Following a challenging 2016, when the price of Brent Crude dipped briefly below $30 per barrel and governments across the GCC were compelled to significantly adjust their fiscal plans, 2017 has brought the region some respite – both to current accounts and the wider economy.
Qatar remained better insulated from the effects of oil price volatility than most countries in the Gulf, owing chiefly to the unintended countercyclical effects of its infrastructure investment boom. Nonetheless, a return of oil prices to above $50 per barrel will certainly reduce strain on the economy, which was beginning to experience tightening in liquidity. Stronger energy prices will provide the government with a positive platform for the launch of its new six-year strategic plan, which will aim to further deliver on the economic diversification mandated by Qatar National Vision 2030.
The economic blockade that was imposed on Qatar in June 2017 by several of its regional neighbours has led to a further focus on local industry, and has particularly supported small and medium-sized enterprises in the country (see analysis), as well as the manufacturing sector.
Challenges & Opportunities
In common with the rest of the GCC, the precipitous drop in oil prices constrained the economic outlook for 2016. While Qatar’s main export commodity is gas, most of its long-term contracts are priced using oil as a benchmark, leaving the economy subject to price volatility.
The national accounts reflect the sudden effect of this decline. In the final quarter of 2015 government revenues reached QR96.2bn ($26.4bn), and the total budget surplus was equivalent to 5.2% of GDP. Within three months, however, revenues dropped to QR29bn($8bn), and the budget deficit for the first quarter of 2016 reached 9.9% of GDP.
While authorities in other countries might have panicked in the face of such a rapid turnaround in public finances, Qatar’s government took a measured approach to the problem. Early on it decided to cut current spending and borrowing on international debt markets. Both capital spending plans and long-term investments held by the Qatar Investment Authority (QIA) were to remain untouched.
This approach was met with widespread approval. The IMF, in its concluding statement of the 2016 Article IV mission, noted that Qatar is “effectively adjusting to the new reality of sustained lower energy prices”, and that financing the deficit mainly through external borrowing, as well as asset drawdown “seems appropriate”. Debt markets gave their own seal of approval to the government’s plans, as initial demand for Qatar’s record eurobond sale in May 2016 exceeded expectations. This led authorities to nearly double the total issue, from an initially planned $5bn to $9bn.
The recourse to international debt markets allowed Qatar to remain on track for its bold infrastructure investment programme. Between 2010 and 2022 – when Qatar will host the FIFA World Cup – the government will spend an anticipated $220bn on projects across the economy, including the Qatar Integrated Rail Project (QIRP), the second phase of Hamad International Airport and the mixed-use development at Lusail City.
“Without a doubt Qatar’s biggest milestone is the World Cup tournament,” Yasser Wehbe, CEO of Lumatron, told OBG. “The increased activity in so many sectors, and specifically in local manufacturing, will play strongly into increasing GDP.”
Continuing investments somewhat cushioned the economic effects of the sudden decline in hydrocarbons. According to the Ministry of Development Planning and Statistics (MDPS), non-hydrocarbons GDP grew by 5.6% in 2016.
The IMF estimated Qatar’s real GDP growth in 2016 in at 2.2%, marking continued deceleration. In 2012 real GDP was growing at 4.7%, and in the years following it slowed to 4.4%, 4% and 3.6% in 2015; before this, Qatar had several years of double-digit real GDP growth.
A sharp decline in hydrocarbons revenues between 2014 and 2015 – free on-board exports fell by almost 40%, from QR461bn ($126.6bn) to QR281bn ($77.2bn) – resulted in a drop in nominal GDP of more than 20%, with the hydrocarbons sector shrinking by 41.3%. This decline continued into the first quarter of 2016, with nominal GDP falling by 8.5%, and hydrocarbons by 23.6%, over this period. By this point the drop in oil prices had begun to affect the non-hydrocarbons economy, which until then had continuing positive growth. In the first quarter of 2016 nominal GDP in the non-hydrocarbons economy declined by 0.6%.
