It was inevitable that Qatar would be impacted by the global financial crisis. As one of the world’s leading hydrocarbons producers, the slump in energy demand brought about by the worst recession in more than 50 years was certain to cause oil prices to fall from their historic high of $148 a barrel in July 2008. It was only natural that this would dent Doha’s coffers. And so it did.

Key fact

The International Monetary Fund predicts Qatar’s economy to grow by 18.5 per cent in 2010

Source: MEED

Nominal oil and gas gross domestic product (GDP) declined by about 42 per cent in the second half of 2009, compared with the same period a year earlier, and for the year as a whole, overall GDP was down 15 per cent at $85bn, compared with $100.4bn in 2008. This led to a 7 percentage point reduction in real GDP growth to 9.4 per cent, compared with 16.4 per cent growth in 2008. As a result, government revenues are forecast to have fallen 9 per cent to $32.2bn for the 2009/10 financial year.

Safety net

But Doha’s strategists can afford to consign 2009 to the annals of history as a mere blip in the country’s meteoric economic growth record. First, they know that despite everything, Qatar still ranked as one of the world’s fastest-growing economies in 2009. But more importantly, they also know with near absolute certainty that their hydrocarbons revenues will be far higher for the foreseeable future. The reason being, a decade of investment in building up Qatar’s liquefied natural gas (LNG) infrastructure is set to come to fruition this year.

The government has been focused on trying to stimulate the economy through increased expenditure

Kapil Chadda, HSBC

LNG production capacity at the giant industrial city of Ras Laffan on the northeastern coast of the Qatar peninsula will hit 77 million tonnes a year (t/y) in 2010, a leap of nearly 25 per cent from 62.2 million t/y in 2009, and 95 per cent higher than in 2008. It is estimated that about three quarters of the output is already contracted for export under long-term contracts, and the rest will be sold on the open market.

This year will also see the start-up of the $19bn Pearl gas-to-liquids project, a joint development of the state-owned energy firm Qatar Petroleum and UK/Dutch Shell. It will be the largest such facility in the world with a capacity of 140,000 barrels a day of gas liquids.

Qatar’s growth story is mainly being driven by gas … What will happen once gas production does not keep increasing?

Marios Maratheftis, Standard Chartered

Gas revenues already contribute more than oil to Qatar’s GDP. In the third quarter of 2008, the sector overtook oil for the first time as the largest contributor to GDP, at 30.8 per cent. And gas will continue to dominate the country’s economic landscape in the coming years. Doha is projected to earn more than $59bn from gas exports in 2010, up from $37.3bn in 2009.

The surge in LNG output is expected to bring about a return to double-digit GDP growth in 2010 and 2011, estimated by Qatar’s Central Bank at 18.1 per cent and 13.3 per cent, respectively. The Washington-based International Monetary Fund predicts even higher growth at 18.5 per cent in 2010, and 14.3 per cent in 2011.

Gas revenues*
 (QRbn)  
  2004 2005 2006 2007 2008 2009
 Gas  23.5 34.6 54.6 78.9 97.6 87.5
*contribution to GDP in current prices
Source:Qatar Statistics Authority

The central bank is forecasting nominal GDP for 2010 of $115.9bn, a rise of 36 per cent on 2009. For 2011, its forecast is for a further 16 per cent rise to $134.6bn.

Government revenues are also projected to surge, rising to almost $50bn in 2011, pushing the fiscal surplus from an estimated 2 per cent of GDP in 2009/2010 to 7.4 per cent in 2011/2012. The current account balance is expected to record a similar trend, with surpluses rising back to more than 20 per cent of GDP in 2010-2011.      

Much of Doha’s additional wealth is expected to be channelled into three main areas: To fund infrastructure projects; the activities of the Qatar Foundation for Education, Science and Community Development; and to support the acquisitions of the country’s sovereign wealth fund the Qatar Investment Authority (QIA).

The state has set a budget 25 per cent higher for the 2010-2011 fiscal year, increasing spending to $32.4bn. The enlarged budget stands in stark contrast to the broader global environment where many countries are grappling with sovereign debt problems.  In January this year, Dubai announced a 6 per cent reduction in expenditure for its 2010 budget to $9.64bn, compared with $10.3bn in 2009.

Some 40 per cent of Doha’s budget will be dedicated to infrastructure projects, with expenditure also going to the private sector to create jobs.

“Over the last 18 months, the government has been very focused on trying to stimulate the economy through increased expenditure,” says Kapil Chadda, managing director and head of global banking at HSBC Bank Middle East in Qatar, “Because oil and gas expansion is reaching a plateau, they have diverted their attention to infrastructure, which is in serious need of being upgraded.”

Society

The megaprojects planned or under way in the country include the $11bn New Doha International airport, a $2bn causeway linking Qatar to Bahrain, a $25bn integrated rail network, as well as the New Doha port.

Considerable investment will also be directed into the Qatar Foundation to fund its multifarious activities.

Established in 1995, the foundation is spearheading the country’s drive to become an advanced knowledge-based society by investing in education, healthcare, science and technology.

Its flagship project to date is Education City, a 1,000-hectare campus, which is home to the branch campuses of world-renowned universities, including the US’ Carnegie Mellon
University and Weill Cornell Medical College. The site also accommodates the Qatar Science & Technology Park, a $600m innovation centre where technology can be developed and commercialised.

A research hospital is also under construction at Education City. Scheduled to open in 2012, it will initially house 412 beds, and is being set up with a $7.9bn endowment from Qatar Foundation.

The foundation’s work extends beyond Education City and includes initiatives to reduce youth unemployment in the Middle East and North Africa region, a children’s television channel, a diabetes association and an equestrian centre.

“The foundation is going to require substantial investment,” says Chadda. “I would expect the endowment would need to be about $50bn for what they want to achieve and I estimate they probably have single-digit billions right now.” 

Qatar’s sovereign wealth fund is also expected absorb billions of dollars as it becomes increasingly prominent in the international investment arena. Doha grabbed the spotlight on 8 May this year when Qatar Holding, the QIA’s investment arm, announced it had bought the London department store Harrods for $2bn.

Two days later, Qatar Holding set up a $1bn fund to invest in infrastructure and natural resources in Indonesia. Previously, it injected $5.3bn into the Qatar’s banking sector by acquiring 5 per cent stakes in seven of the nine local banks.

Aside from being able to draw on its growing hydrocarbon income to fund such projects, the government also has access to about $10bn in funds raised through sovereign bond issues during 2009, giving it deep pockets with which to pursue its development and diversification agenda in the coming years. Such projects are essential to ensure the long-term future of the country.

“The problem is Qatar’s growth story is mainly being driven by gas,” says Marios Maratheftis, regional head of research at Standard Chartered bank in Dubai.

“And the question that needs to be addressed is what will happen to its economic performance once gas production does not keep increasing year after year? I would expect growth dynamics to slow down significantly from 2011 onwards.”

Although Qatar sits on the world’s third-largest gas reserves after Russia and Iran, simply continuing to build more LNG trains is not a sustainable solution. Furthermore, global demand for gas cannot be taken for granted as the drop in consumption during the recent recession demonstrates. Likewise, the surprise increase in US domestic gas production this year that has resulted in Qatar gas intended for the US being diverted to Europe.

Certainly what the country has achieved in the sector is nothing short of impressive, given that it only began LNG exports in 1997. But as Doha is acutely aware, in the long-term other sectors need to start driving economic growth. But with its investments in Qatar Foundation and the QIA, the country is heading in the right direction.