It was smiles and applause all round at the Ritz-Carlton Doha on April 1, as gathered dignitaries and industry captains, flown in for the occasion by Qatar Airways, witnessed the public release of the World Economic Forum’s first Arab World Competitiveness Report. The launch may have been just one event amid a series of round-table discussions organised by the Geneva-based forum, but for the Qatari hosts it was a particularly sweet moment to savour. Ahead of ambitious local rivals Bahrain and the UAE, it was Qatar that emerged at the top of the ranking. According to the statisticians from the World Economic Forum (WEF), Qatar now has the most competitive Arab economy and the best regional model for its neighbours to emulate.
The previous day, Qatari finance minister Yousef Bin Hussain Kamal had announced the government’s budget for fiscal year 2005/2006. Continuing an expansionist policy of capital spending, he increased budgeted outlays by 32% to QR11.7bn ($3.2bn). A little less than QR10bn of that is to go on infrastructure development and most of the rest will go into education and healthcare. The best news, however, came in the budgeted revenues. Despite the increase in expenditure, a 45% increase in forecast income to QR38bn should mean the government can invest generously and still have a QR218m surplus at the end.
Until recently, Qatar was known for little more than the Gulf headquarters of the US military command and the home of Al Jazeera, the controversial Arabic news channel. Although the world recognised that the co-existence of those entities on Qatari territory signalled a liberal and balanced attitude to geopolitics, the fact that Qatar’s 11,437sq km of desert is home to only 745,000 people meant that it was largely disregarded as a business centre or market mover.
Preparing for the future
Times are changing rapidly, though. Qatar’s average crude oil output hit 759,000 barrels per day last year and, at current production rates, its reserves are expected to last another 60 years. The government budgeted for average prices of $19 per barrel last year but earned $35, and because it prefers to make conservative estimates, the budget it has outlined for 2005/2006 assumes an average this year of $27.
Realising that the state cannot rely on oil income alone for future funding, the government has invested heavily in its natural gas reserves since the 1990s. Thanks to exploitation of the vast offshore North Field, analysts are projecting that the emirate will become the world’s largest producer of liquefied natural gas (LNG) and gas-to-liquid by 2010. Sales and purchase agreements (SPAs) have been signed with Japan, Korea, India, Italy, Spain and the UK among others. If complemented by draft deals with Taiwan, the US and Belgium, that should lead to secured export contracts for 77.2 million tonnes of LNG a year by 2012. Qatar Petroleum, the state hydrocarbons company, has correspondingly committed QR122bn to its LNG and piped natural gas projects in a five-year plan starting this year.
State investments in oil and gas derivatives, such as petrochemicals and fertilisers, are also enabling the economy to diversify and create new employment opportunities in the private and semi-private sector. The oil and gas sector still accounts for 60% of GDP but if earnings related to the rising price of oil are factored out, the non-oil sector has been making steady advances since 2000 and grew by 10.8% in 2004 alone.
Of the non-energy sectors, manufacturing comes high on the GDP earnings list along with general services, financial services and real estate – which are lumped together for the purposes of Qatar National Bank’s (QNB) economic analysis. Anyone who has tried to book a hotel room in Doha or considered buying a property in one of the luxury developments recently opened to foreign ownership will understand how closely linked the two industries are.
Construction continues
Cranes tower over Doha’s West Bay skyline as buildings funded by the last oil boom make way for those being built with the proceeds of today’s bonus payout. Urban myth holds that 150 new tower blocks are being built in the Qatari capital, though bankers say this probably represents the number of applications that have been lodged rather than the number of projects financed. Nonetheless, the pace of demand and credit growth in the real estate sector has been so fast that Qatar Central Bank (QCB) has set strict limits on exposure at 150% of shareholder equity or 15% of deposits, whichever is lower.
QCB figures released in April show that the consolidated balance sheet of Qatar’s commercial banks stood at QR88bn at the end of December 2004. Total deposits were QR60bn, of which QR23bn belonged to the public sector. Domestic credit was just under QR50m, while foreign assets and liabilities reached QR40bn and QR8bn respectively.
Commercial banking
The commercial banking sector is a competitive one, occupied by 14 banks. QNB leads the pack by assets, followed by Commercial Bank of Qatar, Doha Bank, Ahli Bank and International Bank of Qatar. Two Islamic banks, Qatar Islamic Bank and Qatar International Islamic Bank, round out those institutions that are fully or majority owned by Qataris. The international banking community is represented by branches of Arab Bank, Bank Saderat Iran, BNP Paribas, HSBC, Mashreqbank, Standard Chartered and United Bank.
Historically, the government has been a major depositor in the local banking sector and a major borrower, the former providing capital for the banks to funnel into private sector credit even if the latter requires lending at tight margins and tends to distort non-performing loan ratios. Assessing Qatari loan-GDP ratios, Kuwait-based Gulf Investment Corporation (GIC) found the rate to be 62% for 2003 – 34% if loans to the government were excluded.
“We believe those low ratios are not going to prevail in Qatar in the intermediate term,” GIC analyst Karim Kamal wrote in a report. “Government liberalisation initiatives in the economy at large, coupled with the sale of stakes in two local banks (Al Ahli Bank of Qatar and Grindlays Qatar), are setting the stage for a sizeable wave of credit expansion in the country.” This expansion will have two main themes: government exposure giving way to private sector credit, and smaller banks driving the market to gain market share, he wrote.
In the battle for retail market share, local bankers will privately admit that personal leverage has increased significantly in the past year or so. QNB estimates that inflation doubled from 2.26% in 2003 to about 5% in 2004, driven mainly by double-digit inflation growth in the housing sector. But a generous state welfare system and GDP per capita earnings of $36,476 last year have given Qatari nationals the financial resources and creditworthiness to invest heavily in local equities, and real estate in particular.
Salary schemes
At the other end of the wealth scale, expatriate labourers who are unofficially deemed unbankable have been brought into the financial system through employer salary schemes. Some banks issue debit cards to corporate clients’ workers, for example, so that the employers can make salary transfers rather than issuing cheques and their labourers can access their funds through an ATM or PoS purchase.
Even a cursory glance at the 2004 results posted by Qatar’s banks will show that the sector enjoyed another bumper year. Among the largest conventional banks, Doha Bank reported 70% net profit growth to QR365.6m, Commercial Bank of Qatar reported 31.7% growth to QR326.7m, and QNB reported 27.1% growth to QR815m. The expectation for 2005 is also bullish, although two of this year’s big stories – the entry of conventional banks into the Islamic finance business and the evolution of the Doha Securities Market – could have unpredictable effects on the competitive structure of the market.
Market matures
Corporate and investment bankers report that the market is maturing fast, that demand for derivatives is growing and that corporate treasurers are increasingly aware of the need to hedge positions. The hope now is that the Qatari government will establish a benchmark domestic riyal debt yield curve that would spur the formation of a local debt capital market. That, in turn, would help the banks to manage their own liquidity and provide local companies with a means to diversify their sources of funding. As in neighbouring countries, however, the anchor on this ambition is that the government does not need to borrow any more.
The third big story for the financial services sector will be the Qatar Financial Centre (QFC) (The Banker April 2005, p115), which was expected to open for licence applications this month. It will offer a low-tax environment charging 10% on profits after three years, 100% ownership and profit repatriation, and the opportunity to build close relationships with Qatar’s public and private sectors. Consequently, it is expected to be popular with international institutions that are aware of the project deal flow and high net worth wealth management potential in Qatar.
