For investors seeking shelter from the global financial storm, there are few better destinations than Doha. Qatar’s government has, through good fortune and astute custodianship of its resources, engineered a robust economy that should enable it to ride out the downturn.

In September 2008, the Gulf’s governments predicted that their economies would decouple from those of the US and Europe as the financial crisis took hold, and would be largely immune to its impact.

While this optimism among other regional governments has since been dashed, in part by plummeting oil prices and the breadth of the region’s exposure to the real estate market, Qatar’s claim of economic strength stands up to scrutiny. Just 12 months ago, booming liquidity caused by high oil prices and soaring inflation, which peaked at 16.6 per cent in the second quarter of 2008, were major concerns for Doha.

Qatar’s burgeoning liquidity posed a problem for policymakers who were focusing on controlling inflation, but as financing has dried up elsewhere in the Gulf, Doha’s strong cash position is now viewed as a key resource in helping the government battle the global financial conditions. Inflation, while still hovering at about 14 per cent, has moved down the agenda in light of the slowdown.

Table: Qatar – Economic indicators

  2006 2007 2008e 2009f
Nominal GDP ($bn) 56.8 68.0 86.1 116.3
GDP per capita ($) 54,500 55,400 61,000 70,500
Hydrocarbons GDP (% change) 5.4 9.7 24.6 29.5
Non-hydrocarbons GDP (% change) 19.9 18.0 15.0 20.0
Hydrocarbons exports ($bn) 31.2 40.7 76.1 91.0
Current account balance ($bn) 16.2 21.9 50.1 60.8
External debt ($bn) 29.9 40.4 53.1 63.5
Fiscal balance (QRbn) 18.6 29.3 58.6 86.4
GDP=gross domestic product; e=estimate; f=forecast. Source: Institute of International Finance

Falling inflation

In January, the International Monetary Fund (IMF) predicted that inflation would continue to fall in 2009 as rents came down and lower food and raw materials prices were passed on to consumers.

The latest figures for Qatar reveal a picture of too much money, rather than not enough. The M2 money supply index, a measure of total money supply, is expected to rise to 50.9 in 2009, up from 29 in 2008 and 24.4 in 2007.

High liquidity means Doha is one of the few Gulf states that is in a position to push ahead with its long-term planning and development, while neighbours such as Dubai face a massive tail-off in financing for key projects.

Qatar’s wealth – per capita gross domestic product (GDP) averaged $67,000 in 2007 – results from sales from its vast gas reserves, which totalled QR88.3bn ($24.3bn) in 2008.

Qatar also benefits from having a small population, estimated at just 928,635 people in 2008, the second smallest in the Gulf behind Bahrain. This means much of its gas output can be exported at market prices, rather than being used for subsidised domestic supplies.

Exports from Qatar’s gas industry will sustain the country’s economy growth, which has averaged 11 per cent a year over the past five years. “The continuing rapid expansion of gas exports will offset a slowdown in non-hydrocarbons activity and preserve the country’s high real growth rates,” says Tristan Cooper, senior Gulf analyst at ratings agency Moody’s Investors Service.

Simon Williams, economist at UK bank HSBC, forecasts a near double-digit GDP growth rate in 2009, against a Gulf-wide average of 2 per cent or less.

The Washington-based Institute of International Finance (IIF) forecasts Qatar will enjoy 9 per cent real GDP growth this year, compared with just 1.2 per cent in Saudi Arabia.

Though more richly endowed with hydrocarbons than many of its neighbours, the way Doha has harnessed its abundant gas reserves also stands out, thanks in part to the favourable terms offered to foreign companies investing in the sector. Hydrocarbons-rich Saudi Arabia, by comparison, has struggled to agree terms with international oil companies.

“Qatar is running on a very different trajectory to other parts of the region,” says Williams, referring to the country’s liquefied natural gas (LNG) terminals, refineries and petrochemicals infrastructure. “The investment Qatar has made in the industrialisation of its hydrocarbons resources is more advanced and funding is more secure.”

Not that Doha has been fully protected against global economic fluctuations. Qatar Investment Authority (QIA), the emirate’s sovereign wealth fund, has been forced to embark on a cash injection drive involving the acquisition of sizeable shares in Qatari banks (see feature, page 44).

Meanwhile, the Doha Securities Market (DSM) has had a poor start to the year, losing 15 per cent of its value by 22 January. “Qatar is by no means immune to the global economic slump,” says Cooper. “The stock market and real estate sector have already been hit. This has affected confidence.

“Luckily, the government of Qatar has a much greater ability than governments in most other countries to cushion the blow to private sector sentiment through fiscal stimulus.”

