Qatar is expected to post its first budget deficit in 15 years in 2016, exemplifying the difficulties faced by the oil-dependent economy. But, far from buckling under the pressure, the country is stepping up to the challenge of diversifying its economy and reining in public spending, as Kit Gillet reports.

Qatar's economic balancing act

Qatar is considered by many observers to be an economy in transition, moving slowly from a heavy reliance on oil and gas to a more balanced knowledge- and resource-based economy. In the short term, however, the country is facing the dual challenge of having to rein in spending at a time of low oil prices while also continuing with huge infrastructure expenditure as the country gears up to host the FIFA World Cup in 2022.

For the first time in 15 years, Qatar is expected to post a budget deficit in 2016, of about $12.8bn, in large part due to the continuing low price of oil on the global market. Despite this, and because of the country’s strong liquefied natural gas revenues, as well as its high level of infrastructure spending and its growing non-hydrocarbon sector, the economic situation is anything but dire.

“If you analyse all of the GCC [Gulf Co-operation Council] and the region, Qatar has the most vibrant economy right now,” says Giyas Gökkent, senior economist for Africa and the Middle East at the Institute of International Finance (IIF). “Qatar has been very proactive with fiscal adjustment. It started looking at spending in 2014, even before the [oil] price crashes. It has already taken a lot of steps.” 

Heading off difficulties

Between 2008 and 2013, Qatar was the fastest growing economy in the world, with a compound annual gross domestic product (GDP) growth rate of 10.7%. The drop in global oil prices, which are down about 70% since June 2014, ended that run, but the economy is still showing solid, if less spectacular, growth. In December 2015, Qatar’s GDP for the year was downgraded to 3.7%, from the 7.3% forecasted in June 2015. Real GDP growth in 2016 was expected to increase to 4.3%.

Qatar’s strong growth rate over the past decade was in large part due to the expansion of the hydrocarbon sector, particularly natural gas production, which increased by 350% between 2004 and 2014, according to a December 2015 report by ratings agency Moody’s.

In recent years, Qatar has embarked on a diversification programme as part of its Qatar National Vision 2030 initiative, which aims to generate new sources of growth and revenue, moving the economy away from the oil and gas sectors. As a result, economic growth in recent years has been driven by the non-hydrocarbon sector, with hydrocarbon production broadly flat. According to ratings agency Fitch, Qatar’s non-hydrocarbon economy has grown by an average of 10% over the past five years, dropping slightly to an estimated 8% in 2015, and is expected to be about 6% this year.

“Diversification has to happen. If you see the transformations that are taking place in Saudi Arabia, the United Arab Emirates and Qatar, the emphasis is to privatise more. Industry is improving, the business rules are simplifying, and market regulations are shaping up. All this is to make sure diversification happens,” says Dr R Seetharaman, CEO of Doha Bank.

"Everyone is focusing on the SME [small and medium-sized enterprise] sector – it is going to increase national stability, while increasing growth and employment. It is not only big corporations that can deliver growth to a country. For instance, in the UAE, SMEs contribute about 60% to GDP. This is the right direction," he adds.

Building blocks

The fastest growing sectors in Qatar have been construction, which has benefited from the government’s large infrastructure spending in the lead up to the World Cup in 2022; services, which have taken advantage of the growth in the population, with the arrival of many new expat workers; and manufacturing, with Qatar moving to expand upstream in the hydrocarbon value chain.

“Looking forward, we expect that it will be the non-hydrocarbon sector that will drive the economy in the coming periods spurred by the large investments in major infrastructure projects and the growing population,” says Bassel Gamal, group CEO of Qatar Islamic Bank.

“In 2015, the construction sector was the fastest growing sector with a growth rate of 13.6%, followed by the service sector, which grew by 11.9%. Other areas demonstrating high growth include banking, insurance, hospitability, consumption and utilities,” he adds.

Despite all this, the drop in global oil prices has had a significant impact. According to a Standard & Poor’s research note published on May 3, 2016, the sharp fall in oil prices has dented Qatar's economic growth prospects, as well as its wealth levels, reducing GDP per capita from more than $90,000 in 2014 to an estimated $60,000 in 2016.

