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Qatar's shining example

The rapid expansion of Qatar's energy sector has given a huge boost to the country's economy - and the financial sector has been making the most of the opportunities presented by this activity. Writer Stephen Timewell
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Qatar's shining example

As the world's largest exporter of liquefied natural gas (LNG), Qatar delivered an impressive economic performance in 2009, despite the global slowdown. Indeed, it had an overall real gross domestic product (GDP) growth rate of 9%, one of the highest in the world, along with China. And according to the latest International Monetary Fund (IMF) Article IV report, Qatar's growth performance is expected to be even stronger in 2010, driven by a rapid expansion in LNG production and related industries, and a pick-up in manufacturing and construction. Real growth in 2010 is set to reach a stunning 18.5%.

Unlike some of its Gulf neighbours, the global financial turmoil and the recent difficulties in Dubai have had little effect on Qatar's banking system. Taken together, the central bank's macro-prudential policies and some decisive government intervention have enabled the banks to maintain high capital, liquidity and profitability levels.

Qatar's economic success extends across virtually all sectors and the IMF estimates that the external current account recorded a large surplus of about 15.7% of GDP in 2009, on account of the rebound in the prices of oil and gas. The central bank's net reserves strengthened further to $19.2bn, or about five months of imports of goods and services.

Huge growth forecast

With an average oil price forecast by the IMF at $75.3 per barrel for 2010 and the completion of its LNG trains, Qatar's nominal GDP is forecast to rise by 31.5% in 2010 to QR396.5bn ($109bn) in 2010. What's more, Mohamad Moabi, assistant general manager for economics and research at Qatar National Bank (QNB), believes a number of projects in oil production expansion, LNG, petrochemical, aluminium and other energy sectors will come on-stream in 2010 and these are expected to push up hydrocarbon output and raise nominal GDP by a further 18.6% in 2011, to QR470.3bn.

The oil and gas sector remains the dominant part of Qatar's economy, accounting for an estimated 55.4% of nominal GDP in 2010, after reaching almost 61% in 2008.

Like its neighbours, Qatar's government has continued to spend, despite the global financial slowdown. The budget for 2010-11 is the largest in its history, with budgeted expenditures up by 24.8% over the previous budget to QR117.9bn.

The 2010-11 budget is based on a conservative oil price assumption of $55 per barrel and forecasts revenues of QR127.5bn, with a surplus of QR9.6bn. QNB notes that the budget has a continued focus on infrastructure spending and increased allocations for healthcare and education.

Ali Shareef Al-Emadi, QNB's group CEO, explains that the government infrastructure spending priorities are on banks, health and transport. He adds that Qatar's government is keen to develop its human capital, hence the focus on improving all areas of education.

Elsewhere, the government is considering whether to establish a 29-station underground metro network, while the country is bidding to host the 2022 FIFA World Cup.

One investment that has been finalised came in May this year when Qatar Holding, the strategic and direct investment arm of the Qatar Investment Authority, bought London's prestigious department store Harrods for £1.5bn ($2.18bn).

IMF expects

Looking ahead, Qatar's growth projections are strong and fiscal and external accounts are expected to show surpluses over the medium term. The IMF report notes: "A cornerstone of Qatar's strategy is a commitment to diversify the economy by building related industries around the full LNG value chain and linking upstream, midstream, and downstream components (including acquiring ships and building ports).

"Non-hydrocarbon real GDP is expected to record double-digit growth over the medium term, buoyed by continued strong activity in services and a pick-up in manufacturing and construction. Hydrocarbon output is expected to grow by 25% in 2010 and by 13% in 2011-12 as LNG production peaks at 78 million tonnes by 2012.

"Strong revenue growth from the increase in LNG production to capacity will create additional fiscal space, with the annual average fiscal surplus estimated at about 12.5% of GDP in 2010-14. The current account surplus is expected to stabilise at an annual average of 31% of GDP in 2010-14, as imports, which soared during the boom years, would grow at a more moderate rate."

While the outlook is positive, Qatar still faces the risk of disruption in its gas shipments from further global recession and declining real estate prices (down by about 30% since late 2008). It must also be cautious of adverse financial developments in the region, such as Dubai, which could dampen sentiment among global investors.

