As it contemplates a near-term future seemingly guaranteed by soaring hydrocarbon revenues and burnished by international acceptance in the form of a winning the rights to host football's 2022 World Cup, Qatar’s economy and society are forging ahead, eager to embrace the outside world. With world-leading growth rates, and gross domestic product (GDP) per capita set to cross the $100,000 mark next year, the outlook could not be brighter.
Like its Gulf Co-operation Council (GCC) partners, Qatar’s wealth stems from abundant hydrocarbon resources. In total, it produces the equivalent of 4.5 million to 5 million barrels of oil per day, matching the combined production of Kuwait and Abu Dhabi, in a country with a total population of only 1.7 million. It has, over the past 10 to 15 years, invested heavily in gas infrastructure and is now reaping the benefits of its global seaborne liquefied natural gas (LNG) strategy.
As a result, GDP of just over $160bn is forecast for 2011. With gas export incomes rising to $39bn in the four years to 2010 at an annual average rate of 34.7%, compared to a more sedate but still important concomitant rise of 6.2% in crude petroleum to $20.4bn, Qatar’s immediate future seems secure. With extremely low extraction costs, its hydrocarbon riches have some Qatari officials waxing lyrical about a cloudless economic horizon for the next 150 years.
Quick turnaround
“It's amazing how quickly this country has developed. People often forget that 10 years ago, Qatar was a net borrower,” says International Bank of Qatar managing director George Nasra. “Qatar has a very ambitious leadership, and [its leaders] have the financial resources to implement their vision.”
This vision centres around stable gas revenues, infrastructure expansion boosted by the successful World Cup bid, economic diversification and the honing of its human capital through education, health and cultural initiatives.
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Soaring government revenues have emphasised contrasts with other GCC players, whose economies have struggled in the financial crisis. The Qatari government’s budget was QR48bn ($13.17bn) in the black in 2010, at 9.7% of GDP. Real growth of 20% is expected this year, but will drop to 7.1% in 2012. Despite Qatar’s extraordinary growth, inflation seems well under control. After falling 2.4% in 2010 on easing housing rents, it is expected to go up to 4.2% this year.
Taking a breather
The 2004-08 economic boom saw the population of Qatar double to 1.5 million people, and the government is now understandably happy to catch its breath and consolidate. Still, the financial crisis has brought pause for thought, and, at a time when Qatar’s LNG strategy is starting to reap real dividends, the authorities are mindful of curtailing exuberant excesses, especially given the uncertain political backdrop. “There’s quite an unstable situation in the [Middle East and north Africa] region,” says a European banker, citing turmoil in Bahrain, Libya and Egypt.
Managing growth entails a firm hand on the tiller, and Qatar's authorities are mindful of the confusion that arises from the country's existing two-pronged regulatory structure. Today, the Qatar Central Bank (QCB) oversees the country’s 18 wholesale banks, of which six are commercial banks, four Islamic, one a specialised bank and seven representative offices of international banks. Meanwhile, the Qatar Financial Centre Regulatory Authority directs about 130 financial institutions. Officials have gone on record saying that a single regulator, likely to be the QCB, will emerge, but a date as yet is not forthcoming.
"There are plans for that to occur," says Rod Ringrow, senior executive officer at State Street Middle East North Africa. "The sooner they are finalised, the better for the Qatari market."
Banks thrive
Qatar’s strong public finances and external trade position are reflected in a thriving banking industry, which continues to exhibit impressive profitability. With results still to be fully assessed, a broad measure of industry profits showed a rise of 22.3% in 2010, after the entire sector saw a paltry rise of only 0.8% in 2009. “Banks generally are highly capitalised. Remember, [with assets of about $70bn, sovereign wealth fund] the Qatar Investment Authority has participated in three rounds of capital increases of 20% for most Qatari banks,” says Mr Nasra. “They are profitable, and very liquid.”
Powerhouse Qatar National Bank (QNB), which controls just under 40% of domestic banking assets, has continued to outperform most of its peers, increasing return on equity by some six percentage points to 27.5% in 2010. Last year, its total assets grew 24.6% to QR223.4bn, and deposits rose faster than loans to QR165.5bn to help rein in its loan-to-deposit ratio to 79.6%. Net profits rose to QR5.7bn, an increase of 35.8%, well ahead of the overall market. QNB is at the forefront of moves to rein in excessive credit expansion, especially on the consumer side.
"We have seen some pick-up in credit growth. It has been reasonably subdued post-crisis," says Kamran Butt, Credit Suisse's MENA head of equity research. "We have seen some life over the past couple of months and quarters. We are in a buoyant credit-growth environment. Most of that is going towards the corporate, rather than household, sector."
The rest of the domestic marketplace continues to perform, with aggregate net profits in excess of QR6.8bn. With only one-tenth of QNB’s assets, Al Khaliji Bank increased profits by 155% last year. Only marginally bigger, Islamic finance operation Masraf Al Rayan has had a notable two years, growing assets by more than 44% each year and deposits by 51.5% in 2010, reflecting the general strength of Islamic banking in Doha, and likely to benefit further from the closure of conventional banks’ Islamic windows.
Consolidation calls
With 18 depositary institutions serving such a small population, calls for consolidation are inevitable. A merger between International Bank of Qatar and Al Khaliji, which in 2009 combined accounted for only 8.8% of banking assets, could create Qatar’s third largest bank, says Mr Nasra. The deal is not a certainty and depends on an understanding on the exchange ratio. "The time-frame for agreement is before the end of the year. We are not in a position to comment further than that," he says.
