Qatar draws US in closer with promise of more defence spending

A combination of deft diplomacy and a willingness to spend heavily on military equipment and training appears to have secured firm US support for Qatar, judging from statements made at the first US-Qatar Strategic Dialogue in Washington on 30 January. The outcome of the meeting – which is destined to become an annual affair – will provide a boost to confidence in Doha as it continues to look for ways to ensure its security in the face of the dispute with the GCC-3 of Bahrain, Saudi Arabia and the UAE, and in the face of President Donald Trump’s ‘bromance’ with the Al-Salman leadership in Riyadh.

Public deposits support Qatar’s banking sector

Perhaps more than anything, Qatar’s government must be thankful for the huge savings it had built up before this year. The economy was faced with a potentially destabilising shock in early June, when Bahrain, Egypt, Saudi Arabia and the UAE imposed their boycott. Imports fell sharply and customers withdrew bank deposits in large volumes. However, Doha’s willingness to reach into its own pockets meant nerves were soothed and banks stayed liquid.

Economic challenges test Qatar banking sector

The Qatar economy faced with a potentially destabilising shock in early June 2017, when Bahrain, Egypt, Saudi Arabia and the UAE cut diplomatic ties with Qatar and closed transport links. Imports fell sharply and customers withdrew bank deposits in large volumes. In order to soothe nerves and ensure its banks stayed liquid, Doha reached deep into its own pockets.

The Middle East's 10 Biggest Sovereign Wealth Funds (For Now)

Saudi Arabia’s plan to create a $2 trillion sovereign wealth fund has set an ambitious new standard for state-run investment vehicles. These funds are an increasingly common sight around the world, but particularly in the Middle East, where oil-rich governments like to squirrel away money when oil prices are high in preparation for leaner times. The Sovereign Wealth Fund Institute (SWF Institute) lists 79 funds in its rankings, with 20 of them in the Middle East and North Africa.

Doha's deficit planning

Published in MEED, 15 March 2016

Low oil prices have pushed Qatar’s budget into the red, forcing the government to re-evaluate its economic model

The numbers speak plainly enough. The budget announced by Qatar’s Finance Minister Ali Shareef al-Emadi in December included a QR70bn ($19.1bn) fall in projected revenues for this year compared with the last – a decline of 31 per cent.

That would test the mettle of most governments, but the Qatari authorities appear to be holding their nerve.

The fall in oil revenues is leading to an overhaul of government activities, cuts in subsidies and other spending, and a push to expand the private sector and make the public sector less wasteful. But there is no sense of panic, not least because the economy is still growing at a healthy rate.

Emir Sheikh Tamim bin Hamad al-Thani had set out the government’s thinking in November, in a speech to inaugurate the new session of the Advisory Council. He said of the low oil price that “it requires caution and alertness, but not fear”.

The new sense of realism has continued this year. On 11 January, Prime Minister Sheikh Abdullah bin Nasser bin Khalifa al-Thani announced three new ministerial groups to coordinate economic policy, with the first of them having the task of reviewing the cost of major projects.

As it stands, the total cost of government projects under way is QR261bn, excluding the oil and gas sector, according to Al-Emadi. That includes QR87bn for transport schemes, QR30bn for water and electricity projects and QR24bn for sports schemes. There are also QR17bn-worth of education projects and QR7bn in the health sector. The budget set out spending of QR91bn on major projects this year alone.

What the low oil price has emphasised is that far more needs to be done to diversify the economy.

Doha has encouraged investment in a range of sectors over the past decade, including finance, tourism and education. Sheikh Tamim has now told his government “to hammer out an industrial strategy to increase the contribution of the manufacturing industry to GDP”. He also wants Qatar to produce more of the food it consumes.

Even so, the economy will continue to rely on gas revenues for some time to come. “Our pursuit for economic diversification and reducing the dependence on oil and gas does not mean that we will not pay adequate attention to maintain and develop this sector… it will remain for a long time a major component of the GDP,” said Sheikh Tamim in November.

The government does at least have room for manoeuvre, not least because it can tolerate lower energy prices than most of its peers due to low production costs.

In addition, while the oil and gas sector may be slowing, the rest of the economy is continuing to post healthy growth rates, helped by ongoing infrastructure spending.

Qatar National Bank (QNB) says the economy grew by 3.8 per cent year-on-year in the third quarter of 2015; London-based Capital Economics describes Qatar as “the best-performing economy in the GCC”.