“Given that hydrocarbon-related activity accounts for roughly 55% of Qatari GDP, we expect lower oil and gas prices to slow real activity and push down economic growth to an average of 4% between 2016 and 2019, from an average of 5.5% over the past four years. Still, we expect that the country's huge infrastructure investment programme will support growth,” the rating agency said.

On March 31, ratings agency Fitch predicted that overall government and public sector expenditure would fall 7% to about QR203bn ($55.7bn) in 2016, and a further 3% to QR197bn in 2017, “underpinned by reductions in current expenditure other than salaries and wages”.

Tightening the purse strings

In November 2015, the Qatari minister of development planning and statistics, Dr Saleh Mohamed Salem al-Nabit, told an audience at the Dean’s Lecture Series at Carnegie Mellon University in Qatar that “in light of… the high-level challenges facing the hydrocarbon market, a greater discipline has become an urgency in the assessment and spending of development budgets for all programmes and projects.”

However, major projects are set to continue, with the country set to spend a total of $200bn on key infrastructure in the lead up to 2022, much of this going to transportation projects and urban development.

Instead, reductions in spending are being achieved partly by reducing subsidies for fuel and electricity, but also by scaling back activities at state-owned organisations, including news agency Al Jazeera, which once had ambitions to rival US counterpart CNN and UK counterpart the BBC, and the state museums. Still, it is the subsidy reform, as well as new taxes, that could have the strongest impact.

In January 2016, the country raised the price of petrol by more than 30%, with just a few hours' notice, while in April 2016 it was announced that gasoline and diesel subsidies would be scrapped as of May 2016. As recently as July 2015, the International Monetary Fund had listed Qatar as the top subsidiser in the world on a per capita basis.

“The gradual elimination of subsidies is welcome. It could have an impact on Qatar’s competitiveness at the margins but it will encourage more efficient consumption, and is good for the economy in the long term,” says the IIF’s Mr Gökkent.

Qatar will also alter its stamp duties in 2017, while at the same time it plans to levy additional taxes on tobacco, alcohol and energy drinks, starting in 2017, which will bring in additional revenue. Mr Gökkent predicts that the taxation changes could bring in 1% to 2% of GDP to the government’s coffers. There is also talk of the government applying a 5% value-added tax on all goods and services, excluding selected foods and medical items, as of 2018, potentially raising a further QR12bn to QR15bn a year, according to Fitch Ratings.

Ahead of the game

Qatar has been able to build up a considerable investible surplus over the years, and has approximately $256bn, held by the Qatar Investment Authority, that could be used for investments. Right now, however, it is trying to conserve that money, with this year’s budget deficit expected to be covered by local and international debt issues.

The government is also planning to introduce a new law on public-private partnerships, with PPPs set to be used in the near future to finance the construction of an estimated 40 schools, 10 medical centres and other infrastructure projects. PPPs will open up opportunities for the private sector to participate in projects in the sport, health and education sectors, as well as in public infrastructure developments.

“The new law on PPPs that [Qatar is] putting into practice now will enable PPPs to finance the concession of schools and healthcare. It is a good sign,” says Doha Bank’s Mr Seetharaman.

The ratings agencies continue to show faith in Qatar’s economy. In April 2016, Fitch affirmed Qatar's long-term foreign and local currency issuer default ratings at AA with a 'stable' outlook, with the ratings reflecting the country’s sizeable sovereign assets, as well as its fiscal adjustment efforts, proven oil and gas reserves and high level of GDP per capita. Meanwhile, in December 2015 Moody's placed the country’s economic strength on a par with Germany (Aaa stable), Saudi Arabia (Aa3 stable) and Japan (A1 stable) at Aa2 for government bond ratings. “Our assessment of Qatar’s very high economic strength is based on the country’s exceptionally high level of income, large oil and gas reserves, and strong growth performance and outlook,” it wrote in a credit analysis.

Despite some economic uncertainty in the region, Qatar’s economy looks set to continue its robust growth.

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