A year since four of its neighbours severed economic ties with Qatar, the country has unexpectedly found that the new economic circumstances have resulted in an accelerated programme of reforms. Kit Gillet reports.

Qatar

Qatar’s economy suffered a shock in June 2017 when Saudi Arabia, along with the United Arab Emirates, Bahrain and Egypt, cut diplomatic and economic ties with the country. Some feared for an economy that has traditionally relied heavily on trade links with those countries: Qatar shares its only land border with Saudi Arabia, making the latter a key transit point for Qatari imports and exports. All land, sea and air links between Qatar and the four countries were suspended.

After several years of lower global oil prices, which led to Qatar recording its first budget deficit in a decade-and-a-half in 2016, there were concerns about the country’s ability to weather the storm, especially at a time when the government is investing heavily in infrastructure linked to hosting 2022 FIFA World Cup. Qatar is estimated to be spending $200bn on infrastructure projects related to the tournament, building metro and rail systems and no fewer than eight new sports stadiums, with 90% of the infrastructure work expected to be completed by 2019.

In a September 2017 report, Steffen Dyck, vice-president at Moody’s, described the severity of the diplomatic dispute between the countries as “unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC [Gulf Co-operation Council] as a whole”.

Endurance test

Despite these concerns, Qatar has so far managed to handle the new political realities, and insiders feel that the adverse conditions have actually helped the country push forward with market liberalisations that might otherwise have taken many years.

“It is quite mind-boggling to look at the way Qatar was cornered overnight. It has turned out to be transformative, with decisive leadership reassuring the people,” says Dr R Seetharaman, CEO of Doha Bank, one of Qatar’s largest lenders. “One market trend is a huge amount of liberalisation. Investment laws have been changed, with free zones reactivated. Public-private partnerships laws have been promulgated. This is quite promising, and has opened up the economy again. We see cautious optimism, even if the economic blockade continues.”

Despite its small size and population of just 2.6 million, Qatar is the world’s top exporter of liquefied natural gas (LNG). It also has the third largest proven natural gas reserves in the world. In the past, due to its vast natural resources, Qatar has lacked strong incentives to diversify its economy or pursue innovation.

Qatar’s past economic success has been strongly linked to the growth of its hydrocarbon sector, as well as higher global energy prices. Between 2004 and 2014, Qatar’s natural gas production increased by an estimated 350%, and this will rise further as a result of the decision in April 2017 to end the 12-year moratorium on new developments in the giant North Field gas reservoir, the world’s largest non-associated natural gas field. Qatar is expected to boost its LNG production by about 30% over the next five to seven years.

Diversification push

Nevertheless, there has long been a realisation that Qatar’s economy needs to move away from its reliance on hydrocarbons, and the recent blockade may have unintentionally aided this process.

“One of our biggest diversification efforts, starting a couple of years back, but especially since the blockade, is opening up the economy, reforming our legislation, liberalising our legal environment and allowing more foreign ownership,” says Yousuf Mohamed Al-Jaida, CEO of QFC Authority, a business and financial centre located in Doha.

If it wasn’t for the blockade, we’d probably be looking at the reforms happening over a period of five to six years

Yousuf Mohamed Al-Jaida

Mr Al-Jaida highlights the fact that every sector of the economy is now open for 100% foreign ownership, including the financial services sector. “The blockade has been a catalyst for all these changes,” he says. “If it wasn’t for the blockade, we’d probably be looking at the reforms happening over a period of five to six years. The blockade expedited all of these reforms over a period of about six months.

“Right now, the non-hydrocarbon contribution to the economy is about 51%. I think a well-diversified economy would be about 80% to 85%, so we are still some years away from that,” he adds.

In the money

Qatar achieved the highest gross domestic product (GDP) growth rates in the world between 2008 and 2013, with a compound annual GDP increase of 10.7%. However, the collapse in global oil prices in 2014 inevitably affected the country’s economic growth figures.