Still, the financial situation does put the country under something of a cloud. On 4 March, US ratings agency Moody’s Investors Service placed Qatar on review for a possible downgrade, while it assesses the government’s fiscal reforms. It noted that continued large investments for the 2022 football World Cup are taking a toll on the government’s fiscal position, even though it “retains very significant financial buffers”.

The size of that financial cushion remains a matter of speculation, but Moody’s thinks the Qatar Investment Authority (QIA) holds assets of $329bn, equivalent to 183 per cent of GDP. The government says it would rather issue debt than use up those assets or its reserves at the Central Bank of Qatar (QCB).

“Qatar will maintain these reserves and investments,” said Al-Emadi in December. “The 2016 budget does not include any income from the reserves at QCB or investments of QIA, as this is being reinvested to boost the country’s reserves and investments.”

If the government can navigate its way through the current economic climate without drawing down its savings, it could provide a stronger base for the country’s future.

However, the longer-term sustainability of the economy will rely on success with its diversification efforts more than with the current quasi-austerity. The government may find it trickier to hold its nerve and maintain its momentum in that regard if and when oil prices start to rise again.

Qatar faces a future of cheaper gas

Published in MEED, 6 October 2015

Qatar is a heavyweight in the international market for liquefied natural gas (LNG), accounting for about a third of global sales in recent years. The revenues it has earned from those gas sales have bankrolled the development of the country and given it a new-found level of confidence, but its position of market dominance now looks to be coming to an end.

Low energy prices mean that revenues are sliding and a glut of new LNG facilities are coming online around the world, putting further downward pressure on prices.

The problems start with the fall in oil prices over the past year. Most LNG sales have historically been done on the basis of long-term contracts of up to 25 years in length, which protects producers from short-term swings in demand. However, while it means that the volume of sales is secure, the prices are not. The contracts are generally indexed to the oil price, so any revenues coming from gas sales are taking the same hit as those from oil. There is a time-lag built into the system so the effect of the oil price decline only really started to feed through in April or May this year, but it is apparent now.

Not all of the LNG produced by Qatar is tied to long-term contracts. An estimated 10-25 per cent of it is sold via short-term contracts, with the proportion varying from project to project. In addition, there are also other by-products of the LNG process, such as condensates and liquefied petroleum gas (LPG), which rise and fall more directly in line with oil prices.

Minimum price

There is some protection for Qatar, as its long-term contracts are thought to include a minimum price for the gas. Even so, Qatar will be nursing a substantial cut in its revenues this year.

The country’s two LNG producers, RasGas and QatarGas, earned around $55.4bn in revenues from LNG sales last year according to Saudi bank Samba. If the predictions of some market analysts are correct, this year the figure could be around $16bn lower.

“RasGas’ sales of LNG, condensate and LPG are either directly or indirectly linked to oil prices, so the revenue stream is materially affected by lower oil prices,” says Jelena Babayeva,lead analyst for RasGas at Fitch Ratings. “However, as far as we know most of the LNG contracts also have a certain floor level embedded. This will prevent a decline in LNG revenues equivalent to the fall in oil prices. So if oil prices have fallen by 50 per cent the reduction in LNG revenues is less, probably at least 30 per cent.”

The longer term picture looks no more inviting, given the increasing level of competition coming to the market. “What we’re going to see is a lot more supply becoming available at a time when demand looks fairly weak,” says Andy Flower, an independent energy consultant.

That weakness in demand is particularly noticeable in Asia, which is leading to a reduction in the previously large premium paid by buyers in that region compared to the US and Europe. In 2014, the gas price in the US averaged around $4 per million British thermal units (btu), while in Europe it was $10 and in Asia it was $18. However, this year prices in Asia had fallen to less than $10 per million btu and they are not expected to recover anytime soon.

As it stands, Qatar supplies around 31 per cent of the LNG imported by countries in the Asia Pacific region, according to data from oil major BP, and an even greater share of the LNG going into Europe and Eurasian countries.

It is bound to be harder for it to maintain that sort of market share in the future, given the greater competition.

“There is a lot of supply coming into the market and most of it is from Australia and the US,” adds Flower. “The thing about the US LNG is it’s pretty flexible. The people building the liquefaction plants in the US don’t care where the LNG goes, so it can be moved around the world with few restrictions and that’s going to create a new dynamic in the market.”