The financial buffer made possible by Qatar’s gas wealth should allow the government to continue with its economic expansion programme at a time when construction costs are falling. Outlays on contractors and materials will fall compared with the boom years of 2005-08, underpinning the economic arguments for investing in new industrial and public infrastructure.

The government is putting up a confident front. Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani announced amid collapsing global equity markets in October 2008 that Qatar would continue with its infrastructure and investment projects despite the global financial turmoil.

Projects under way or in the planning stage stood at more than $200bn towards the end of 2008, according to Gulf projects tracker MEED Projects.

Infrastructure spending

The Public Works Authority’s five-year plan to 2012 covers the implementation of 60 major projects worth more than QR25bn. It is set to complete seven major road projects this year, including the first stage of the Salwa International Highway and the 16-kilometre-long Umm Birkah road from the Zubarah interchange to Ras Laffan.

Private sector confidence in Doha is subdued, but has not evaporated like it has in Dubai. A business optimism survey conducted by US credit information provider Dun & Bradstreet (D&B) shows that for the first quarter of 2009, a small majority of businesses in the non-hydrocarbons sector expect an increase in the volume of sales and net profits, indicating that demand levels in the economy are likely to hold firm.

In a sign of the regional confidence in Qatar, real estate developers in Dubai are reported to be relocating staff to Doha, redeploying resources that are sitting idle in the UAE. Land-mark downstream developments such as the Mesaieed petrochemicals complex, developed by Qatar Holding and South Korea’s Honam Petrochemical Corporation, are also under way.

Industries Qatar, the large state-backed holding group, is steering some ambitious medium-term expansion plans among its affiliates, such as Qatar Steel, which is planning to nearly double steel output by 2012, from its current level of 1.14 million tonnes of steel billets and 832,000 tonnes of steel bars a year.

Senior Qatari ministers have outlined the financial parameters that will guide investment in major projects in 2009. In October 2008, Energy Minister Abdullah bin Hamad al-Attiyah announced that his country’s energy projects would not be under threat as long as Qatari oil prices remained above the 2008-09 budgeted figure of $55 a barrel.

This figure is highly conservative. Removing any substantial cause for concern over the current oil price of just over $40 a barrel, the IMF has calculated that Qatar only needs an annual average oil price of $24 a barrel to balance its budget.

The 2009-10 budget, which is yet to be unveiled, is expected to be based on an oil price of $35 a barrel. However, Finance Minister Youssef Kamal has hinted that it will be a ‘balanced’ budget, meaning the Gulf state will not run a deficit in 2009-10, unlike Saudi Arabia.

This budget prediction does not appear to factor in the massive revenue boost due from the expansions of Qatar’s liquefied natural gas (LNG) production that have taken place in recent years, which should provide a significant budget surplus for 2009-10.

With its LNG production forecast at about 77 million tones a year (t/y) by 2010, up from 35 million t/y in 2008, Qatar will become the world’s largest LNG producer.

“LNG is one of the fundamental drivers of the Qatari economy and exports are expected to increase by 50 per cent in 2009,” says Marios Maratheftis, regional head of research for the Middle East, North Africa and Pakistan at UK-headquartered Standard Chartered Bank.

Gas exports have an advantage over crude in that the price is usually determined by long-term contracts, which means their revenues are less volatile, enabling long-term planning.

These gas exports have also helped Qatar record massive budget and current account surpluses in recent years, and will continue to do so this year. Over the past three years, Qatar’s fiscal surpluses have averaged 21 per cent of GDP, according to the IIF.

Yet this is not just the result of massive oil and gas windfalls accruing to the exchequer – income on investments, such as those made by the QIA, rose to QR25.8bn in 2007-08, up QR5.7bn on the previous year. The largest portion of this comes from Qatar Petroleum’s (QP) interests in joint ventures and affiliates, and holdings in state-run entities such as telecoms group Qtel.

There are also the revenues created from QP’s offshore assets, which remain undisclosed and are not included when calculating budgets. In November 2008, Emir Sheikh Hamad bin Khalifa al-Thani told the opening session of Qatar’s Advisory Council that the regional fiscal outlook for 2009 should not force the government to defer costly projects.

He said Qatar could finance these projects with its revenues from surging gas export earnings and, if necessary, by using the government’s monetary reserve.

According to Maratheftis, Qatar’s expected budget surplus will exceed 20 per cent of GDP this year, with revenues likely to exceed the anticipated QR103.3bn.

Economic strength

This provides the Qatari economy with the financial strength to weather the slowdown, while other Gulf states will have to rack up large deficits to keep their economies moving.

“In this environment, the right policy response is to increase government spending significantly to cushion the impact on the economy and pick up the slack,” says Maratheftis. “The problem for most countries is that they do not have the resources and will have to borrow heavily or print money. Qatar, on the other hand, has been saving aggressively over the past few years.”

