 333 per cent from QR50m in the first nine months of 2008 to QR215m for the corresponding period this year. QNB posted a net profit of QR1,059m in the third quarter this year, a decline of 7.5 per cent compared with the same quarter in 2008.

Meanwhile, Qatar Islamic Bank, the state’s second-biggest lender by market value, reported a 53 per cent year-on-year fall in profits to QR187.35m in the third quarter of 2009.

Hidden benefits

Banking analysts predict further asset-quality deterioration as a result of increasing non-performing loans, which are expected to peak towards the end of this year or in the first quarter of 2010.

Although banks recorded consumer lending growth of 3.4 per cent in the first nine months of this year, the tightened financial markets have resulted in a credit squeeze for the private sector.

The ongoing global economic turmoil has also halted the property boom in the country. Land prices have dropped by nearly 30 per cent within Doha city centre, while rates in the suburbs are estimated to have declined even faster, at about 45 per cent.

However, many observers have welcomed the cooling down in the real estate market, citing soaring rents as contributing to the high inflation rates in the country last year, which peaked at 15 per cent.

Qatar’s Planning Council reported a 154 per cent increase in housing rents between 2005 and 2007.

“Inflationary pressures were a key concern in the region, and so was the existence of asset bubbles, especially in real estate,” says Marios Maratheftis, regional head of research at the UK’s Standard Chartered Bank. “The real estate sector has been the hardest hit [of all the economic sectors] in Qatar, and that has been mainly because of the excessive speculation in the sector during 2008.”

Chadda says the current correction is proving beneficial in some respects. “The slowdown has been very beneficial in helping to iron out the kinks in the system such as the infrastructure bottlenecks and manpower issues,” he says.

Qatar has used its abundant oil wealth to launch large projects in a variety of industries over the past few years as part of ongoing efforts to diversify the economy.

The hydrocarbons sector accounted for 65 per cent of real GDP and more than 90 per cent of exports in 2008, but the government has set itself the target of reducing this to 50 per cent by 2030. 

The government’s stimulus packages this year and growing gas export receipts have helped to enliven the non-hydrocarbons sector and offset the sharp slowdown in private sector activity, which has slowed due to the lack of bank finance available to fund it.

QNB data shows that Qatar’s non-oil-and-gas sectors posted 19.9 per cent growth in the first quarter of this year compared with 2008.

According to regional projects tracker MEED projects, there are currently $216bn worth of projects either planned or under way in Qatar, but Chadda says there has been a slowdown in the market.

“Any projects that were still on paper and for which the financing had not yet been raised have been put on hold,” says Chadda. “But projects that had already been committed to have continued as planned, although the pace at which they have been rolled out has slowed down.” 

Landmark projects such as the multi-billion-dollar Qatar-Bahrain causeway have continued to be developed, and in early September, Qatargas announced that its fifth 7.8 million-tonne-a-year (t/y) LNG train had started production. Train 5 is a joint venture of state-run oil company Qatar Petroleum, which holds a 65 per cent stake in the scheme, the US’ ExxonMobil Corporation, with an 18.3 per cent stake, and France’s Total, which holds the remaining 16.7 per cent.

Despite the difficulties it has faced this year, Qatar continues to have strong domestic and foreign assets, and a strong economic outlook driven largely by its investment in the LNG industry.

Given that Qatar only started producing LNG in 1996 and is now the largest exporter of it in the world, the growth of the industry has been remarkable.

Qatari bankers are confident about Doha’s future economic performance. “Size matters,” says Chadda. “Being a reasonably small economy, the stimulus packages introduced in Qatar have had more impact than they have had in larger countries such as Saudi Arabia.”

Inflation in Qatar is expected to ease to an average of 9 per cent in 2009 on the back of a global decline in commodity prices and a cooling down in rental prices, which will contribute to ensuring Doha achieves good GDP growth this year.

“I expect Qatar to be the fastest-growing economy in the world this year and next, growing by 8.5 per cent in 2009 and 9.5 per cent in 2010,” says Maratheftis.

Assuming a recovery in oil prices, QNB is forecasting a considerably more optimistic 18.5 per cent increase in real GDP growth in 2010. 

With the possible exception of Dubai, no other regional economy experienced the 2003-08 boom as strongly as Qatar, with GDP increasing by almost 300 per cent over the six-year period.

A key challenge for the government going forward will be managing the rate of economic expansion in a way that avoids future overheating and the risk of further potentially painful corrections.

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