Future problem

There is still some time before Qatar will have to face up to such pressures. The first Qatari LNG trains came on stream in the mid to late 1990s, but most have only started production since the mid-2000s. It now has a total of 14 trains, with QatarGas and RasGas operating seven each. In total they have a production capacity of some 77.5 million t/y of LNG, with 41.2 million of that coming from the QatarGas trains. The timeline of development means that most of the Qatari long-term contracts are not due to come up for renewal for another five or ten years at least.

Three contracts for a total of 7 million t/y are due to expire in 2021, but most of the contracts will not run out until the mid-2030s. Once that happens, Qatar will have to renegotiate its contracts. By then the costs of developing the plants should have been paid off, which will give Qatar the flexibility to sign shorter-term supply deals. Doha could then find itself in a similar position to Saudi Arabia in the oil market, where Riyadh is accepting low oil prices in an effort to maintain its market share.

Loan repayments

In the meantime, the financial position of the companies involved remains solid. RasGas is due to make the next repayment on its loans in 2019. In the past it has made such repayments from its operating cash-flow and it is expected to do the same in 2019.

Even with lower prices, it still appears to be in a healthy situation, given its low cost of production. According to Babayeva, RasGas probably needs oil to be trading at $35 a barrel or less.

“In our very conservative ratings scenario, if we assume that this RasGas repayment in 2019 will be fully repaid from operational cash flows and not refinanced, then they need to achieve a price of $35 a barrel in that year,” she says. “However, if they decide to refinance rather than repay it then the breakeven price they will need will be significantly lower. I believe it will probably be around $20 or even lower.”

Shipping company Nakilat, which transports the LNG produced by QatarGas and RasGas, also has debts to repay. It raised some $6.7bn in debt to buy 25 tankers between 2006 and 2009, some of which was refinanced in 2013. A substantial proportion of it falls due in 2025. As with the two LNG producers, it is assumed that the government would step in to help if there was any need.

Nonetheless, the lower revenues from LNG will have an impact on the wider economy and the government’s fiscal position. The days of easy money are now coming to an end.

“Qatar has benefitted from extremely favourable market conditions in the recent past. They were certainly much better than what they anticipated when the LNG projects were sanctioned,” says Federico Gronda, head of the energy project finance team at Fitch. “The market is now very different.”

Qatar: Build It, But Will They Come?

Qatar may have a world-class airport, but it may struggle to attract 7 million tourists by 2030. Published in Bloomberg Businessweek, 21 December 2014

Travelling into Doha by air these days is a far more enjoyable experience than it used to be. Gone are the unwelcome bus rides between plane and terminal and the cramped duty free area of the old airport. In their place at the recently opened Hamad International Airport are world-class, modern and spacious facilities.

The airport opened in May 2014, several years later than originally planned, and there were some unusually public legal wrangles with contractors along the way, such as with the German-UAE joint venture Lindner Depa Interiors about the fit-out of lounges. Now that it is finally open, those in charge say the new airport will play an important role in the growth of the country’s economy and could help it to diversify into areas such as meetings, incentives, conferences and exhibitions (MICE).

“Hamad International Airport will be one of the key drivers of the country’s economic diversification and will have a strong impact on the human and economic development pillars of Qatar National Vision 2030,” says Badr Al-Meer, chief operating officer of the airport.

“The airport also supports the evolution of a significant MICE market in Qatar which, with state-of-the-art facilities such as the Qatar National Convention Centre and initiatives from Qatar MICE Development Institute, is set for rapid growth.”

The airport will be able to handle up to 50 million passengers a year once complete, which should provide plenty of room for Qatar Airways to continue expanding. But the big question for the country is whether it can persuade enough passengers to leave the airport and spend time and money in the country rather than just change planes.

The number of international tourists visiting Qatar has varied significantly in recent years, from 1.5 million in 2010 to 2.5 million in 2011 and back down to 1.2 million in 2012, according to the World Tourism Organisation, an arm of the UN.

The Middle East region as a whole attracts around 52 million tourists a year, so Qatar is clearly only gaining a small fraction of the market. It is currently in the same league as Lebanon, which attracted 1.4 million visitors in 2012, and Oman, which received just under 2 million visitors. By contrast Dubai, which is Qatar’s most natural rival in many ways, welcomed close to 9 million visitors in 2012.