The situation began to improve in the second quarter of 2016, with nominal GDP growth picking up to 2.3%, before accelerating to 4.2% in the third quarter and 4.1% in the fourth quarter. However, in its Quarterly Statistical Bulletin of June 2017, QCB estimated that the growth rate fell to 2.7% during the first quarter of 2017, and a contraction of 3.1% in the second quarter.
The hydrocarbons sector – which expanded by 6.5%, 8.7% and 6% in the second, third and fourth quarters, respectively – led this return to growth. According to Qatar Central Bank (QCB) estimates, growth in hydrocarbons GDP was 7.8% in the first quarter of 2017. However, in the second quarter it was estimated to have contracted by 6.8%.
The non-hydrocarbons economy also returned to positive territory in the second, third and fourth quarters of 2016, growing by 0.6%, 3.2% and 3.3%, respectively, before falling to an estimated 0.3% in the first quarter of 2017 and then contracting by 1.3% in the second quarter.
Volatility in oil prices in 2015 ensured that, in nominal terms, the contribution of the hydrocarbons sector to the economy fell below 50% for the first time in recent years. In 2015 the non-hydrocarbons economy constituted 61.4% of the total, an increase of 13.9 percentage points over 2014. Moreover, the IMF anticipates that the non-hydrocarbons sector will continue to grow in coming years, hovering around 70% of nominal GDP up to 2020. Diversification will change the structure of the economy over time, as Qatar becomes increasingly reliant on non-hydrocarbons revenue sources.
“With the renewed focus by the country’s leadership on diversifying the national economy, a revised strategy which empowers various players to boost the growth of tourism is set, and thus will impact the growth of the retail sector now and in the future,” Bader Al Darwish, chairman and managing director of Darwish Holding, told OBG.
The most significant growth has been in construction, which as recently as 2012 accounted for under 5% of GDP. However, given the major investments in new infrastructure, the share of construction in the economy had risen to 11.9% by 2016.
This recent growth has brought construction almost onto a par with manufacturing, which is currently the second-largest sector in the economy after upstream hydrocarbons, representing 9.7% of GDP in 2015. The share of manufacturing has remained relatively stable in recent years. Between 2012 and 2017 the sector generally accounted for between 9.5% and 10.5% of GDP. By contrast, major growth segments in the economy over the same period have included wholesale and retail trade, which expanded from 5.3% of GDP in 2011 to 8.8% in 2015, and real estate, which grew from 3.9% to 6.4% over the same period.
In terms of prices the 2016 downturn was compounded by an uptick in consumer price index (CPI) inflation, which had moderated somewhat, falling from 3.4% in 2014 to 1.8% in 2015. In 2016 inflation picked up once again: the IMF estimated this at 2.7%. QCB figures show most of the rise in inflation resulted from domestic factors, with indices for housing, education and transport seeing particularly sharp increases across the year. IMF projections see CPI inflation easing considerably for 2017, to 0.9% before once again increasing in 2018 to 4.9% with the anticipated launch of GCC-wide value-added tax, expected to be fixed at an initial 5%.
To some extent Qatar’s inflationary pressures are driven by continuing strong growth in population, specifically in the migrant labour segment. Between 2006 and 2016 the compound annual growth rate in the population was 9.64%, with the overall population tripling as a result – growing from 1.04m in 2006 to 2.62m in 2016. MDPS and Qatar National Bank (QNB) figures show that, resulting from this growth, Qatar currently has a demographic bulge of working-age males between 20 and 49 years old, who account for 59.3% of the population.
QNB and the World Bank predict that the population will continue to grow relatively robustly and will reach 3m in 2025. However, upon the completion of many infrastructure projects in the early 2020s, many migrant labourers are likely to leave Qatar.
According to MDPS figures, the labour force reached 1.99m in the second quarter of 2017, with migrant workers comprising 94.8% of the total. The rate of labour force participation was highest among males, at 96.2%, while female participation was significantly lower at 58.7%.