According to data from Qatar National Bank (QNB), the country’s non-hydrocarbon sector grew by 4.2% in 2017, with a contraction in the hydrocarbon sector leading to overall economic growth of 1.6%.

“We are still doing very well and will make sure economic growth outpaces that of the region,” Qatari finance minister Ali Sherif al-Emadi told Reuters in April 2018, predicting private sector growth of 4% in 2018. Overall, Qatar’s economy is expected to grow by about 2.6% in 2018, and close to 3% in 2019, he said.

In February 2018, Fitch reported that, based on preliminary figures, it expected Qatar’s fiscal deficit to have declined to 2.5% of GDP in 2017, from 5.1% in 2016, including estimated investment income from Qatar Investment Authority, the country’s sovereign wealth fund, which has about $320bn in global assets. “The expected improvement results from recovering oil and gas prices and an associated rebound in nominal GDP and government revenue,” Fitch stated.

In late 2017, Qatar forecast an almost $8bn budget deficit for 2018, though subsequent increases in energy prices could bring that figure down.

International realignment

The Saudi-led blockade, which led to the withdrawal of billions of dollars of deposits from Qatari banks, also disrupted the country’s imports and exports, necessitating a change in Qatar’s trade relationships and networks.

“A lot of our strategies have been realigned to the post-blockade political realities,” says QFC Authority’s Mr Al-Jaida. “We saw an immediate relationship form with Turkey, and new political alliances with countries such as Kuwait and Oman, which have benefited massively through transit and logistics. Our food supply lines have been extended through Iran and Pakistan. We are extending trade agreements, and believe business can thrive.”

Qatar’s imports dropped by 40% year on year in June 2017, immediately after the blockade was announced. However, by October imports were higher than the same month in 2016, highlighting the country’s success in realigning its economy to limit the impact of the blockade. By February 2018, Qatar’s exports expanded 14% year on year, according to QNB figures, led by higher hydrocarbon prices, with imports up 0.6%.

One well-timed development has been the inauguration, in September 2017, of Hamad Port, a $7.4bn development on Qatar’s east coast that aims to become a regional transport hub. With a capacity of 7.5 million containers a year, the port allows a greater flow of goods directly between Qatar and the rest of the world. “The port… will break the shackles of any restrictions imposed on our economy,” said Jassim bin Saif al Sulaiti, Qatar’s transport minister, at the inauguration ceremony.

Long way round

However, there are still challenges for many sectors of the Qatari economy, especially those such as tourism and hospitality that rely heavily on visitors to the region. In April 2018, Qatar Airways CEO Akbar al-Baker told reporters at the Eurasia Airshow in Turkey that the airline had made a “substantial” loss in its last financial year, blocked from flying to 18 cities in Saudi Arabia, the UAE, Bahrain and Egypt, and banned from the airspace of each of those countries, necessitating indirect flight routes.

Construction costs have also risen, with supplies needing to be re-routed and new supply lines needing to be formed. “Private sector entities may yet require government support to deal with the loss of economic links with Saudi Arabia and the UAE,” Fitch reported in February 2018.

Yet, while certain sectors of the economy are still being affected, there is an air of cautious optimism in Qatar. “There is a drive for self-sufficiency for the country, and a big push for things such as manufacturing, pharmaceuticals, industrial production and general agriculture,” says Redmond Ramsdale, head of GCC bank ratings at Fitch. “Food used to come directly from Saudi Arabia. Sohar port and airport [in Oman] have played a larger role since the dispute started.” 

So far, all attempts to end the geopolitical tension, both from within the region and with international support, have failed. As such, the economic and diplomatic fissure between Qatar and some of its neighbours could last for some time.

According to Doha Bank’s Mr Seetharaman, while the blockade is not having any serious economic impact in Qatar, the Gulf region as a whole will ultimately be the loser. “When you are together, co-operating, coordinating, your position is different,” he says. “This blockade has created more division, and international investors are more sceptical. [However] it’s manageable from a Qatar perspective, with no serious impact on the overall economy or financial stability, or on the investment side.”

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