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.