The MDPS also reported in its annual bulletin of labour force statistics that occupation varied by demographic group. In 2016 the plurality (32.8%) of the labour force was in crafts and related trades. The second-largest category – and with 40.3% of economically active women, the most common category for female workers – was elementary occupations, comprising 19% of all economically active individuals.
While 34.2% of non-citizens were in crafts and related trades, only 5.5% of citizens worked in this industry, and 0.1% of crafts and related trade workers were women. Furthermore, the plurality of Qataris (29.6%) worked as professionals, with only 8.1% of foreign nationals belonging to this category.
Qatar is the third-largest economy in the GCC, after Saudi Arabia and the UAE. Between 2018 and 2022 Qatar is forecast to have average GDP growth of 2.97%.
Regarding global indicators for the overall economic environment, Qatar ranked 18th out of 138 countries in the World Economic Forum’s 2017 Global Competitiveness Index, a fall of four places from 2016. However, this still places it second-highest in the GCC, behind only the UAE. As highlighted by the report, the main challenges facing domestic businesses are restrictive labour regulations and inflation. According to the ease of doing business index in the World Bank’s “Doing Business 2018” report, Qatar ranked 83rd of 190 economies, placing it fourth in the GCC, above Saudi Arabia and below Oman. The World Bank found that Qatar has made important recent strides, improving access to credit information, and facilitating imports and exports with the inauguration of the new Hamad Port.
The government ran a deficit of QR49.9bn ($13.7bn) in 2016, equivalent to 8.99% of GDP, according to Ministry of Finance (MoF) figures. To cover the deficit, Qatar issued $14.5bn of external debt, including the $9bn eurobond sale in May 2016 and $2.6bn of domestic debt, some of which also covered rollovers of existing debt. According to international media, this placed Qatar third for debt issuance in the region, after Saudi Arabia and the UAE. A total of $77.8bn of debt was issued across the Middle East in 2016, up 145% on 2015 and the highest figure since records began in 1980.
The scale of new borrowing saw Qatar’s gross debt rise from 34.9% of GDP to an estimated 47.8% over the 12-month period from 2015 to 2016. Further IMF projections estimate that the gross government debt-to-GDP rate will continue to rise – albeit more gradually – over the next several years, eventually peaking at 55.5% in 2020. Indeed, according to the MoF, the government has continued to run a deficit in 2017: in the first and second quarters of the year the deficit was equivalent to 5.1% and 4.1% of GDP, respectively. In the 2017 budget the MoF stated plans to narrow the deficit by 56.9% from the 2016 rate, but this was still anticipated to reach QR28.4bn ($7.8bn). However, these figures were based on an estimated oil price of $45 per barrel, while actual prices averaged $51.25 in the first three quarters of 2017. This could cause the 2017 deficit to be lower than projected, though it equalled QR13.7bn ($3.8bn) by the end of the first half of 2017.
Alongside debt issuance, the government has embarked on a round of fiscal discipline to pare back current spending (see analysis). This saw expatriate workers in several government ministries laid off during 2016. Capital spending has been not only maintained but strengthened over the course of the downturn, with the MoF indicating that it expected to sign off on QR46.1bn ($12.7bn) of new contracts in 2017. This adds to an existing stock of QR374bn ($102.7bn) of non-hydrocarbons projects already initiated by the public sector. On the revenue side, several new tax-raising measures were scheduled to begin throughout 2017 (see analysis), adding to prior government efforts to rein in subsidies, which included a 30% hike in petrol prices in January 2016.
Qatar’s emergence as a modern, developed economy owes much to the discovery and exploitation of its mineral wealth. Oil was first discovered on the peninsula in 1939, with production beginning at the end of the following decade. Qatar has been a member of the Organisation of the Petroleum Exporting Countries (OPEC) since 1961, and by the 1970s the country had come to enjoy one of the highest GDPs per capita in the world. By that point the traditional economic mainstays of pearling and fishing had largely given way to the now dominant hydrocarbons sector, although government support ensured that agricultural activities continued.
