Doha prepares for slower growth

Profit from gas exports will ease in Qatar this year, but few are worried in the Gulf state as its recent boom should help cushion the blow. Published in MEED, 9 March 2012

Nothing lasts forever, as Qatar is about to find out when its’ astonishing run of double-digit growth comes to an abrupt end during 2012.

It is thanks to the expansion of its oil and gas sales that the country has enjoyed economic growth of close to 20 per cent for much of the past five years. In particular, liquefied natural gas (LNG) exports have increased from $18.7bn in 2007 to almost $62bn in 2011. But with most major gas projects now complete, gross domestic product (GDP) is expected to rise by a far more modest – albeit still healthy – 6 per cent this year.

On the surface, managing such a sharp slowdown could present serious challenges, but economists say the nature of Qatar’s recent boom means the country should be able to manage the process with ease.

“A lot of the economic growth in Qatar over the past few years has been as a result of the massive expansion of its LNG output,” says Liz Martins, senior economist at HSBC Middle East. “That is real growth, but it’s not 18-20 per cent growth in consumer spending. There will be a slowdown in the growth of gas output in the coming years, but we’ll still see consumption and investment at quite robust levels, so it will not be a painful slowdown in that sense. It may not even feel too much like a slowdown.”

Managing salary expectations in Qatar

Nonetheless, there are some potential pitfalls the country needs to watch out for, not least the challenge of managing expectations. Qatar’s government, keen to ensure its citizens remained content as the Arab uprisings spread across the region last year, has been generous in its approach to public-sector salaries and pensions. In September 2011, the government announced a 60 per cent rise in the pay and pensions of local public sector workers and a 120 per cent rise for military officers.

For now, the country can easily afford such generosity. UK bank HSBC estimates that the budget surplus will widen to more than 10 per cent of GDP in the fiscal year ending in April 2012, despite the pay awards. If such rises come to be expected in the future there could be a problem but, given that the slowdown will not be a surprise, people in Doha say the government should be able to manage this.

“The pay rise of 60 per cent was an exceptional event that happens once every 10 or 20 years,” says one Qatar-based banker. “It cannot be expected to occur again next year, or the year after, and I don’t see a link to expectations for the future.”

The pay rises do, however, help to fuel inflation and can cause problems for private-sector firms competing to hire local staff. Increasing state spending to such a degree also sets back the government’s hopes of reducing its dependency on the oil and gas sector. Doha has said it wants to be able to fully finance the state budget from non-hydrocarbons revenues by 2020, but according to the Washington-headquartered IMF it may miss its target.

The organisation said in its most recent Article IV report on Qatar, released in January, that “the recent increases in current expenditures, and the large public-sector salary and pension increase for Qataris announced in September, in particular, led to an expansionary fiscal stance in 2011/12 … According to [IMF] staff’s calculation, the non-hydrocarbon revenue would cover about 63 per cent of the total expenditure by 2016/17, implying a need for more effort by the authorities to achieve their target.”

Qatar’s inflation concern

Inflation itself is another potential area of concern, as it is expected to creep up in the coming years. Most observers expect the consumer price index (CPI) to rise 3-4 per cent in 2012, as a result of strengthening domestic demand and higher government spending. The figure would be even higher if housing costs were excluded.

“We’re going to see credit growth, wage growth, population expansion and higher domestic demand – all of those things are inflationary,” says Martins. “However, very low inflation in the rental price component of the CPI basket will continue to keep headline rates down.”

According to the Qatar Statistics Authority, the CPI rose 1.2 per cent between January 2011 and January 2012. However, the ‘rental, fuel and energy’ category, which accounts for 32 per cent of the entire basket, fell 5.9 per cent over that period. Without that, the inflation rate would have been 4 per cent for the 12 months.

“Rents are a bit distorting, because they are a large component of the index and they have been very weak,” says Andrew Gilmour of Saudi Arabia’s Samba bank. “I would suspect that, given the public-sector salary increases and the large-scale investments they’re pushing ahead with, that you would see that inflation rate excluding rent picking up to 6 or 7 per cent, which would begin to start causing some concerns.”

Overall, the economy itself should carry on growing, not least because of the huge government investment in infrastructure – both to allow for the day-to-day growth in the country’s population and for football’s Fifa World Cup, due to take place in Qatar in 2022.

“If you think of the past 10-15 years as an era that saw heavy investment in the energy sector, the next 10 years will see heavy investment in development projects, infrastructure and transportation projects,” says the Qatar-based banker. “You’ll still have growth, but at a lower rate than in previous years. Qatar needs to upgrade, expand and modernise its infrastructure. Does Qatar have the same road network as Dubai or Saudi Arabia? No. Do we have a metro system? No. Do we have the airport capacity? No.”

Encouraging economic diversification

Qatar certainly has the ability to diversify. Government revenues mean it is comfortably able to afford major projects, such as the New Doha International airport and a national rail system. Even with higher government spending, the budget surplus is expected to be close to 10 per cent of GDP for the next two years, according to HSBC.

The markets gave their own positive opinion on the healthy state of Qatar’s financial position in December, when the government sold $5bn-worth of five-, 10- and 20-year bonds, with coupons of between 3.125 and 5.75 per cent.

The trick will be using this and other revenues to develop the right sort of infrastructure to ensure that the economy can diversify away from energy resources in a way that is viable in the longer term.

“Trying to pick new sectors to develop is a difficult job,” says Gilmour. “What they’re doing is providing the enabling environment to encourage investors and see what comes. They’ll establish the infrastructure and then it’s a question of market forces to some extent determining what takes off.

“They’re wary to some extent of the sequence of events in Dubai and Abu Dhabi. At the same time there is this impetus from the World Cup, which will require them to [develop] a fair amount of infrastructure. My one concern will be that some of this will be underutilised once it is over.”

One reason why some infrastructure may be underused in the longer term is that Qatar is chasing after the same sectors as many of its regional rivals. Industries including financial services, tourism, logistics and communications, education and healthcare have also been identified by Dubai, Abu Dhabi and Bahrain as target areas of future growth. Beyond the immediate Gulf region, countries such as Jordan are also focusing on these sectors.

“Qatar is competing with many other GCC states going for the same markets,” says Trevor Cullinan, director of sovereign ratings at Standard & Poor’s, the credit ratings agency. “It remains to be seen whether the investments they’re making will prove to be viable in the long term, but at least they’re clear on the goals. It’s a much better strategy than just consuming their hydrocarbons-related wealth.”

Price insulation from energy prices

While Qatar builds up this capacity, the country is in a better position than most in the region, as its LNG gas exports are often tied in to long-term supply contracts. This means Qatar is insulated, to some extent, from the fluctuations in world energy prices in a way that oil exporters are not.

While the moratorium on new oil and gas developments mean that growth in real hydrocarbon GDP will slow down to 3 per cent in the coming years, the IMF says that the large government investment programme in infrastructure should keep the non-hydrocarbon part of the economy growing at 9-10 per cent in the medium term.

Regional political problems could yet threaten all this, particularly with the rising tensions between Iran and the West. If Tehran were ever to make good on the threat it made in January to close the Strait of Hormuz, then Qatar’s entire economic strategy would be at risk, as it has no alternative routes for its LNG export.

There’s not much that Qatar, or indeed any of the other GCC countries, can do to stop this happening. However, the wealth the country has built up to date gives it a cushion which should mean it can cope with such an eventuality, at least in the short-term.

“They have very comfortable financial buffers to see them through what one has to assume would be a temporary closure of the strait,” says Gilmour. “It would be highly disruptive, but they could manage. The [income] that is coming their way from the energy industries is going to provide them with a very comfortable path.”