The global financial crisis is highlighting the fundamental strengths of the Qatari economy. At a time when the world’s developed economies are suffering major slowdowns, the majority of economists’ forecasts for Qatar’s 2009 gross domestic product (GDP) hover around the 9 per cent growth mark, making it one of the fastest growing economies in the world.
Qatar’s predicted growth far outstrips that of the rest of the GCC region, which, with an average 2 per cent GDP growth for 2009, has nonetheless been lauded as one of the strongest performing regions in the world.
In spite of the global downturn, Qatar’s expansion this year will not be far behind the average 11 per cent GDP growth it has achieved over the five years to 2008. Qatar’s economy registered an astonishing growth of almost 44 per cent in 2008, with GDP totalling $102.4bn last year.
“I am confident that GDP growth will not be any lower than 9.6 per cent in 2009,” says Raghavan Seetharaman, chief executive officer of Doha Bank. “This is a reflection that [Qatar has] one of the best performing economies in the world – the economy is solid because it is commodity, not paper-driven.”
The main engine driving this GDP growth is the state’s burgeoning liquefied natural gas (LNG) industry. Qatar is already the world’s largest exporter of LNG and production is forecast to jump from an estimated 43 million tonnes a year (t/y) in April 2009 to 77 million t/y by 2010. Last year, Qatar’s gas sector overtook oil as the largest contributor to GDP for the first time in the country’s history. Gas constituted 32 per cent of the state’s income in 2008 compared with 27 per cent for the oil sector.
The majority of this new gas production has been designated for export. The volumes of Qatar’s supply and purchase agreements are estimated to reach approximately 70.3 million t/y in 2010, substantially higher than the 30.7 million t/y in 2007.
A good litmus test of the general health of the economy is the state’s banking sector. The government has undertaken a multi-pronged strategy to boost liquidity since ratings agency Moody’s Investors Service changed its credit outlook for Qatar’s banking sector from stable to negative in February this year. Qatar’s nine local banks registered an average increase in profit and assets of 10 per cent and 19 per cent respectively for the first quarter of 2009, compared with the same period in 2008.
“I am confident that banks can keep pace with the overall growth of the economy this year, so I am forecasting 10 per cent growth,” says Seetharaman, who praises the government for their active support of the sector.
In February, the sovereign wealth fund Qatar Investment Authority (QIA) injected $5.3bn of capital into the banking sector by acquiring 5 per cent stakes in seven of the nine Qatari banks listed on the Doha Securities Market. This played a critical role in fortifying their balance sheets at a time when the international credit markets had all but dried up. The QIA is now planning to increase its equity stake to 10 per cent by the end of 2009.
In early March, the Qatar Central Bank (QCB) also bought the badly performing local equity portfolios of banks, which helped free up capital for finance houses, preventing any selling pressures in the stock market.
At the end of May, the QCB announced a further $4.1bn package aimed at boosting liquidity by offering to buy real estate investments from state-owned banks. The QCB has a deadline of the end of June to complete the transaction.
“This is being carried out to pre-empt any negative stimuli on the economy, given the exposures to real estate,” says Reji Joseph, head of corporate finance for professional services group KPMG in Qatar. “With substantial investments in this sector, any adverse stress on these projects will have a cascading effect on the wider economic environment.”
It is hoped that the package will encourage banks to continue lending to the property market, which has suffered due to falling property prices of 30-40 per cent in some areas over the past year.
At the time of the announcement, Prime Minister Sheikh Hamad al-Thani was quoted as saying that the package is aimed at ensuring that the rate of national economic growth remained on track. Like other GCC countries, Qatari banks are expected to see their profitability in 2009 challenged by slower loan growth, funding constraints and increasing impairment charges. “Asset quality remains the biggest issue facing Qatari banks in 2009,” says Robert Thursfield, director of Fitch Ratings’ financial institutions team in London. “We expect loan defaults to rise given the rapid growth in lending during the boom.”
With this evident weakness in the banking sector, the government is ensuring the country’s projects market continues to contribute to economic growth by spending billions of dollars on public infrastructure works. Gulf projects tracker MEED Projects estimates that the value of projects, either planned or under way, currently stands at $200bn in Qatar.
The government announced a $25.97bn budget in April for the 2009/10 financial year, which allocates $10.4bn or 40 per cent of total expenditure for non-oil and gas development projects – only a slight drop from the $11.1bn allocated to development projects in 2008-2009. However, Qatar’s Finance & Economy Minister Yousef Kamal has predicted that revenue will fall by 14 per cent to $24.4bn for the same period, meaning it will have to draw on its reserves to cover the shortfall.
