Qatar’s economy thrives through self-sufficiency

The global pandemic coming on the back of an economic blockade led by some of its largest neighbours could have had a strong negative economic impact on Qatar. Instead, the country has fared relatively well over the past year.

In fact, according to Bassel Gamal, group chief executive of Qatar Islamic Bank, the country’s economy was the least affected in the Gulf Co-operation Council (GCC) region by the contraction in economic activities caused by the pandemic.

Qatar’s economy contracted by 3.9% in the fourth quarter of 2020, compared to the same period in 2019, according to government data. Compared to the third quarter, economic activity was down just 0.5%.

Back to growth

Mr Gamal says that while some business sectors, such as tourism, hospitality, transport and leisure, have been strongly affected by restrictions on travel and gatherings, the ongoing vaccination rollout and economic management of the pandemic have aided the overall recovery. “Other sectors which were also most affected by the pandemic, such as energy and industry, have seen a stronger recovery due to the increase in demand and the boost of supply chains, now nearing pre-pandemic levels,” he adds.

In March 2020, Qatar unveiled a QR75bn ($20.5bn) stimulus package to help support the economy in the face of the pandemic, with a moratorium on the repayment of loans extended until September this year, giving businesses further time to overcome the impact of the pandemic.

According to the World Bank, Qatar’s real gross domestic product (GDP) is expected to grow by 3% in 2021 — the same rate for both the oil and non-oil sectors. Meanwhile, the bank expects the country’s fiscal deficit to narrow to 2.3% in 2021, aided by a recovery in oil prices to pre-pandemic levels.

Strong finances

Qatar, which has a population of just under three million, is one of the richest countries in the world on a per-capita basis, with its sovereign wealth fund, the Qatar Investment Authority, managing more than $300bn in assets.

The country’s economy, which relies heavily on hydrocarbon revenues, is one of the strongest in the region, says Joseph Abraham, group chief executive of Commercial Bank of Qatar. “The government has a lot of fiscal flexibility: their budget is set at $45 per barrel of oil, and we’re currently at $67 per barrel,” he notes.

“They’ve already announced that the first quarter showed a slight budget surplus, despite some significant expenses. You’ve got all the ingredients for positive growth in 2021, leading to even more positive outlook in 2022,” he adds.

One key marker for Qatar in 2022 is the Fifa World Cup. Beyond being an important statement for the country, which will be the first in the region to host the tournament, the World Cup has acted as a catalyst for investments over the past few years. According to estimates from the business intelligence tool Meed, the tournament has underpinned around $13.6bn a year in project contracts in Qatar over the past decade, with the peak years seeing contracts awarded of more than $17bn.

Even without the World Cup, however, the pipeline of ongoing projects should support economic growth. “The current pipeline of projects reflects a much broader market activity in Qatar,” says Junaid Ansari, senior vice president of investment strategy and research at Kamco Invest.

Mr Ansari says that the pandemic had an effect on contracts being awarded in 2020, with data suggesting a decline from close to $13bn in 2019 to a little over $10bn in 2020.

“However, contracts awarded during January and February 2021 have already exceeded 2020 levels, with a total value of $13.5bn in 2021 [to date],” he says. “Qatar is expected to be one of the most active markets for projects in the region this year, with contract awards expected to reach more than $30bn, mainly in the power, transport, gas and construction sectors.”

Energy expansion

The country marked a significant economic milestone in February, with Qatar Petroleum’s decision to move ahead with its landmark North Field Expansion Project, which would boost Qatar’s liquified natural gas (LNG) output by more than 40% over the next few years. The state-owned company is set to invest $28.75bn in the project, which will increase the country’s LNG production capacity from 77 million tonnes per year to 110 million tonnes by 2025.

Qatar is already the world’s fifth-largest gas producer and largest LNG exporter, with its oil and gas sector contributing around a third of the country’s nominal GDP.

“The outlook is quite positive for Qatar because you’ve got the World Cup coming, you have the removal of the blockade and you’ve got the North Field gas expansion going on, which is a huge amount of expenditure,” Mr Abraham notes.

Blockade lifts

The green light for the North Field expansion came a month after another key economic milestone, with January’s decision by Saudi Arabia, UAE, Bahrain and Egypt to lift their political and economic blockade on Qatar.

Despite fears of economic challenges, the blockade, which had been in place since June 2017, seems to have had little negative effect on Qatar’s economy, and has instead led to the development of new domestic industries for the country and alternative trade routes and relationships.

“Qatar has improved its self-sufficiency in many aspects. It’s created a whole new dairy industry from scratch and I don’t believe that will ever go away despite a renewal of cross-border trade,” Mr Abraham says. “Similarly, it’s built up its logistics capabilities, enhanced self-sufficiency in food, water, and so on. It’s also taken measures to open up to 100% foreign ownership for companies across Qatar.”

In April, Qatari authorities also approved a draft law that would allow non-Qatari investors to own up to 100% of the capital of companies listed on the Qatar Stock Exchange, which is seen as an important step in further opening up the country to foreign investment.

Inflow of investment

Following the end of the blockade, Qatar’s foreign minister said that the country’s sovereign wealth fund could potentially invest in Saudi Arabia and the other Gulf countries, given the right opportunities.

At the same time, the end of the blockade means that money is also likely to flow into the country in the form of foreign direct investment (FDI), says Sadiq Hamour, director of financial institutions at Qatar Financial Centre.

“Investor sentiment has shifted, and with that came a massive inflow of portfolio investment — year-to-date, it stands at approximately $600m,” he says, compared to just $93.6m throughout 2020. “Beyond portfolio investments, numerous real estate and other non-oil ventures have been reactivated among Gulf business partners that hold promise of substantial activity in the future,” he adds.

At the same time, one notable impact of the pandemic has been on a steady outflowing of foreign workers from the region. In February, S&P estimated that the GCC’s total population contracted by 4% in 2020. The sharpest decline was felt in Dubai, followed by Oman and Qatar, which both saw a drop of 5%. Almost 95% of Qatar’s population is expatriate, and they are relied upon in many industries, particularly in the private sector.

As Qatar continues to diversify its economy, including through massive infrastructure projects, the demographic of foreign workers is likely to shift, with some predicting the composition of the foreign workforce transitioning from low-skilled roles to increasingly white-collar and skilled positions.

Non-hydrocarbon growth

While the energy sector remains dominant, Qatar continues to invest heavily in diversifying its economy.

“In the grand scheme of things, hydrocarbons are still going to dominate, but that isn’t to hide some genuine progress from the non-hydrocarbon sector,” says Benjamin Young, director of financial institutions ratings at S&P Global Ratings.

According to a recent report by KPMG, the manufacturing sector in Qatar is expected to emerge as a major employment generator over the next few years, with the sector set to grow from around 85,000 people today to more than 100,000 by 2025.

Mr Young says that efforts to bring in more FDI and changing the rules on ownership structure are particularly important, but that once concern emerging as a result of boycott being lifted is around whether the new Qatari enterprises that were set up to get around logistical issues due to Dubai being closed are competitive when trade can once again flow easily between Qatar and its neighbours.

“I’m less optimistic,” he says. “It’s economies of scale — typically you had a lot of trade coming through Dubai that was distributed regionally, so the volumes made it cheaper.”

New trade and logistic routes opened up with countries like Turkey and China are interesting and beneficial, he says, but they are far less significant economically to the country than trade with closer neighbours.

Still, keeping those trade links growing, while also re-engaging with its neighbours and spending heavily on large-scale infrastructure projects, should keep the Qatari economy firing.