In terms of debt, Qatar's position is deemed sustainable based on some core assumptions that assume hefty oil reserves of 27 billion barrels and massive gas reserves of 18.7 billion tonnes. Projected government external debt is put at $13.7bn in 2009, or 16.6% of GDP, rising to a projected $15.7bn in 2010, or 14.4% of GDP. Total external debt (excluding banks) is projected at $67.4bn in 2010, accounting for 61.9% of GDP, not insignificant but manageable.

With an estimated population of 1.2 million in 2009, Qatar retains one of the world's highest per capita incomes - $76,000 in 2009 - and this looks set to continue to grow as the economy expands.

Regulatory overhaul

In other developments, Qatar's authorities are taking several steps to improve the country's regulatory framework, including a comprehensive review of prudential regulations and monetary policy instruments by the Qatar Central Bank (QCB), the possible setting up of a risk-monitoring department at the QCB, and also establishing a credit bureau that would enhance credit monitoring by banks.

One key aspect of Qatar's new regulatory environment is the imminent transformation of what were two regulatory structures that are now expected to be combined into a single rulebook or single regulator.

In 2005, the Qatar Financial Centre (QFC) was established in Doha to attract international financial services institutions and major multinational corporations and to encourage participation in the growing market for financial services in Qatar and the Middle East. The QFC has operated to international standards and its own legal infrastructure and Philip Thorpe, formerly of the UK's Financial Services Authority (FSA) and more recently the Dubai Financial Services Authority, was appointed chairman and CEO of the Qatar Financial Centre Regulatory Authority (QFCRA).

At the time the QFC was being established, the UK's FSA regulatory model was winning favour around the world. In Qatar - where the QCB regulated the domestic banks and QFCRA regulated institutions based in the QFC - there was movement towards a single regulator built around the QFC's international standards. But the global recession of 2008 changed thinking about the regulatory approach and in 2008 the Qatar government announced its intention to create a unified regulator, but with a new structure with an integrated approach.

Waiting for the global financial dust to settle, Qatar has postponed its set-up but, as Mr Thorpe explains, the authorities hope "to create an integrated regulator, possibly before the summer or at least in 2010".

"The government has not wavered in its desire for a single regulator," says Mr Thorpe. He believes a new regulatory entity will be created, focusing on international standards and acting as an umbrella organisation. But he does not envisage a sharp transition as the QFCRA sets up.

How long this transformation to a single regulator will take is not clear, but Mr Thorpe envisages at least a two-year transition period. This would allow the two existing regulatory bodies to amalgamate themselves and develop a new complex set of regulations as a new umbrella organisation.

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International standing: Qatar Holding bought UK department store Harrods for £1.5bn in a move to diversify away from oil and gas

Niche approach

In addition to regulatory change, the QFC itself is also undergoing structural change, focusing on phase two of its strategy and a new direction. It is clear that Qatar has realised it does not want to directly compete with Dubai as a financial centre and wants to focus on specific areas, such as asset management, reinsurance and captive insurance, where it feels a niche approach will bring special advantages and opportunities.

By mid-2009, the QFC, with help from the Boston Consulting Group, established plans for the next five years, deciding what was no longer core, cutting non-core activities and making a number of redundancies.

It has been a period of change, according to Shashank Srivastava, acting CEO of Qatar Financial Centre Authority (QFCA). Stuart Pearce, CEO at QFCA since the organisation was formed, retired in late 2009, but still remains active on the board. Other well-known figures, such as former director of marketing and corporate communications Steve Martin, have gone.

The 2010 strategy focused on developing the three new hubs - asset management, reinsurance and captive insurance - with banking remaining at the centre of the hubs. Mr Srivastava says: "We need banking, we need to develop asset management, so we need banking."

Along with the QFCA's new strategy, the Qatar Exchange is expected to see developments this year, particularly in strengthening the capital markets platform and building the secondary market. While arguments continue over whether Qatar is over-banked, the strong economic growth is creating huge opportunities across the economy and for broad expansion across the financial sector.

Qatar economic outlook

Qatar economic outlook

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