Manageable inflation expected in Qatar

 

When Qatar found itself subject to an economic blockade in 2017, a number of financial data points were of immediate interest to economic observers. The sudden withdrawal of foreign deposits was an early concern, and one which the government quickly overcame by pouring capital from public bodies into the system (see Banking chapter).

Attention was also focused on the trade challenges thrown up by the blockade, and the effect that these would have on the cost of living for both Qataris and expatriates based in the country.

When the diplomatic rift started, around onesixth of Qatar’s imports were produced in blockading countries, and a significant portion of other imports transited through Saudi Arabia and the UAE. The developments had a significant effect on the nation’s trade patterns, with Qatar’s imports declining by 40% in the immediate aftermath of the blockade (see Trade & Investment chapter).

The nation’s consumer price index therefore became a closely observed metric, as Qatar prepared for a spike in prices caused by restricted trade channels and a shortage of goods.

Inflation History

The country’s last significant inflation bubble occurred in the run-up to the global economic crisis of 2007 and 2008. During this period the nation’s inflation rate exceeded 15%, compared to an average of 3.5% in the 10 years to 2005, as per the IMF’s World Economic Outlook database.

The significant rise in inflation in 2007-08 was powered by a combination of high levels of public spending, growing demand for housing and the Qatari riyal’s peg to the US dollar.

This situation was exacerbated by the activities of the US central bank, the Federal Reserve, which in an effort to boost the ailing US economy in the wake of the financial crisis made a series of interest rate cuts. These monetary policy actions in turn compelled countries with US dollar-linked local currencies, including all of the GCC with the exception of Kuwait, to follow suit.

While the Qatar Central Bank did its best to suppress the inflationary trend – by tracking the US Federal Reserve’s interest rate cuts by reducing Qatari deposit rates but leaving lending rates untouched when possible – the rising cost of living in the country was sufficient to prompt calls for a revaluation of the currency peg to the dollar.

For its part, Kuwait had already made the transition from a US dollar currency peg to a reference basket of currencies, and elsewhere in the Gulf region the issue was becoming a prominent topic in public policy discourse as well. Qatar’s official position at that time was that any change to the peg must be part of a wider GCC policy shift.

Following the blockade, the government ramped up activity with other trading partners, with Turkish exports to Qatar increasing by 50% by end-2017 The currency peg debate was effectively ended by the collapse of US global financial services firm Lehman Brothers in September 2008, and Qatar’s record inflation trend was quickly transformed into a period of deflation that saw a negative inflation rate of 4.9% in 2009. This was driven largely by the housing sector, which at that time had a heavy weighting on the consumer price index. This deflationary trend persisted until 2011, when an energy price recovery served to stabilise the regional economy.

Swift Action Plan

The Qatari government was understandably keen not to allow a political event to push headline inflation to a similar level to the one experienced in 2007-08. The most pressing challenge in this regard was the shutting off of trade routes. The government responded to this development by ramping up activity with established trading partners and forging links with new ones.

In the days and weeks following the blockade, Turkish cargo planes ferried thousands of tonnes of fresh fruit and vegetables and dry foodstuffs to the country. This influx of Turkish goods saw Turkish exports to Qatar increase by some 50% by the close of 2017, to reach $750m in value.

Ties with Iran have also been strengthened in the aftermath, and the Iranian port of Bushehr has emerged as an important hub for Qatar’s importing activity – both for Iranian goods and trans-shipments of goods from markets such as Turkey.

The Omani ports of Sohar and Salalah are also key links in supply chain routes for goods going to and from Qatar. According to the Qatar Chamber, Oman’s imports from Qatar increased by 48% in value terms from OR86m ($223.3m) in 2016 to OR128m ($332.4m) in 2017, while Oman’s exports to Qatar increased more than five-fold from OR93m ($241.5m) to OR549m ($1.4bn) over the same period.

Further afield, Qatar’s Ministry of Public Health struck a deal with Ireland’s Ministry of Agriculture to import lamb, beef and chicken. These and other steps meant that for ordinary Qataris, there was relatively little disruption to the supply of goods.

Mixed Picture

Throughout this period, Qatar’s inflation rate actually followed a broadly declining trend, from an annual average of 2.7% in 2016 to 0.5% in 2017, and a year-on-year rate of -1.6% in January 2019. Once again, house prices and rental rates have played a determining role in this phenomenon.

Already falling before the blockade in June 2017, they entered a more pronounced downward trend immediately following the political crisis. While the number of home sales rose in the first nine months of 2018, the combined value of these transactions fell on a year-on-year basis by 32%.

Rents on residential and office properties also declined in the year to September 2018, with local press reporting that landlords in developments such as The Pearl and Lusail are offering tenants rent-free periods and waivers of utility expenses.

However, the current inflationary landscape is more varied than the headline figures suggest. While the decline in house prices and rentals has dragged the consumer price index into negative territory, a number of components within the index have shown a marked increase over 2018.

For example, between December 2017 and December 2018 the education index rose from 125 to 136.5 points, according to figures from the Planning and Statistics Authority. The medical services index similarly climbed from 104.5 to 108 points over the same period, while furniture and furnishing rose from 108.5 to 110.3 points.

Where Qatar’s residents felt price gains most acutely, however, was in the transport sector, the index for which jumped by 5.6% in the 12 months to December 2018 as the effects of reduced energy subsidies and the dismantling of the controlled price mechanism for petrol and diesel worked its way through the economic system.

Looking Ahead

The inflation versus deflation question in Qatar is likely to remain of interest to economic observers over the short to medium term. While Qatar has delayed the implementation of its value-added tax (VAT) system until after 2019, the inflationary aspect of the move is already being anticipated: the IMF, assuming that Qatar would introduce VAT in the second half of 2018, projected that inflation would rise to a peak of 3.9% in the second half of the year, before easing to around 2.2% in the medium term.

While the IMF’s inflation forecast for Qatar is largely invalidated by the country’s postponement of the date of VAT implementation, upward inflationary pressure over the medium term is nonetheless eventually expected as a result of the change in taxation policy. The aforementioned decline in the country’s real estate rental prices, however, should help to mitigate the impact of VAT’s short-term effect on the consumer price index.

The outlook for headline inflation over the short to medium term is therefore a relatively benign one. Most estimates suggest there will be a temporary rise in inflation to around 3% in the year in which VAT is introduced. The annualised consumer price index is then projected to fall back once again as the VAT effect drops off.

If these forecasts prove to be accurate, Qatar could reasonably accommodate a firming of house prices as well as rental rates without an overly negative effect on its medium-term inflation rate. For this scenario to become a real likelihood, however, the supply and demand imbalance in the housing market must first be resolved.

The rise witnessed in Qatar’s purchasing managers’ index in January 2019 was therefore welcome news for government planners. The index hit a sixmonth high at the start of the year, as confidence was regained thanks to the opening of 40 new Qatari-owned manufacturing units.

As a result of Qatar’s drive towards increased self-sufficiency, local firms have higher personnel levels and are preparing to launch new manufacturing, retail and other non-oil activities. The purchasing managers’ index, which stood at 50.5 in January 2019, up from 50.1 in December 2018, was boosted by record expansion of input stocks.

A sustained trend of industrial and manufacturing expansion, combined with rising employment levels, would have a positive effect on the home and rental real estate market, and contribute to the formation of a consumer price index basket in which the major components are all moving in the same direction.

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The Report: Qatar 2019

Economy chapter from The Report: Qatar 2019

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