The Qatar Tourism Authority (QTA) is not attempting to match Dubai, but it has set out some ambitious targets in its national tourism strategy, which was launched in February 2014. Chief among them is the aim of attracting 7 million tourists to the country by 2030. It also wants the sector to contribute 3.1 per cent of GDP by 2030, up from 0.8 per cent in 2012.

At the moment, the majority of visitors come from around the Gulf. “Many of the tourists visiting Qatar’s hotels come from neighbouring GCC countries, mostly from Saudi Arabia and the UAE,” says Hamad Abdulla Al Mulla, CEO of local hotels group Katara Hospitality. “The GCC has been the primary market for in-bound tourists in previous years. In 2013, more than 1 million tourists from the Gulf visited Qatar.”

If the country is to hit its target of 7 million visitors, it will clearly need to attract far more from outside the region. The QTA says that 64 per cent of visitors should be coming from outside the GCC by 2030, compared to around 30 per cent at the moment. The country will also need a lot more hotel rooms. In 2012, there were some 13,407 rooms available. The national tourism strategy says that figure should rise to between 56,100 and 62,000 by 2030.

However, there is one issue, which makes the idea of a gradual build-up of accommodation and visitor numbers more complicated. The country is due to host the football World Cup in 2022 and the sport’s governing body FIFA is demanding at least 60,000 hotel rooms are available by then. Once the tournament is over, the country could find itself with significant overcapacity.

“It will be difficult for the country to achieve the level of visitor growth which will garner enough demand to support a 400 per cent expansion in the number of hotel rooms,” said Saudi bank Samba, in a report on the Qatari economy published in July 2014.

Other industry insiders appear confident that the country will be able to build enough rooms in time for the competition and to avoid a surplus in the long-term. “The market will build what the market deems necessary and sustainable for the post-World Cup period in Qatar,” says Nick Smith, a partner at construction consultancy firm EC Harris. “The shortfall will be provided by temporary accommodation that is easy to dismantle and remove.”

Sporting events are a key element in Qatar’s plans to attract more visitors, along with the MICE sector. However, it is less clear what all the tourists might do when there are no major sporting events to view or conferences to attend. Qatar is a conservative society and, as a result, life in Doha is noticeably more sedate than somewhere like Dubai. There has been some noticeable investment in art galleries and museums in recent years – including the Arab Museum of Modern Art (Mathaf), which opened in 2010 and the National Museum of Qatar, which is still under construction – but in reality there is little to mark the country out from other destinations in the region.

“Whilst some museums, hotels and a significant number of shopping centres are under construction – in addition to the downtown entertainment area – it is fair to say that hotel, hospitality and tourism facility developments are yet to gather pace,” says Smith.

Clearly, developing a vibrant tourism strategy requires more than simply building a modern airport and providing accommodation. But Qatar’s playing the long game and while it may be starting from a low base, it has at least got some of the right foundations in place, according to observers.

“Qatar, like many of its neighbours, has been keen to maximise the long-term opportunities afforded by trade and tourism, and it now has the necessary infrastructure to build on these industries in the medium- to long-term,” says Michael Regan, a partner at international law firm Mayer Brown.

State Spending Boosts Qatari Banking Sector

Qatar’s banking sector is not entirely without risks, but most observers seem confident of strong growth in the years ahead Published in Bloomberg Businessweek, 21 December 2014

The assets of the Qatari banking system passed the QR1 trillion ($275 billion) threshold this year, in another sign of the continued healthy growth of the sector.

According to data compiled by Qatar National Bank (QNB), the country’s oldest and largest bank, the sector’s assets grew by a compound annual rate of 18.1 per cent from 2009 to 2013. Deposits over that time grew by 22.1 per cent, loans by 20.8 per cent, and profits by 12.5 per cent.

Adding to the sense of positive momentum, the loan-to-deposit ratio has been falling, from 111 per cent in 2011 and 2012 to 105 per cent in 2013, and non-performing loans accounted for just 1.9 per cent of all loans at the end of last year.

“The banking sector continues to grow at a double-digit rate on the strength of Qatar’s rapid economic growth and large investment spending,” says Joannes Mongardini, head of economics at QNB Group. “Banking assets are projected to grow by 11 per cent in 2015, driven by an increase in loans to finance Qatar’s large public and private projects currently underway.”

Given all that it is unsurprising that the IMF characterised the local banking sector as “well capitalised, liquid, and profitable” in its latest annual review of the Qatari economy in May 2014. Others in the region echo that positive assessment.

