When Qatar announced plans to set up a financial centre, the cynics described it at best the creation of a Rolls Royce machine for a Mini-sized market and at worst a folie de grandeur. But in the year or so since the Qatar Financial Centre (QFC) opened its doors in May 2005, it has become clear that the government is serious about creating the right environment to attract international financial institutions and multinational corporations.
The legal structure is in place, senior figures including Lord Woolf, Britain’s former Lord Chief Justice, who is to be the financial centre’s top judge, have been appointed, a dozen institutions, including Standard Chartered, have been given licences and the QFC is moving into its new purpose-built headquarters.
The commitment to the QFC is evidence that a country that was once a rather prosperous backwater in the Gulf now intends to become an open, diversified, industrial economy. And to do so it is prepared to mention the word ‘competition’.
For the past 20 years, the six Gulf Co-operation Council countries – Saudi Arabia, the UAE, Bahrain, Qatar, Oman and Kuwait – have maintained the polite fiction, in public at least, that they work together as partners.
The reality is rather different, but senior figures in the region are usually reluctant to admit this. Yousef Kamal, Qatar’s minister of finance and acting minister of commerce and economy, is an exception when he agrees readily that the international financial centres now being established across the Gulf are competing with each other.
“Of course there is competition, but I like that. That is the best way to ensure that the customers will get better quality,” says Mr Kamal, who is also the chairman of the QFC Authority, which is responsible for commercial strategy and developing relationships with the global financial community.
And the one certainty about the future of Gulf markets is that there will be intense battle in the next decade, at the end of which there will be one dominant market, which will be the centre for debt and equities initiation and trading.
Regional ambitions
Bahrain has for three decades been the region’s banking capital and has had the most professionally managed stock exchange. But it is now being challenged by not only Qatar but the region’s largest market, Saudi Arabia, while Dubai has also set up the Dubai International Financial Centre (DIFC) and even Kuwait is expressing ambitions to being a regional financial and commercial centre.
In the next five years, there will be more than enough business for the world’s leading investment banks to justify having several offices in the region as the Gulf states invest massive sums of money – estimated by some to be up to $1000bn – in modernising their infrastructure and diversifying their industrial base.
Brad Bourland, chief economist at Riyadh-based Samba Bank, says Saudi Arabia alone has projects worth $283bn either under way or at the advanced planning stage – and that will require both the government and the private sector to raise many billions through international debt, equity and project finance markets.
The UAE and Qatar are also spending billions of dollars. Qatar has plans for more than $100bn of investment. According to Abdulrahman Al-Shaibi, head of project finance at Qatar Petroleum, his organisation will invest $90bn in the next five years and “of this we want to secure $30bn in project finance”.
There are potentially rich pickings for the world’s top investment banks and the expectation is that leading banks, such as HSBC, Deutsche Bank, BNP Paribas and JPMorgan, will be able to justify offices in at least several Gulf states. The decisive factor will probably be the implicit message from all governments that those banks with a local presence will have a distinct advantage in competing for mandates.
The real test will come when the current surge of business eases and the banks have to choose between the centres. The decisive factors are likely to be the regulatory systems and a thriving economy, followed by the infrastructure and the environment in which executives live.
Long-term view
Mr Kamal is already looking towards that time. “We know that Saudi Arabia is the largest market. So we have to ask what we are able to offer that will make people choose Qatar. Our strategy is to make the financial centre attractive, not just today and tomorrow but in 10 years’ time and beyond that date,” he says.
He is adamant that he does not want banks just to set up in Qatar to issue bonds and deal with companies wanting loans and advisory services. “We have to create other activities – for example, foreign companies need insurance and, if we provide this, we can consolidate our relationships with them. Our first steps may be to look at the local market but we must then broaden our approach to the region. If you limit yourself to the local market, the centre just won’t work,” he says.
This message is echoed by Stuart Pearce, the former HSBC executive who is the chief executive and director general of the QFC Authority, which is responsible for the centre’s commercial strategy. “We have to create a mechanism that will entice the financial institutions here and make them stay because it is the best place to do business. In particular, you need a capital market where companies from the wider region can list, raise debt and issue equity,” he says.
Regulatory regime
Regulation is critical. The QFC Regulatory Authority (QFCRA) has powers of authorisation, supervision and enforcement that will be consistent with those available in major world financial markets. QFCRA chairman and chief executive Philip Thorpe, who was also responsible for setting up the DIFC before leaving in controversial circumstances two years ago, says the authority will provide a legal and regulatory regime that will be familiar to firms that presently operate in well-regulated international financial markets.
A key appointment has been that of Lord Woolf. The tribunal will be the commercial court as well developing laws and procedures – and his presence is intended to give international banks comfort that legal processes will be fair and transparent.
Bankers in Qatar say that the growing enthusiasm of Mr Kamal, who has been responsible for the QFC Authority since becoming acting economy and commerce minister in March, has been important in maintaining the QFC’s momentum. Mr Kamal, who holds senior board positions at many of the country’s leading institutions, will stand down from the QFC when a new economy minister is appointed (the chairmanship is held by the minister of economy and commerce). But he is reflecting the government’s view when he says he believes strongly that there “should be no intervention on the political side”.
It is a view that contrasts strongly with the reality in Saudi Arabia, where the reaction to a fall in share prices was to sack the regulator.
Another advantage, say bankers in Doha, is that the QFC has only to deal with one government. They say this will give Qatar a long-term advantage over Dubai, which is part of the UAE Federation. They cite the fractious relationship between Dubai and the federal authorities, which delayed the setting up of the DIFC for up to two years, as evidence of the problems this can cause.
Although Mr Kamal’s time as chairman of the QFC may be limited, his decisions as finance minister will have a major impact on its future. Having been a prudent and disciplined minister in the late 1990s, he now has to manage a booming economy, whose GDP, fuelled by high gas and oil prices, has grown from $8bn in 1995 to an estimated $48bn by the end of this year and, he says: “$70bn by 2012. The government is on course to have a huge surplus. In three years’ time, it will be $10bn. Then we will need international institutions to help us manage our investments.”
Equally important will be to ensure financial stability during this period when growth is likely to remain at 30%. For nothing is more likely to discourage international banks from basing themselves in Qatar than the high levels of inflation that can accompany rapid growth.
Inflationary issue
While many political leaders in the Gulf are in denial about any inflationary threat, Mr Kamal is sanguine about the problem: “If you have growth at this level, you cannot deny that there will be inflation. The question is what you do about it.”
In a tax-free environment, the powers of a finance minister are limited. But the Qatar government is determined, he says, to act where it can. And one of the areas in which it can help is reduction of rents, which in some cases have doubled in the past year, and the cost of building.
The government has set up a non-profit company whose job will be to ensure that there is no shortage of building materials and it has acquired two plots of land on which it will build cheap housing for workers coming into Qatar – rents will be QR200–QR300 ($55–$82) a month.
“We are also opening our doors for any international contractor to come in here without a sponsor. We have spoken to companies from Europe, Asia and elsewhere in the world to invite them to come to Qatar,” Mr Kamal says.