“Qatari banking has been remarkably resilient,” says Mr Ringrow. “There is room for consolidation, as there are a high number of banks. The sector received strong support from the government and the banks here are in good shape. I can see them playing a wider role on the international stage, as well as a bigger regional role.”
Several developments point to a more prudential QCB regulatory stance. This includes strengthening oversight, the launch of a credit bureau and tighter consumer lending ceilings. In March, the QCB reduced limits on personal borrowing for Qataris from QR2.5m to QR2.0m, and to QR400,000 for expatriates.
In 2010, the QBC published its first Financial Stability Report – likely to become an annual publication – and commissioned a thorough stress-test of the country's financial sector. Regulations include a minimum 10% capital adequacy ratio for local banks, required reserves at 4.75% of deposits, lending limits to individuals of 20% of bank capital and reserves, a limit of 65% of purchase cost on property financing, and a tightening of the rules governing non-performing loans and their provisioning. Moody’s estimates that these grew by about 140% in 2009. QNB data show a deterioration in capital asset ratios from 15.3% at year-end 2010 to 13.3% in the first quarter of 2011.
The fall-out from the QCB order for conventional banks to close Islamic windows continues. Most agree the QCB was simply removing overlaps between the conventional and Islamic segments of the market. “The QCB’s role in supervising the banking sector and managing monetary policy was made too difficult by the conventional banks having Islamic window operations,” says Abdul Hakeem Mostafawi, CEO of HSBC Qatar.
“The QCB opined that banks may not be able to manage the risks and present consistent financial reports when operating both forms of banking, particularly when using conventional fixed-income deposits to fund Islamic assets. Citing these difficulties, the QCB directed conventional commercial banks to wind up their Islamic banking operations by the end of the year.”
It is no accident that the prestige of the Islamic finance will grow, and Qatar is likely to gain credit for initiating a measure that will in time probably be replicated throughout the wider GCC, say some analysts although the decision remains controversial
Mixed private sector fortunes
The fortunes of the private sector have been mixed. Commercial bank lending was up at a faster rate in 2010, growing 19.3%, 65.7% of it to the private sector. Consumer rents have dropped amid a weakening of between 30% and 40% in real-estate prices. Rent, fuel and energy, which make up one-third of the price index, fell 12% and 12.8%, respectively, in the consumer price index in 2009 and 2010. It is, however, seen as a panacea until the employment conditions of Qatari nationals can be improved. “The government is putting pressure on the private sector to employ more nationals,” says a banking source. “Large companies, especially banks, are trying their utmost to implement that. There is not enough pressure on smaller companies.”
For this reason, Qatar Development Bank has been given a mandate to disburse QR2bn to small and medium-sized enterprises to enable Qataris to set up small businesses or partner with non-Qatari entrepreneurs.
A key target for the Doha Securities Market, renamed the Qatar Exchange (QE) last year, is the success of its application for inclusion in the Morgan Stanley Capital International (MSCI) family of indices, though it has already been rejected twice. To this end, Qatari officials said the QE switched to a delivery-versus-payment settlement system in May as a step towards promotion from frontier to emerging market status. Another bone of contention is the share of listed companies available to foreign investors. Today this is 25%, but the MSCI is believed to be pushing for 49%. Near neighbour the United Arab Emirates is also applying for MSCI membership.
“I think an increase in inward investment would benefit Qatar. Stocks on the exchange included as part of the MSCI family would benefit,” says Mr Ringrow. “In terms of ETFs [exchange traded funds], none are in existence in Qatar or the UAE. There is a small Saudi ETF but it is relatively thin. [Inclusion of] either Qatar or the UAE would be good for the GCC region as a whole.”
Finding a niche
As Dubai forges ahead in becoming the Middle East's pre-eminent financial centre, and Bahrain suffers internal strife at the hands of its Shia majority, denting its reputation as a stable banking hub, bankers say Qatar is looking to insurance, reinsurance and asset management as the niches to pursue. In 2009, non-life reinsurance business originating from the GCC region was worth almost $5bn, according to the new GCC Reinsurance Barometer, published by the QFC.
“There is a focus on asset management and reinsurance. That's the goal,” says Mr Ringrow. “That's the revised strategy of the Qatar Financial Centre Regulatory Authority.”
"In terms of pensions, more needs to be done on the administration and actuarial sides," says Mr Nasra. "There is a serious shortage of these facilities, not only in Qatar, but in the whole region."
To meet future challenges, Qatar is preoccupied with development of its human capital. The Qatar Foundation is the driving force behind attracting several Western universities, including Texas A&M, Carnegie Mellon and Northwestern as well as Weill Cornell Medical College, to campuses in and around Doha.
Published in 2008, Qatar’s Vision 2030 outlines a transition to a knowledge-based economy through education, science and research and community development. “The pace of development has been unbelievable,” says HSBC Qatar’s chief executive Abdul Hakeem Mostafawi. “It is being done for the right reasons. This includes education, industry and research and development.”
Despite the rosy outlook, bankers emerging from 30 months of adverse operating conditions display a practised guardedness. “There are a number of positives, but one must be careful of hyperbole,” says one Qatar-based official. “It pays not to inflate the picture too much.”
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