Even though Qatar is expected to post a budget deficit of $1.6bn this year, its first since 2004/05, this will have a negligible impact – equating to a modest 2 per cent of Qatar’s GDP, which can easily be financed from available government resources. And with the budget based on an oil price of $40 a barrel, it looks likely that the deficit will be eliminated given the current price of oil is more than $60 a barrel. “Now with the shifts in oil prices, the budgetary position could be expected to return to surpluses,” says Joseph.
In addition to maintaining high growth rates during the downturn, Qatar is also determined to continue to drive forward with its diversification strategy. The country’s hydrocarbons sector remains the backbone of the economy – contributing 62 per cent of GDP last year.
The $10.4bn allocated to development projects this year will play a crucial role in underpinning its ongoing diversification. In October last year, the government launched the Qatar National Vision 2030, which will serve as a blueprint for the social and economic future of the country. In stressing the need for reduced dependence on the hydrocarbons sector, the plan calls for an expanded role for other industries and services within the economy.
Industries Qatar (IQ), set up by the government in 2003 to act as a holding vehicle for the downstream activities of the state’s oil and gas industry, will be central to executing this vision.
IQ is 70 per cent owned by state energy company Qatar Petroleum and is therefore able to provide natural gas to domestic industries at considerably cheaper prices compared with the rest of the world, enabling them to capitalise on extremely low production costs. Today, IQ is spearheading growth in the petrochemicals, fertilisers and steel markets.
The Mesaieed petrochemicals complex planned by South Korea’s Honam Petrochemical Corporation to come on stream after 2012 is one of Qatar’s flagship petrochemicals projects, and of critical importance to the GCC and global petrochemical industries. The complex will increase the region’s ethylene capacity by 900,000 t/y. Meanwhile, IQ subsidiary Qatar Steel has announced significant expansions and expects to increase its reinforced steel (rebar) capacity by 45 per cent from 1.7 million t/y in Qatar by 2011.
“There needs to be enhancement of the value chain and Qatar is doing this by developing its petrochemicals and heavy industries,” says Eckart Woertz, economics programme manager at the Dubai-based Gulf Research Centre.
But while the government’s diversification strategy is clearly reaping rewards as shown in the capacity increases in steel and petrochemicals, LNG will continue to provide the main source of income for the foreseeable future. This guaranteed, long-term revenue stream is a welcome boon for Qatar’s economy but it also poses the key challenge of how best to put these vast sums of money to work. The Ras Laffan LNG project alone is expected to earn Qatar $292bn in exports over the next five years.
GDP is expected to jump from $102.2bn this year to $139.4bn in 2010, largely on the back of LNG exports, and it is not yet clear where the government will invest this money – and what proportion of it will be invested domestically versus overseas.
However, it is clear that the QIA will be the brains behind any overseas investments. Set up in 2005, with an agenda to invest Qatar’s export income in non-oil and gas related opportunities, the QIA has risen to prominence on the world stage in the past few years through its high-profile investments in, among other things, the London Stock Exchange Group. The QIA increased its stake in the UK’s Barclays Bank from 6.4 per cent to more than 10 per cent in October last year, after Barclays refused public money from the UK government. “The authority’s objective is to generate further wealth creation but also risk mitigation in order to counter problems that would have arisen from an over-reliance on their most abundant asset,” says Seetharaman. “Qatar does not just want to be known as a gas-producing nation, but as an international player.”
Qatar is in a privileged position because its LNG exports are based on long-term contracts which, unlike its oil-dependent neighbours that sell oil on a more short-term basis, provides substantial assurances for long-term capital inflows. These fixed revenues make it far easier to plan long-term investments.
The International Monetary Fund (IMF) has predicted that, of the oil-producing countries in the region, Qatar will be the only country to escape the global crisis largely unscathed.
Like every other country across the globe, Qatar’s economic growth has been eroded but its macroeconomic fundamentals remain sound. Indeed, Moody’s sovereign rating of Qatar at Aa2 is a testament to the stability and economic strength of the country.
Looking ahead, Qatar National Bank has forecast GDP growth of 23.5 per cent for 2010, up from 9.6 per cent in 2009.
“It will not be difficult to achieve this [growth] as the major portion will be from LNG export increases,” says Joseph. “LNG is expected to grow in significance due to environmental concerns. Qatar has the ability to dream big [plans] and then execute [them].”