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Middle EastJune 3 2009

Qatar's plan comes together

Beyond banking: the recently renovated Museum of Islamic ArtOne of the few economies to prosper in the past two years, Qatar's route to success - on the back of liquefied natural gas exports - started with an expensive, long-term investment in the mid-1990s that is now coming to fruition. Writer Stephen Timewell
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Qatar's plan comes together

If most economies across the globe were suffering from the worldwide financial crisis in 2008, then Qatar, the world's largest exporter of liquefied natural gas (LNG), was certainly an exception, with nominal gross domestic product (GDP) growing by a significant 44%, driven by sizeable expansion in the gas sector, which now is larger than the oil sector. With LNG exports expected to more than double in quantity from 30.4 million tonnes in 2008 to 77.4 million tonnes in 2011, Qatar's outlook in both the near and long-term appears extremely bright.

Although lower oil prices and the financial crisis have taken their toll, Qatar is still anticipating an encouraging real GDP growth rate of 11% in 2009, according to the latest Qatar National Bank (QNB) report, and an even better 21.5% in 2010. Also with sustained government spending and key recent measures to support the financial sector, the relatively small but dynamic Gulf state is arguably not only the strongest economy in the region but one of the healthiest across the world.

Tricky climb

Qatar's current success, however, has not come easily. After the current ruler, Sheikh Hamad Bin Khaleifa al-Thani, deposed his father in a bloodless coup in 1995, he took a big gamble on opening up Qatar's gas fields and on exporting LNG globally. This hugely expensive long-term investment exercise, financed by huge debt, is only now coming to fruition, with six LNG super-trains coming on stream from now until the end of 2011. LNG exports are set to rise from $4bn in 2003 to close to $40bn in 2011, based on long-term contracts which have more stable prices than oil. For example, LNG prices paid by Japan, Qatar's biggest importer, have fallen by just 13% since July 2008 compared to the 68% fall in crude during the same period.

The success of the Emir's gamble is evident in the milestone delivery of LNG at Milford Haven in Wales on March 20 this year. This tanker delivery of 216,000 cubic metres of LNG was the first of about 50 shipments to be delivered to the UK every year from Qatargas II, the world's first fully integrated LNG supply project.

Qatargas II has revolutionised the global gas industry and given Qatar considerable advantages over its rivals. And during the next two years, the decades of heavy investment will finally provide the huge returns expected from the North field, the world's biggest non-associated gas reservoir with 25.5bn cubic metres of gas reserves.

The success of Qatar's gas efforts have underpinned the country's overall economic effort to diversify its economy away from oil and gas, which accounted for about 62% of GDP in 2008. Estimates suggest that Qatar will spend more than $100bn in the next three years on a broad range of projects, including a new financial district and a new international airport.

Qatar's vision extends well beyond oil and gas and the state continues to spend on a range of infrastructure projects and on building its non-oil and gas economy. Other areas of focus - education, health, cultural and tourism projects - are adding diversity as well as making Doha, Qatar's capital, an appealing and well-resourced place to live.

Tourism is a growth industry, with government planning to invest $17bn over the next five years. This is evident from the huge growth of Qatar Airways, which is still expanding fast despite the current financial crisis. The company covers more than 80 destinations worldwide, with more to come this year. Also, the recently opened Museum of Islamic Art, designed by renowned architect I M Pei, and the renovation of Souq Waqif provide quality facilities largely unmatched in the region.

The heavy investment in education to develop the country's human capital is apparent in the recently inaugurated Qatar Science and Technology Park, part of the Qatar Foundation initiatives, and in efforts to attract many foreign universities to help build the country's research capabilities.

Although many Gulf countries have cancelled capital projects or delayed spending, Qatar remains committed to maintaining spending initiatives and, as one banker puts it, "not having half-finished projects lying around". The latest budget for the 2009-10 fiscal year allocated QR94.5bn ($26bn) in spending (26% of 2008 GDP), down from QR96bn the previous year. Qatar forecasts its first deficit this decade of QR5.8bn (based on an assumed oil price of $40 a barrel) with revenues falling by 14% as a result of reduced oil prices.

Benefits ahead

Analysts believe that maintaining spending will enable Qatar to benefit from falling construction costs and also reduced inflation. Steel and cement costs have dropped considerably in recent months, causing many projects to be renegotiated. Last year, inflation reached a concerning high of 15%, up from 13.8% in 2007, but for this year the governor of Qatar Central Bank, Abdullah bin Saud Al-Thani, forecasts that inflation will slow to "single figures", with GDP growth in the 7% to 9% range.

