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Middle EastJuly 31 2005

Qatar on the rise

Qatar is raising its profile in the Gulf with another hydrocarbon-fuelled growth spurt. By Will McSheehy.
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To a visitor, Doha looks somewhat outmoded. Many of the buildings were clearly built in the 1970s and 1980s off the back of the world’s last great oil boom, and Qatar’s capital city still has a sleepy feel to it.

But appearances are often deceptive. Qatar’s population may be tiny in global terms, at about 800,000 – only a quarter of them Qatari nationals – yet the cranes towering over Doha’s skyline indicate that another hydrocarbon-fuelled growth spurt is in full swing.

Despite the long shadow cast by neighbouring Saudi Arabia, this peninsula nation is forging its own path. While protecting the cultural and religious identity of his people, Emir Sheikh Hamad bin Khalifa al Thani wants to see his country not just modernise but leap to the forefront of global development indicators.

American universities are being brought in to educate the youth, $5bn is being spent on airport expansion to meet the expected influx of business travellers and tourists, and sports facilities are being radically overhauled in preparation for Qatar’s role as host of the 2006 Asian Games.

Where once Qatar was almost unknown to the outside world, today it is recognised as the base from which US Central Command launched the 2003 invasion of Iraq. It is the home of controversial Arabic news channel al Jazeera, and has led the Gulf in introducing universal suffrage in preparation for parliamentary elections next year.

Qatar’s immediate neighbour may not like all these developments but finds it increasingly difficult to influence the Emir should it dislike his unilateral initiatives. At the most basic level, Qatar is no vassal state and enjoys fabulous natural wealth. Its GDP per capita of about $35,000 is more than three times that of Saudi Arabia.

Secret of success

The secret of Qatar’s economic success lies compressed in the rock strata under its desert sands and territorial waters. As an Organization of the Petroleum Exporting Countries (OPEC) producer, the country is a relative minnow, pumping roughly 800,000 barrels per day (bpd) of crude oil. Qatar Petroleum, the state energy company, is working with international companies, including Occidental, Total and Maersk, to boost output to one million bpd by 2010, but that will still be small compared with Saudi Arabia’s projected output of 12.5 million bpd or the UAE’s three million bpd.

The picture is very different, however, if you look at the fuel described recently by Deutsche Bank as “the oil of the 21st century”. In 1971 Shell discovered natural gas in Qatar’s offshore North Field and at the time was disappointed that it had not struck oil. Today, the field’s 900,000bn cubic feet of gas is viewed far more favourably.

As demand for cheap energy soars from expanding industry in China and India, and as traditionally self-sufficient markets like the US and UK run low on their own reserves of natural gas, Qatar is in an enviable position. The International Energy Agency predicts that global demand for gas will double by 2030. Developments in gas to liquids (GTL) super-cooling techniques have made it cheap enough to make liquefied natural gas (LNG), which can be piped or shipped to wherever it is required.

Simultaneously, international oil companies are struggling to replenish their dwindling oil reserves and are hearing the predictions of the future dominance of gas over the energy markets. It is little wonder then that the top executives of BP, ExxonMobil, Shell and Total have all been to Doha in the past year to lobby the government for a piece of the action.

Whereas Qatar was treated with suspicion in the 1990s when it borrowed on the international markets to invest in hydrocarbons production, it now boasts an A+ sovereign credit rating from Standard & Poor’s. During the past decade, about $40bn of investment has been poured into energy infrastructure, and spending plans for a further $100bn have been drawn up for action by 2012.

By that time, the government expects to be operating seven major LNG joint venture projects through Rasgas and Qatargas and to be the world’s largest LNG producer, capable of an annual output of 77 million tonnes. Admittedly, rival producers Iran and Russia might be able to upset the apple cart, but for now it is Qatar that is proving most amenable to foreign investment.

