LAST spring the IMF made some bold forecasts about the Qatari economy in 1998. Assuming an average crude oil export price of $17.70 a barrel, the fund estimated that Doha would enjoy real growth of 11.5 per cent this year. The oil sector was expected to expand by a whopping 22 per cent; non-oil activity would be up by 6 per cent.

The dramatic expansion would be driven by a surge in oil output of 120,000 barrels a day (b/d). This would contribute to a 15 per cent reduction in the government's foreign debt service ratio, the IMF said. Official external debt would remain unchanged at $2,870 million, but the strong economic performance would cut the ratio of this debt to GDP to

17.9 per cent from 21.2 per cent in 1997.

Twelve months on, the IMF forecasts have turned out to be wildly inaccurate because of the collapse in oil prices. In the first quarter of 1998, Qatari marine crude averaged just $12.40 a barrel, a far cry from the fund's original estimate.

The slump has encouraged local economists to do some rapid calculations of their own. Most concur that Doha will be lucky to achieve growth of 2-3 per cent if oil prices remain at around $13 a barrel for the rest of the year.

Tumbling oil prices have had an immediate impact on government spending plans. In the 1998/99 budget, which was effective from

1 April, capital spending is projected to fall by 35 per cent to QR 1,730 million, while overall expenditure is set to decline by 4.4 per cent.

Despite the cuts, the deficit will grow by almost 10 per cent to QR 3,310 million as a result of a 7.7 per cent drop in revenues. The reduced income figure of QR 12,350 million implies that the government has based the budget on an oil price of $13 a barrel, bankers say.

'The budget comes in the wake of circumstances that have had a great effect on oil prices,' the recently-appointed Finance, Economy & Trade Minister Yousef Hussein Kamal said in his budget statement. 'The government had to plan a budget that would have no effect on the performance of services in a negative way or on the completion of previously planned government projects and with a deficit that would be manageable during the year.'

Nevertheless, the scale of the deficit seems almost certain to prevent the government achieving its target of a balanced budget by 2000, even though actual deficits have tended to come in well below forecasts in the past.

'Realistically, I think we are now looking at 2002 or 2003 for eradicating the deficit. It will only be then that gas revenues of about $2 billion a year will begin to kick in,' says one foreign banker.

Traditionally, the government has drawn on the domestic banks to finance the budget deficit. Latest figures from the Qatar Central Bank (QCB) show that in September of last year, public sector borrowing was running at about QR 12,000 million.

However, alternative financing mechanisms are now being seriously considered. After four years of study, the introduction of treasury instruments seems inevitable following the passage of a new public debt law in early 1998.

For other financing needs - from general expenditure to the funding of its equity participation in new gas-based ventures - the government is looking further afield. There are plans to tap the Eurobond market for the first time with the aim of raising up to $1,000 million. This is part of a government strategy to diversify the sources of borrowing, relying less on the syndicated loans that were previously favoured. The pricing of the bond is also likely to work out cheaper than a conventional syndicated borrowing. The last time Qatar went for a sovereign loan in late 1997, the $200 million facility was priced at about 40 basis points over Libor.

Doha is expected to secure a credit rating for the bond, which will oblige the government to open its books to the critical gaze of the rating agencies. The rating will be the main influence on how the bond is received in the international market. It should also provide a clear and up-to-date indication of how Qatari risk is viewed from abroad, in the light of lower oil prices and the high debt burden.

So far, there has been no sign of a reduction in foreign banks' appetite for Qatari risk. The perception that Qatar is resource-rich but cash-poor still stands. In addition, it is understood that Doha's financing needs are essentially short term and additional funds are only needed to see the country through a transitional phase until substantial gas revenues start to flow in two-three years' time.

A series of separate project financing deals is also due to come to the market in 1998 for new petrochemical and refining capacity. Here, concerns about demand in Asia are likely to have a more direct impact on loan pricing than the present state of the oil market, as the financing will be secured on the basis of future export sales to the Far East.

An estimated $450 million worth of borrowing for the Qatar Vinyl Company (QVC) project will be the first to come forward and much is riding on its reception. QVC financial adviser Societe Generale has opted to divide the borrowing between a bond issue and a long-term loan.

'QVC is one of the strongest projects to have come to the market in recent years. It has strong shareholders, a good financial adviser and healthy projected returns. If for some reason, it doesn't fly, it will have serious implications for other upcoming project financing deals,' says a local banker.

QVC's importance goes far beyond the confines of Qatar. 'We need data points for Gulf financing as a whole, since there has been little in the market in recent months,' says another Doha-based banker. 'QVC should provide that benchmark.'

New opportunities should open up for foreign banks in the next two years. With several projects launched between 1993-95 now on stream or nearing completion of construction, clients are beginning to consider some debt refinancing. The prime candidate is Qatar Liquefied Gas Company (Qatargas), which has borrowed an estimated $3,100 million for its Ras Laffan development. It already operates two liquefied natural gas (LNG) trains, and is commissioning a third.

'Once we have fixed our gas sales pricing mechanism with the Japanese and the interest rates on our borrowings, we will seriously consider refinancing,' says Qatargas managing director Faisal al-Suwaidi. 'We are not under any pressure to refinance, but on a big project like Qatargas, the slightest drop in interest rates and charges has a double or even triple effect. It is very tempting to refinance under today's financial circumstances.'