The Qatar Financial Centre Regulatory Authority also reflects the positive outlook, forecasting that real GDP growth will fall to 10.7% in 2009 but will surge to 23.8% in 2009-10, with inflation easing to 9.2% in 2009 and 8.1% in 2010.

Qatar's relatively strong financial position has been reinforced by a successful $3bn sovereign bond issue in early April. This has been rated as Aa2 by ratings agency Moody's, in line with the country's existing issuer rating. "Qatar's Aa2 issuer rating was supported by the country's high level of prosperity, wide external current account surplus, strong balance sheet and the rapid expansion of gas exports that will significantly boost government revenues over the coming years," said Moody's. Although the agency identified credit concerns about increasing spending, inflation, regional geopolitics and Qatar's relatively undiversified economy, these were not perceived as major concerns. The issue, therefore, for general financing purposes, provides a healthy and important benchmark for the country's future financing.

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Abdullah bin Saud Al-Thani, governor of Qatar Central Bank

Acquisition boost

Another useful signal of how Qatar is viewed financially was the hugely successful QR3.3bn Vodafone Qatar initial public offering (IPO) in April, the biggest IPO in the world this year. Despite the difficult market conditions and the fleeing of foreign investors, the IPO, the second largest in Qatar's history, was fully subscribed and completed, and was the first achievement of this scale in the Gulf. Some 82,000 Qataris subscribed to 65% of the shares, with 273 institutional investors taking the remaining 35%.

The Qatar government has introduced two novel schemes to boost liquidity and bolster banks through the financial crisis. Late last year, the country's main sovereign wealth fund, the Qatar Investment Authority (QIA), offered to buy between 10% and 20% of listed banks' capital. The share purchase measure, applying to seven banks (excluding Qatar National Bank, which is already majority government-owned), bought 5% of banks' capital in November and plans to buy another 5% by year-end. This move has helped to boost liquidity and confidence in the banks and has been well accepted; whether or not the remaining 10% will be bought will be decided next year.

The other measure, also designed to boost the banks' liquidity, has involved the government offering to buy the listed banks' local investment portfolios at cost. This helps banks to avoid writing off losses and assists with reducing capital and stimulating lending.

In March, the Qatar Central Bank announced that QR 6.5bn in banks' investment portfolios had been purchased. The central bank co-ordinated with the banks on which investments they wanted to sell.

Also in March, the Commercial Bank of Qatar sold its entire portfolio of Qatari equities to the government in a QR938m deal; the equities had a net book value of QR938m at the time of the deal and the government agreed to pay QR418m in cash along with a five-year bond worth QR520m with a 5.5% coupon. Qatar National Bank is understood to have sold QR4bn-worth of its equities. Again, this measure has been very well received.

In terms of the direct impact of the global financial crisis, Qatari companies fared much better than companies in neighbouring states. The 43 companies listed on the Doha Stock Market, which includes nine banks, realised profits of about QR28.5bn, an increase of 33.4% on 2007 profits of QR21.4bn. All Gulf Co-operation Council (GCC) countries, except for Qatar, experienced corporate profitability declines; a study of 466 companies across the six GCC states revealed that aggregate net income fell by 19.8% in 2008 to $45.6bn.

Dealt a blow

The Qatari banking sector clearly, however, took a blow in the fourth quarter of 2008 where aggregate losses reached QR6bn amid the global crisis, according to a report from Kuwait's Global Investment House. The effect of the losses were neutralised by the government's plan to buy 10% to 20% of bank capital, and the Qatari banking sector is reported to have the lowest rate of loss compared with other GCC banking sectors in Q4 of 2008.

The total aggregate profit of the Qatar banks reached QR10.04bn in 2008, an increase of a sizeable 23% over aggregate profits in 2007 of QR8.16bn. Only one of the banks displayed a decline in profits, with heavyweight Qatar National Bank leading the pack, with a 45.7% increase, reaching profits of QR3.7bn. Overall, Qatari banks have clearly led their regional peers in profit growth in 2008.

In 2009, the economy is expected to hold strong and the banks are expected to follow suit. Qatar is primed for growth, having effectively allowed its population to double from 800,000 in 2004 to more than 1.6 million today. Also, given the solid supportive measures provided by the government to the financial sector, the economy is well positioned, despite the global financial crisis, to continue the very high growth GDP rate trend of recent years, averaging at 34.3% between 2004 and 2008, and to capitalise on both the expansion in the gas and non-hydrocarbon sectors.

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