In the following decades Qatar’s economic fortunes fluctuated according to the price of oil. However, a major shift occurred in the mid-1990s with the decision to develop Qatar’s natural gas fields. Chief among these is the North Field, discovered in 1971, which – together with its associated South Pars gas field in Iran – constitutes the world’s largest natural gas deposit. Development of the field was a gamble, as delivery to market would need to occur almost entirely through LNG conversion, and the state borrowed heavily to finance the construction of the supporting infrastructure. This gamble paid off handsomely, however, as Qatar is now the world’s largest exporter of LNG and the second-largest exporter of natural gas overall, with major export markets in Japan, South Korea, India and China.
The natural gas boon has seen Qatar once again become one of the wealthiest countries in the world per capita, and the richest per capita in oil and gas, with 76,900 barrels of oil equivalent reserves per capita – almost triple the figure for Kuwait, which holds second place. Moreover, the surpluses generated from hydrocarbons exports have not only enabled significant investments in domestic infrastructure, but also allowed Qatar to become a major investor overseas. The QIA, created in 2005, is the nation’s sovereign wealth fund (SWF), and is currently the world’s ninth-largest SWF with an estimated value of $335bn, according to the SWF Institute. The QIA holds investments in several blue-chip corporations, including Glencore, Barclays and Volkswagen, as well as substantial property assets in London, Los Angeles, Paris and Tokyo.
The QIA is one aspect of the government’s broader strategic plan for developing the national economy. The overall framework currently guiding economic policy is QNV 2030, which aims to transform Qatar into an “advanced country … capable of sustaining its own development and providing for a high standard of living for all its people for generations to come”. Delivery of QNV 2030’s goals is achieved through a series of medium-term strategic plans, known as the National Development Strategies (NDS).
The first NDS ran from 2011 to 2016. Priorities for the new plan, which will run until 2022, are shifting growth towards tradeable sectors of the economy and laying the groundwork for the creation of a knowledge economy (see analysis). Running alongside the new plan will be an infrastructure investment programme, which is expected to exceed the $242.1bn LNG expansion phase that occurred in the first decade of the 21st century, according to data from QNB, the MDPS and Haver Analytics.
In addition, Qatar is using its economic influence to drive expansion abroad. “After two decades of strong growth Qatari holdings need to seek overseas opportunities. Real estate has provided us with the necessary expertise and confidence that helped shift our investment interest to other sectors, such as banking, industry, health and retail,” Sheikh Faisal bin Qassim Al Thani, chairman and founder of Al Faisal Company, told OBG. “Despite the current slowdown of the global economy there are scores of business opportunities for Qatari companies. We have identified several new international markets as key priorities, areas that have healthy regulatory environments and enjoy strong growth.”
Among the largest projects currently under way are the $45bn mixed-use real estate development in Lusail City and the $40bn QIRP. Located 22 km north of Doha, the development is being carried out under the auspices of Qatari Diar, a subsidiary of the QIA. The project is due to be completed in 2019, with the Lusail Iconic Stadium set to host the opening and closing ceremonies of the 2022 FIFA World Cup. The 38-sq-km city, which has been under construction since 2006, is anticipated to have an eventual population of 450,000 people. Alongside residential and commercial districts, it will also house government ministries.
Construction on the QIRP began in 2012 and is due for completion in 2030, with key sections to be finished by 2022. The project will include 260 km of metro and light rail in Doha and Lusail City, and 400 km of mainline track in the rest of the country. This will include a high-speed link to Hamad International Airport and links to the GCC rail system and the industrial cities of Ras Laffan and Mesaieed.
