Special Report Contents

• Qatar: Facing a gas export crunch

• Buildout brings price pressures for Qatar

• Qatar faces a future of cheaper gas

• Qatar Exchange struggles to capitalise on emerging markets boost

• Smart transport systems planned to keep Qatar moving

Qatar’s efforts to create a public-private partnership (PPP) regulatory framework and policy moved a step closer in September, when MEED reported that the Economy and Commerce Ministry received bids for advisory services on its development.

The move is potentially highly significant.

Qatar would not be the first Gulf state to seek to formulate a PPP framework.

But the tentative consideration of PPP provides an indicator that the authorities feel the colossal scale of its spending programme might necessitate the private sector taking up more of the burden in future.

In this context, sweating the cost of its sizeable infrastructure projects over the lifetime of the project, rather than incurring a mighty upfront hit, makes clear sense.

That spending programme will see at least $210bn disbursed on a development programme that is driven largely by the need to execute time sensitive World Cup associated infrastructure developments.

Potential deficit

This commitment has driven capital spending to fresh heights over the past year, contributing to a halving of the fiscal surplus in the year to March 31 2015 (to 8 per cent of GDP), and even suggesting Doha could end up in deficit territory next year.

Ratings agency Standard & Poor’s (S&P) expects the general government balance will fall into a deficit of 4.5 per cent of GDP in 2016, from a modest fiscal surplus in 2015. 

However, there is no sign of an imminent slackening of the pace of project spending.

According to National Bank of Kuwait figures contained in the bank’s Mena economic outlook, last year saw a 30 per cent increase in contract awards to $29b.

By the end of the third quarter this year, approximately $22bn-worth of contracts had been awarded, according to regional projects market tracker MEED Projects. By year end, a further $7bn-worth of awards are scheduled to have been made, leaving the total value of contract awards in Qatar flat with 2014.

The Gulf state has also seen a significant reduction in its planned industrial projects this year.  

In April, MEED reported that the Ras Laffan independent water project had been shelved, with the $6.4bn Al-Karanaa petrochemicals scheme cancelled in January. That cancellation followed the decision not to proceed with the $7.4bn Sejeel petrochemicals complex in September 2014.

If [Doha keeps spending] in the single digits, they could still record a budget surplus

Giyas Gokkent, Institute of International Finance

However, transport schemes and projects associated with the 2022 World Cup are likely to be excluded from any government rationalisation or rescheduling efforts.

The government’s fiscal stance will remain expansive, predict analysts, and capital spending remains a key driver of Qatari economic growth.

“Spending has increased sharply in recent years, in double digit proportions annually,” says Giyas Gokkent, a senior economist at the Institute of International Finance.

“It will still increase and if they keep it in the single digits, they could still record a budget surplus in contrast with Saudi Arabia showing a deficit of 20 per cent of GDP.”

Hinging on oil

Much will depend on what oil prices do.

In the early part of the year, oil prices crept up amid reviving demand. Since May though the price has bounced, averaging some $10-20 a barrel below the estimated $59 a barrel budgeted break-even point.

That has a substantial bearing on the Qatar economy, given that the hydrocarbons sector is responsible for about 55 per cent of Qatar’s GDP, and 90 per cent of government revenues.

The Qataris are fortified by a strong fiscal reserve position, as well as enjoying a second hydrocarbons revenue channel from its natural gas exports.

According to Qatar National Bank (QNB), accumulated current account surpluses over the 2005-14 period reached $315bn.

“If they want to spend more they can, but… in a more measured way, with spending increases at a slower pace”

Giyas Gokkent, Institute of International Finance

Some of these savings were kept in international reserves, while others have been invested abroad through the Qatar Investment Authority.

That leaves Doha in a comfortable position to fund any fiscal shortfalls.

The question is how this will affect state expenditure plans.

2015 numbers

30%

Public debt as percentage of GDP

23.2%

Rise in real estate prices

12.7%

Contraction in public sector deposits

41.7%

Fall in exports

13.6%

Rise in imports

4.7%

Forecast for real GDP growth

“If they want to spend more they can, but they need to do it in a more measured way, with spending increases at a slower pace than previous years, when it was running at about 20 per cent a year,” says Gokkent.

Public debt is low – an estimated 30 per cent of GDP – which leaves plenty of scope for Qatar to raise debt on the international market if it wants to continue with its capital spending drive without burdening the state finances. 

Debt markets

Tapping debt would enable the government to avoid drawing down its assets at the same accelerated rate as some Gulf neighbours.

Lower hydrocarbons prices have contained economic performance, but the massive infrastructure buildout has been compensated by greater economic activity.

Asset prices for example have risen strongly.

Real estate prices rose by 23.2 per cent in the year to June 2015, driven by rising population numbers. The population grew more than 10 per cent in year-on-year terms to 2.12 million over the same period.

NBK says output gains from the non-hydrocarbon sector are broad-based, with construction, financial and government services, and trade and hospitality leading the way with growth of above 10 per cent year-on-year.

But the declining crude oil production – averaging just 664,000 b/d in June – allied to lower prices is is exerting a detrimental impact on economic performance.

Crude oil output is falling due to maturing oilfields, and is on course to decline by 7.3 per cent in 2015 says QNB, which would force the hydrocarbons sector to shrink by half a percentage point this year.

Weaker oil sector growth translates into lower government deposits into the banking system.

Public sector deposits contracted by 12.7 per cent year-on-year in July 2015, notes QNB, ameliorated by higher private sector deposits which grew by 12.5 per cent.

Trade position

The trade position is also affected. The merchandise trade surplus – reflecting the country’s status as both a major exporter of crude oil and natural gas – was down to $3.9bn in July 2015, compared to $8.9bn in July 2014.

Exports fell by 41.7 per cent year-on-year, while imports rose by 13.6 per cent as domestic demand increased. 

That still leaves a respectable real GDP growth rate of 4.7 per cent this year, forecasts QNB, rising to 6.4 per cent in 2016 as the non-hydrocarbon sector remains the engine of economic growth – underpinned by buoyant investment spending.

Other analysts are less optimistic.

S&P, in a rating assessment issued in September, argues that while Qatar’s economy grew by about 6 per cent over the last three years, this is expected to slow to about 4 per cent during 2015-2018. 

Whichever scenario pans out, the explosive GDP growth rates of the mid-2000s will not be repeated.

A period of solid if unspectacular growth, accompanied by a greater focus on fiscal consolidation and better targeted spending may prove to be as favourable an outcome as Doha’s policy makers can dare hope for.