“The overall performance of Qatari banks’ remains solid. Strong public spending continues to support the operating environment and drive credit growth, which is expected to be among the highest in the GCC for 2014,” says Nitish Bhojnagarwala, a Dubai-based analyst for credit ratings agency Moody’s Investors Service. “The banks’ financial metrics remain robust. Strong earnings and sound capital and liquidity buffers position them well to benefit from the economic activity driven by large government spending.”

However, while the market is healthy, it is also rather unbalanced in some respects. QNB is responsible for close to half of all assets, with QR475 billion at 30 September this year. The next largest institution is Commercial Bank of Qatar, which has assets of some QR114 billion – less than a quarter of the size of the market leader.

Both of these banks are conventional lenders, but some Shariah-compliant banks are also fairly sizeable. The biggest is Qatar Islamic Bank which has a network of 32 branches and some QR93.3 billion in assets, followed by Masraf al-Rayan, with a far smaller branch network of 10 outlets but QR77.8 billion in assets.

One of the key factors behind the positive performance of the banking sector is the ongoing high levels of government spending, which are underpinning growth in the local economy and helping to ensure that all Qatari banks are making healthy profits these days.

“The Qatari banking sector is well placed to take advantage of the swathe of financing opportunities associated with the government’s ongoing investment drive,” says Tom Simmons, an economist at Saudi Arabia’s Samba Bank. “This is already evident in a pick-up we’ve seen in lending to contractors, which was running at 42 per cent in the 12 months to September, though from a small base. To this end we see credit growth remaining comfortably in double figures through to 2017.”

For all the good news, there are a few clouds on the horizon. Jason Tuvey, an economist at London-based Capital Economics, notes that credit growth has been rising rapidly in recent years, with the credit-to-GDP ratio up by almost 35 percentage points in the past seven years.

“Historically, increases in the credit-to-GDP ratio of 3 percentage points or more in a year have been a good predictor of future financial stress,” he said in a research note published in July. “To be clear, we don’t envisage a crisis in Qatar’s banking sector. And even if there was one, the government’s healthy balance sheet means it would be able to bail the banks out. But it does look like loans may start to sour in greater numbers, which could cause credit conditions to tighten.”

An underlying problem is that, in common with many other countries in the region, deposits and loans are often heavily concentrated around a small number of large customers, not least the government. The nature of the local economy means that banks can easily end up with high levels of exposure to a few key sectors, particularly real estate and construction.

“The major challenge for Qatari banks is certainly real estate prices,” says Eric Dupont, senior manager at Fitch Ratings, another credit ratings agency. “These have been rising rapidly recently despite an over-supply in the amount of office space. At the same time, the contracting sector has been weakening owing to payment delays by the government. Another challenge is continued pressure on margins due to aggressive competition.”

That high level of competition is encouraging some Qatari banks to look abroad for growth, with Turkey, India and parts of Africa among the markets on their radars. QNB is again the most active in this area, with a presence in 22 other countries. In 2013, it bought 97 per cent of National Société Générale Bank in Egypt, opened a representative office in China and a subsidiary in India.

It was not the only one making international moves that year, however. In March 2013, Commercial Bank of Qatar acquired a 71 per cent holding in Alternatifbank in Turkey. And in July 2013, Qatar Islamic Bank opened its first fully-owned overseas branch, in Khartoum, Sudan.

Even as this international expansion is continuing, some international investors have decided that they have had enough of the Qatari market. Earlier this year, National Bank of Kuwait (NBK) agreed to sell its 30 per cent stake in International Bank of Qatar to a group of Qatari investors for $538 million, generating a profit of $87 million for the Kuwaiti institution. NBK said it had made the decision due to the limited potential to increase its holding in the business to a controlling stake, which is its preferred investment strategy these days.

While NBK might have lost interest in the market, most others continue to look at Qatar’s banking sector as one with high growth potential. The enthusiasm of the government to spend heavily to upgrade the country’s infrastructure and diversify its economy – which is in turn leading to strong growth in the population levels – mean the economy is expected to expand at a rapid rate. Capital Economics predicts that GDP will expand by 6-7 per cent this year and next, making Qatar the fastest-growing economy in the Middle East.

All that means there should be plenty of room for further growth for the banks in the years ahead too.

“Qatari banks operate in a stable and supportive environment, with the government's significant capital investment programme driving rapid GDP growth and lending opportunities for domestic banks,” says Dupont. “Project momentum will remain strong in 2015. The banking sector is in good shape.”