Business attraction

Numbers of this magnitude have ensured that international bankers have been as willing as their peers in the oil majors to do business with Qatar Petroleum and its partners. Margins are often very tight and long-term sponsor guarantees a rarity, but the aggressive deal flow coming out of the emirate has translated into numerous opportunities to deploy capital against bullish expectations of future gas demand.

In 2004, Qatar offered the financial services industry a bouquet of about five major projects, which were mostly hydrocarbons-based but which will also fund expansion of the non-energy economy. In total, Qatar’s economy grew by 8.7% in real terms last year and is expected to repeat that success again in 2005.

High on the list came the $665m Ras Laffan LNG bond, the $586m Ras Laffan tanker finance deal, a $223m package for Qatar Shipping arranged by Calyon, and $120m of expansion finance for Qatar National Cement raised by Qatar National Bank (QNB), Commercial Bank of Qatar (CBQ), Gulf International Bank (GIB) and Standard Chartered.

The undisputed deal of the year, however, was the landmark upstream component of the Qatar Liquefied Gas Company II (QatarGas II) facility – the largest arrangement in Middle Eastern history. With the objective of raising $3.6bn of 15-year capital to finance a two-train LNG plant, sponsors Qatar Petroleum and ExxonMobil engaged Royal Bank of Scotland (RBS) as their financial advisers. More than 40 banks responded to RBS’s call for mandated lead arrangers of which 36 were selected, including 28 from outside the Gulf Co-operation Council states.

Project finance

Apart from its scale, the two most interesting facets of QatarGas II were the names involved and the styles of finance involved. As well as banks familiar with Gulf project finance, the deal attracted new market entrants such as Bank of Ireland and WestLB. Two domestic banks, QNB and CBQ, were also part of the team. And QatarGas II involved a $530m Islamic tranche of the same tenor and pricing as the conventional tranche but structured as a Shariah-compliant sale and leaseback transaction. Kuwait Finance House led the pack with a $150m share, followed by Dubai Islamic Bank with $100m.

These two facets to the facility show not only that Gulf sponsors are increasingly keen to bring Islamic banks into the project finance mainstream, but that the skills and balance sheets of Arab banks are maturing fast. Despite a perennial problem of asset/liability mismatches, these Arab banks proved that they could compete for mandates (albeit on a limited basis) with the biggest institutions in the business.

Banking boom

Qatar’s 15 banks enjoyed a bumper year in 2004. Profitability for the sector as a whole grew by 38.5% year-on-year to Qr2.28bn ($626m) and total assets grew by 24.7% to Qr92.6bn. Loans and deposits were both up by roughly 20%.

QNB dominates the sector with a 42.6% share of assets, almost four times the combined assets of the foreign banks – which include Arab Bank, HSBC, BNP Paribas, Standard Chartered and Mashreqbank. Because it is 50% state-owned, QNB has long been the de facto government bank and so has won the cream of public and semi-private business accounts. It faces increasingly stiff competition from the next tier of ambitious pretenders to the throne, however. CBQ and Doha Bank both having increased their capitalisation in the past year to meet the demands of the growing economy.

While the state ‘Q’ companies were the historic battleground for corporate bankers, a gradual broadening of Qatar’s industrial and trade base is shifting emphasis to small and medium-size enterprises (SMEs). Their business is still largely focused on vanilla products but bankers report that there are increasing levels of client sophistication and the seeds of demand for derivative products. That is welcome news as they strive to free up their balance sheets in favour of fee-earning services.

In line with several other Gulf markets, personal leverage has been growing at a dramatic rate. Confident in the social security net provided by the state, Qataris have been borrowing heavily to finance consumer spending, construction projects and even stock market speculation. Although lending for the latter is strictly forbidden by the central bank, commercial bankers say that it is extremely difficult to track where non asset-backed credit is being used.

Stock market growth

The Doha Securities Market (DSM) has been a major beneficiary of both the prevailing bullish economic mood and the ease with which Qataris can lay their hands on capital. Having risen by 69% in 2003 and 64% in 2004, the benchmark DSM index grew by a further 61% in the first quarter of 2005 alone.

