Qatar’s economy is already feeling the benefits from being crowned host of the 2022 FIFA World Cup. Can the country’s non-hydrocarbon growth assist in maintaining the upward trajectory? Kit Gillet reports.

Qatar flag

While Qatar’s economic growth has slowed over the past few years, in the face of reduced global oil prices, the country is still growing faster than most in the Middle East, supported by increased economic diversification as well as heavy investment in the run-up to the FIFA World Cup, which Qatar will host in 2022.

Qatar’s real gross domestic product (GDP) grew 3.6% in 2015, and analysts predict growth of 3.4% for 2016 and about 3.5% for 2017. This is significantly down from the strong performances that saw the country experience the highest GDP growth rates in the world between 2008 and 2013, with a compound annual GDP increase of 10.7%, but it is still impressive given the region’s economic climate.

“Qatar remains one of the fastest growing countries in the Gulf Co-operative Council [GCC],” says Nitish Bhojnagarwala, a vice-president at Moody's Investors Service. “Its non-hydrocarbon real GDP growth is expected to be about 5% for 2017, [and] although it has declined from about 11%, it remains among the highest in the GCC.”

Spending cuts

Cuts in government revenue streams have had a strong effect on Qatar’s economy: for the first time in 15 years the country recorded a budget deficit in 2016.

Speaking to reporters in February 2017, Qatar finance minister Ali Sherif al-Emadi described 2016 as “probably the most difficult” year in terms of the strain on public finances, and that the government had based its 2017 budget on a conservative crude oil price of $45 a barrel. 

For 2017, Qatar has targeted a budget deficit of $7.8bn, down from a targeted deficit of $12.8bn the previous year, with revenues predicted to grow by 9% and total spending to decline by 2% on the back of a 6.6% fall in recurrent government spending.

According to Standard & Poor’s, Qatar’s 2016 expenditure effectively halved compared with 2014, excluding wages and salaries, which reflected the numerous consolidation measures put in place by the authorities, including cuts in subsidies for gasoline and diesel, the mergers of several ministries, and overall reduced social benefits such as foreign medical treatment. As recently as July 2015, the International Monetary Fund had listed Qatar as the top subsidiser in the world on a per-capita basis.

Outlook revision

“There is a sense that the measures already enacted or planned, in addition to the spending cuts and phasing out of subsidies, should be sufficient for now,” says Giyas Gökkent, senior economist for Africa and the Middle East at the Institute of International Finance (IIF).

“While we expect the budget to register a deficit of about 6% of GDP in 2017, this should narrow to about 3% to 4% the following year. The fiscal position is stronger if we take into account Qatar Investment Authority [QIA] investment income, with the budget already near balance,” he adds, saying that the GCC-wide value-added tax of 5% on all goods and services, which will come into effect in 2018, should bring in revenues of about 1.5% of GDP.

Despite efforts to rein in public sector spending, in March 2017 S&P revised its outlook on the long-term sovereign credit ratings for Qatar from 'stable' to 'negative', while affirming its AA long-term and A-1+ short-term ratings. The agency said this was due to the overall weakening of the country’s external liquidity position on the back of a rapid growth of foreign liabilities of the banking sector and also public sector debt.

Other ratings agencies, however, have continued to show faith in Qatar’s economy, largely due to its large sovereign assets. In September 2016, Fitch Ratings affirmed Qatar’s long-term foreign and local currency issuer default ratings at AA with a 'stable' outlook, highlighting the fact that the country’s sovereign assets are sufficient to finance more than 20 years of budget deficits at current levels.

Qatar has amassed a considerable investible surplus over the years, and is estimated to have assets of about $365bn held by the QIA, one of the largest sovereign wealth funds in the world. In recent years, the QIA has used its money to invest in overseas assets, including buying up properties, airports and businesses in the US and Europe. In 2015, the QIA opened an office in New York and announced plans to invest $35bn in the US by 2020; according to reports, the QIA was the fourth largest investor in US office space in 2016.

