The extraordinary thing about Qatar is that no matter how large the wealth and economic potential you believe it might have, the reality is even more astonishing. Although there may have been considerable doubt at the end of the 1990s that Qatar’s ambitious gas plans could be implemented, that initial phase is well over. Qatar’s gas plans are already starting to come to fruition, the financial worries are gone and the outlook is one of unprecedented growth, the key issues being how best to manage the enormous wealth emerging and to provide a suitable vision for the future.
To say that Qatar is just another oil-rich state is to miss the incredible developments that have taken place this decade and the strategy that is driving the change. Standard Chartered Bank’s latest Qatar 2020 Report notes: “Qatar has become the most dynamic economy of the Gulf states. The economy has been transformed over the last decade by astute government policy, rebounding energy prices and the meteoric growth of liquefied natural gas (LNG) exports.”
Time of transformation
Some basic data highlights the change. At the end of 2005, the economy had trebled in size since 1996 in nominal terms, conservative estimates from the report put income per head at $44,200, the highest in the Gulf and one of the highest in the world, and Qatar’s share in the total LNG production capacity worldwide is likely to be 28% by 2011.
Digging a little deeper and understanding the breakdown and trends in Qatar’s energy revenues highlights the extraordinary growth taking place and the huge potential yet to come. Unlike other Gulf states, Qatar has a diverse mixture of energy resources. Next year gas is expected to overtake oil in terms of revenues but that is only part of the story.
As Qatar National Bank chief economist Mohamed Moabi explains, LNG exports have risen from 2.2 million tonnes in 1997 to an expected 30 million tonnes in 2007; but that is not all. While oil production has remained steady at 850,000 barrels a day (b/d), the growth in LNG export volumes and higher oil prices have resulted in oil and gas revenues growing from Qr15.6bn ($4.3bn) in the 2001/02 budget to Qr41.1bn in the 2005/06 budget, an expansion of 164%. And LNG is expected to increase much more. In 2009, long-term supply contracts starting with the UK and the US are expected to boost exports by 7.5 million and 15 million tonnes, respectively.
Mr Moabi believes that LNG exports will peak in 2011 at a huge 77 million tonnes, 35 times the 1997 level. Every one million tonnes of LNG exports is seen as the long-term equivalent of $250m, making 2011 LNG exports the equivalent of about $20bn. And, besides LNG from the recently developed North Field, Qatar is also abundant in gas to liquid (GTL), which, along with piped gas to the UAE beginning this July, provides another diverse source of energy revenues.
Gas fuels role change
Qatar’s expanding gas revenues are not only transforming the country’s budgetary equation but are also impacting dramatically on Qatar’s role in the region and internationally. Speaking to The Banker, Yousuf Hussein Kamal, the minister of finance and chairman of the , summarises Qatar’s huge revenue potential by putting all the country’s diverse energy sources into a single measurement. “By 2012, our energy production from all sources will be the equivalent of about six million b/d.”
This equivalent measure is, in effect, two-thirds of the current oil production of Saudi Arabia, and Qatar only has a population of one million at best (compared with more than 20 million in Saudi Arabia), only 250,000 of whom are Qataris. Using the minister’s forecast, this translates in export terms into revenues well in excess of $100bn and that is if oil prices stay at about $50 a barrel and do not increase. With this conservative oil price assumption, Standard Chartered predicts average incomes per person are likely rise to $69,000 and could go much higher if the oil price escalates.
Economic confidence
Mr Kamal is also bullish about the vitality of the economy and its diversification away from both oil and gas. “By 2015, the government should depend on oil and gas for less than 20% of its budget,” he says. In explaining the government’s positive position, he notes modestly: “The budget in just two years’ time could be financed by just royalties (on oil and gas facilities) and (corporate) taxes alone.” He uses his royalties and taxes analogy to highlight the fact that Qatar is diversifying fast and is moving away from direct dependency on energy revenues. The announced 2007/08 budget, which runs to March 31 next year, predicts a Qr6.7bn surplus, a 193% increase on the previous year’s budget surplus.
Excited by the prospects ahead, Mr Kamal is equally adamant that he has no thoughts of any personal taxation initiatives in the country, as has been rumoured.
Reacting to concerns about the country’s relatively high inflation rate of 11% and worries over the high cost of rents and shortage of housing capacity, the minister is unphased. “With such high overall growth, I don’t think inflation is a bad thing. The inflation has been mainly in real estate, cement and aggregates; the cost of living in Qatar is cheaper than all other states in the Gulf, especially in food,” he says.
Mr Kamal believes, however, that inflation has now reached a plateau and is hopeful that, with various programmes already in place, it can be reduced to single figures later this year. Although that is possible, Qatar is understood to have had the highest average salary rise in the Gulf in the year to August 2006, registering 11.1%, versus 7.9% the previous year, and accommodation costs are reportedly spiralling, with some annual rent rises of 50%-100%.
Long-term strategy
Looking ahead, the minister’s strategy is not just about 2015 but also about 2025. As part of the country’s diversification, Mr Kamal is extremely keen on building Qatar’s education facilities and, through education, providing the building blocks for future generations. Qatar has managed to attract a range of highly reputable international universities, including Cornell and Georgetown, and the minister is pushing for 2.8% of gross domestic product to go into research.
Building the financial sector is part of his overall approach. “The strategic role of the QFC [Qatar Financial Centre] Authority cannot be underestimated,” the minister states. “It is not only raising the capacity of financial services available in Qatar, but it is also helping to raise standards in our financial sector. By attracting to Qatar some of the world’s most prestigious banks, insurance companies and financial services firms, it is a crucial pillar in our economic strategy for the future.’
The QFC, which has been created by Qatar to develop local and regional economies, has been achieving considerable success in attracting high quality institutions that want to participate not only in Qatar’s huge project finance boom, but also in the local and regional wealth being created. The latest QFC listing shows that 48 institutions have been licensed by the authority since September 2005, including key global players that have established operations in the Gulf sometimes for the first time. For Credit Suisse, Barclays Bank, Morgan Stanley and Deutsche Bank, a presence in Doha represents an important move into a relatively new area; and more recent arrivals Lehman Brothers International and Royal Bank of Scotland add further heavyweight depth to the growing market. And with good reason.
Project finance
Qatar will spend more than $145bn on various sectors over the next seven years, of which about $70bn will be project financed. The QFC also provides a strong platform to target financial services in the region; more than $1000bn is reportedly to be invested in high-value projects across the region led by the United Arab Emirates ($491bn), Saudi Arabia ($305bn), Qatar ($145bn) and Kuwait ($126bn). With Qatari authorities insisting that institutions need to have a physical presence in Qatar if they are going to participate in the huge development pie available, bankers are getting the message and changing their approaches. QFC chief executive Stuart Pearce poignantly notes: “Aircraft banking is yesterday’s technology; being on the ground is what is wanted.”
And more banks are coming. According to Philip Thorpe, head of the QFC Regulatory Authority, the independent regulatory body established under QFC law, interest levels are strong: from 48 today, he expects 70 to be licensed by year end. With its international standards, legal and business infrastructure, the QFC is attracting institutions because they can operate both in Qatar and the region, unlike those joining the Dubai International Financial Centre, which cannot do domestic business inside the UAE without a specific UAE licence. Standard Chartered Bank was licensed by the QFC last year and its CEO in Qatar, Kris Babicci, noted: “Qatar is gaining rapid recognition as a key business centre with an excellent base for financial companies looking to expand into the Middle East.”QATAR 2