A major driver of this change was a partial liberalisation of the market in April, whereby non-Qataris were permitted to own up to an aggregate 25% of listed shares. A major initial public offering for the Qatar Gas Transportation Company coincided with the market’s opening, and excited investors pushed price/earnings ratios up over 50 in some sectors. By the end of May, the index had cooled to 9000 from a high of more than 11,000 in March but its trajectory is still expected to climb upwards for the foreseeable future.

Strategic acquisitions

Well aware of the enormous potential of the Qatari market, two regional banks managed to make strategic acquisitions last August. National Bank of Kuwait (NBK) took a 20% stake and management contract for Grindlays Qatar Bank and reopened its lone branch as the International Bank of Qatar (IBQ) in October. Bahrain’s Ahli United Bank (AUB) went a step further to buy 40% of ailing Al Ahli Bank of Qatar, which it renamed Ahli Bank. A heavy non-performing loan burden had left the Qatari bank close to collapse in 2000 but AUB’s entry has brought with it a capital increase from $85m to $239m and a 10-year management contract. A 30-strong team from Bahrain has now begun a portfolio cleansing operation and has launched an aggressive price-led retail strategy to grow market share from about 3% to 10%.

For Qatar’s two Islamic banks – Qatar Islamic Bank and Qatar International Islamic Bank – June was a watershed. Following a central bank decision authorising conventional banks to offer Shariah-compliant services through separate branches or subsidiaries, QNB launched its suite of Al Islami products. The leading conventional banks had been awaiting this decision for some time, and the likes of CBQ and Doha Bank promptly followed suit. All believe they can compete with the incumbents on product range and customer service.

Two of the most telling acquisitions of the past year were CBQ’s purchase of 39.5% of the National Bank of Oman (NBO) last month and QNB’s £135m deal to buy London-based Ansbacher Holdings exactly a year earlier.

For much of 2004, it looked as though NBO would be swallowed by its domestic arch-rival BankMuscat, thus creating an Omani super-bank with a balance sheet large enough to punch outside the sultanate. The deal went sour, however, so CBQ saw an opportunity to step in and secure its first bridgehead for regional expansion.

Ansbacher Holdings, on the other hand, was bought to provide Qatar’s largest bank with a ‘plug-and-play’ wealth management arm. QNB executives say they could have taken the time to grow one themselves but that it was advantageous to buy a business with £2.6bn of fiduciary and £1bn of fund assets under management, plus an international network.

The need for speed

Speed is of the essence because the Qatar Financial Centre (QFC) opened its doors in May. If the centre achieves its objectives of attracting international project financiers, insurers and asset managers to Qatar’s shores, the dynamic of the local market could be changed dramatically as suitcase bankers put down roots in the centre.

Though comparisons are frequently drawn between the QFC and its rivals in Dubai and Bahrain, Qatari authorities are keen to distance themselves from what they see as the weaknesses of their neighbours’ plans. The QFC will levy a 10% tax on corporate profits, for example, to avoid accusations of being just another offshore tax haven. Glitzy buildings are also being downplayed in the centre’s brochures to stress that this is not a project principally designed to make real estate revenues.

What the QFC is selling is proximity to Qatari and other Gulf clients, plus internationally recognised legislation enforced by an independent regulator. Phillip Thorpe, the chief regulator who was dismissed by Dubai in unusual circumstances last year, resurfaced as the chairman and chief executive of the QFC’s regulatory authority this March. To add further embarrassment for Dubai, five of his former staff then defected from Dubai to join him in Doha.

As The Banker went to press, the latest major development was that Stuart Pearce, a veteran HSBC banker and latterly chief executive of HSBC Investments in London, had been appointed to head the commercial QFC Authority. No licences have yet been issued but judging by the past year’s demand for Qatari debt, it can only be a matter of time.

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