Foot on the gas

Qatar’s past economic success has been tied heavily to the expansion of the country’s hydrocarbons sector. Natural gas production in particular increased by an estimated 350% between 2004 and 2014.

Qatar has the third largest proven natural gas reserves in the world and is the world’s largest exporter of liquefied natural gas (LNG). In April 2017, Qatar Petroleum announced the end of a 12-year moratorium on new developments in the giant North Field gas reservoir, the world’s largest non-associated natural gas field. The new development, which is likely to come online in five to seven years, could boost Qatar’s gas production by 400,000 barrels per day (bpd) of oil equivalent, in addition to the approximately 3.3 million barrels equivalent that Qatar currently produces.

“Given that they have announced that they are going to lift the moratorium on exploitation of the Northern Field, that alone will increase gas output by 10%,” says the IIF’s Mr Gökkent. “It’s very significant. It will take a few years to come on stream, just around the time the World Cup is nearing.”

Yet, while Qatar has one of the world’s least expensive natural gas production, at about $1.60 to $2 per 1 million British Thermal Units, there could be challenges in the near future. A widely expected glut in global LNG production capacity poses a risk to revenue, according to Fitch’s MENA Sovereign Credit Overview 2Q17, which predicted that Qatar’s 31% global market share in LNG exports is likely to shrink.

Oil cuts

While Qatar is less reliant on oil exports than it is on gas, the low price of oil worldwide has still had a negative impact on government coffers. It was therefore a relief when, in November 2016, the 13 members of the Organisation of the Petroleum Exporting Countries (OPEC), as well as 11 non-OPEC countries, agreed to cut oil production by 1.8 million bpd. The deal, which aims to rebalance the market and reduce existing stockpiles, was the first agreement to cut production in eight years.

“It has definitely had a positive impact, and given a bit of stability to the overall economic momentum,” says Dr R Seetharaman, CEO of Doha Bank, one of the largest banks in Qatar.

In March the countries agreed to review whether the initial six-month global pact would be extended. 

According to Qatar National Bank (QNB), the country’s largest lender, Qatar’s oil production dropped to 610,000 bpd in March 2017, down from 620,000 bpd the previous month, as the country continued to comply with the OPEC-agreed oil production cuts.

Beyond hydrocarbons

In recent years the Qatari government has strongly promoted the diversification of the economy. Its National Vision 2030 initiative is aimed at generating new sources of growth and revenue outside the traditional oil and gas sectors.

This has had a notable effect: while hydrocarbons were in the past the main driver of growth in the country, non-hydrocarbon growth continues to outpace that of oil and gas, though the latter still makes up an estimated 90% of government revenue, according to S&P. 

QNB says growth in the non-hydrocarbon sector hit 5.6% in 2016, with the construction sector growing the fastest, followed by financial services, the government sector and real estate. 

Helping the construction industry is the fact that the government is spending an estimated $500m a week on preparing for the 2022 World Cup, with total investment in key infrastructure set to be in the region of $200bn.

Much of that money is going towards transportation and urban development projects, including hotels and stadia. The ministry of finance has announced that $12.7bn-worth of new contracts will be agreed in 2017, in addition to the $102.7bn-worth of non-hydrocarbon projects already initiated.

SME target

The private sector is being increasingly targeted as a source of future economic development in Qatar. “Small and medium-sized enterprises [SMEs] provide the engine for private sector growth and diversity, which is one of the strategic pillars of the Qatar National Vision 2030,” says Joseph Abraham, CEO of Commercial Bank of Qatar, which has a dedicated SME unit providing specialised services and products to about 12,000 smaller businesses in Qatar.

However, according to Doha Bank’s Mr Seetharaman, greater diversification still has to happen. “Out of fiscal revenues, oil and gas revenue was close to 50%, investment revenue was more than 30% and other revenue is less than 20%,” he says. “There is scope for huge privatisation and public–private partnerships. And it could be much more meaningful as it also improves the overall competitiveness of the business community.”

In the future, Qatari authorities must continue to take advantage of both public and private sectors in order to keep up the country’s strong economic growth.

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