These savings will enable the government to finance its considerable infrastructure, health and education plans, even if the more capital-intensive energy projects – typically debt-financed – could feel the pinch.

Infrastructure projects are expected to be given priority in the new budget, with government sources hinting that at least 40 per cent of the budget is likely to be diverted to such projects.

Advocates of the fiscal stimulus package say the most important consideration is to keep economic activity on track, even if it requires the active deployment of the state’s full fiscal and monetary armoury.

“A balanced budget would mean the government would need to use its savings, but these are extraordinary global conditions and if the budget needs to be in deficit for key projects to continue, there is nothing wrong in that,” says Maratheftis.

Even slackening the pace of energy-linked projects should not pose a particular challenge for the authorities, given that they announced a moratorium on new exploration in the North field three years ago and will likely extend it beyond 2011.

The global economic downturn and the associated contraction of the Gulf project finance market have struck at exactly the right time for Doha. Much of the country’s growth this year will come from a slate of capital investment projects started in the previous five years, such as the hike in LNG exports.

QP planned its current project slate well in advance, and the extended moratorium on developments in the North field implies a strategic move towards consolidation rather then expansion.

However, the exposure of downstream schemes to the distressed financial markets should not be underestimated, particularly as Kamal announced in early 2008 that the government would seek to tap $70bn worth of debt – both lending and bond issuance – in the coming years.

“Qatar will find it harder to access funding that was there previously, and this is bound to weigh on gross capital formation this year,” says Williams. “It will also feel the impact of much lower hydrocarbons prices.”

Managing growth

But the fact that Qatar’s industrialisation programme is further advanced than those elsewhere in the region means it will outpace other countries by a considerable margin.

In the short term, monetary pressures will absorb the government’s attention. “Too much liquidity creates boom-and-bust cycles and asset price bubbles,” says Maratheftis. “The central bank is right to be concerned [about liquidity levels] and, given the dollar peg, it only has limited tools at its disposal to manage liquidity.”

Qatar’s latest M2 money supply figures, for September 2008, reveal growth of 43 per cent year on year, a massive increase at a time when money was draining out of Gulf financial systems. This situation has given the Qatar Central Bank (QCB) a unique opportunity to combat its excess liquidity.

The QCB’s policy interest rate in January stood at 2 per cent, considerably higher than the equivalent US Federal Reserve rate of 0.5 per cent. The 2 per cent rate is intended to encourage deposits and curb growth in money supply.

In normal times, this would simply have encouraged a flow of money to Doha, but with global liquidity stretched, Qatar has a window of opportunity to harness monetary policy tools to beat down inflation.

“Qatar has been doing all it can to drain liquidity, and liquidity should not be a concern in 2009,” says Maratheftis. “There is no liquidity to come to Qatar to benefit from the interest rate differential.”

Getting M2 money supply growth down from 43 per cent to a more comfortable 10 per cent may cause pain for ordinary Qataris who are already reeling from stark losses on the DSM. The country has enjoyed a credit boom as much as other global economies. The total value of personal loans disbursed by Qatari banks grew by almost 11.5 per cent in the first six months of 2008, despite a worsening global credit outlook, according to figures from Qatar National Bank.

Total domestic credit rose by 24.4 per cent in the first six months of 2008 to QR182bn. Home loans increased by 31.3 per cent over the same period to QR36.7bn. The equivalent figure for the end of 2006 was QR15.7bn.

The monetary authorities attempted to put a stop to the money supply growth with rises in lending rates. The main QCB lending rate reached 5.5 per cent in June as the priority of containing inflation rose to the top of the government’s agenda.

Positive outlook

Although supply bottlenecks associated with Qatar’s rapacious growth were the cause of much of its rising inflation, excess credit was another significant factor.

Yet such fears over inflation are likely to dissipate this year. According to the D&B business optimism survey, there are continued signs of easing inflationary pressures, with 56 per cent of responding businesses expecting no change in their selling prices over the next quarter, and another 18 per cent saying they expect their prices will decrease.

Real estate prices are likely to ease, with a majority of respondents in the construction and real estate sectors expecting no change in their selling prices.

These factors are unlikely to distract Qatar’s policymakers from their long-term plans. Doha is committed to its 2020 target to generate revenue mostly from non-energy-related industries. By 2015, Qatar wants to cut its reliance on hydrocarbons to just 25 per cent of government spending, from about 60 per cent now. The spending stimulus from its considerable savings will support these aims.

Qatar’s comparative advantage has enabled it to monetise its resources successfully, and it is well equipped to cope with the short-term problems in the global economy.

“What we are seeing expressed in 2009 is a reflection of decisions taken more than a decade ago,” says Williams. “The government is pursuing a long-term strategy that was always well budgeted for, and I am bullish on Qatar’s medium-term prospects.”