Development of the system is proceeding in collaboration with Deutsche Bahn, which holds a 49% stake in the Qatar Rail Development Company, and it is a joint venture with Qatar Railways Company, which is a fully owned subsidiary of Qatari Diar. Other projects include the $8bn second phase of renovations of Hamad International Airport – expected to increase the size of the terminal by 50% and provide an additional 24 gates – and the $7.4bn Hamad Port to the south of Doha. The first phase of this new port has already been completed: full commercial operations began on December 1, 2016, while the second and third phases are moving ahead of schedule, brought from 2030 to 2020. The Public Works Authority has also allocated $35bn for the development of expressways and local roads.
In addition to this ongoing infrastructure investment, Qatar has updated its labour regulations in light of international scrutiny over working conditions among labourers in the run up to the 2022 FIFA World Cup. Labour Law No. 21 of 2015 came into effect in December 2016, effectively abolishing the prior kafala (sponsorship) system and replacing it with a contract-based model.
Under the new legislation the exit permits are abolished, special “grievance committees” will be established between employers and workers, and businesses will be fined up to QR25,000 ($7690) for holding employee passports.
Oil & Gas
According to OPEC’s “Annual Statistical Bulletin 2017”, Qatar produced an average of 651,500 barrels per day (bpd) of crude oil and 182.8bn cu metres of marketed natural gas in 2016. When gas-to-liquid production is also included, figures from BP show that domestic daily oil production was 1.9m bpd in 2016 – a sum which has remained relatively stable since 2011.
BP figures for Qatar’s natural gas production are marginally lower than OPEC’s, at 181.2bn cu metres in 2016, with annual growth of 1.3%, representing 5.1% of global natural gas production – placing Qatar fourth globally behind the US, Russia and Iran. In terms of pipeline exports Qatar is in ninth place globally. However, in LNG exports it ranks first, with 104.4bn cu metres in 2016.
According to data compiled by QNB Economics, Qatar’s overall production of hydrocarbons amounted to 5m barrels of oil equivalent per day in 2015, with gas comprising 65% and oil 35%. While QNB estimated that total production remained flat with respect to 2014, there was some shifting in volumes, with gas production rising 4.2% and oil production declining slightly for the third consecutive year. Further declines in oil production are likely in 2017 as Qatar adjusts to new production quotas agreed in December 2016 in the first joint OPEC and non-OPEC production pact since 2001. The pact, signed at OPEC’s headquarters in Vienna, will see cuts in production totalling around 1.8m bpd, or 2% of global production. However, hydrocarbons revenue has been recovering in 2017, which has improved the economic forecast for FY 2017/18.
In terms of new production, Qatar lifted the 2005 moratorium on further development of its North Field offshore gas deposit in April 2017. The last project agreed upon before this self-imposed suspension was the $10bn Barzan gas project, which is expected to provide additional production capacity of 56.6m cu metres per day, mainly for domestic use. The project is a joint venture between Qatar Petroleum (QP) and ExxonMobil, and production was scheduled to begin in November 2016 before ramping up to full capacity in 2017. The RasGas-operated project has been delayed several times, and after the discovery of a leak in a gas pipeline in October 2017, anonymous sources told Reuters the project was unlikely to begin before 2018.
In July 2017 QP announced plans to ramp up annual production at its North Field from 77m tonnes to 100m by 2024. QP is also engaged in an $11bn project to redevelop the existing oilfield at Bul Hanine, with a total of 150 new wells expected to be drilled by 2028, doubling capacity to 90,000 bpd and extending the life of the field.
While manufacturing contributed just under 10% to GDP in 2015, the sector has struggled somewhat recently in light of falling oil prices and weaker global commodities demand. Particularly, the petrochemicals segment has put expansion plans on hold, with two major new petrochemicals plants planned for Al Sejeel and Al Karaana cancelled in late 2014 and early 2015, respectively. Expansion of RasGas’ helium plant at Ras Laffan is proceeding as planned, however, with the third plant currently under construction and due to begin operations in 2018. The facility will boast an expected capacity of 400m standard cu feet of liquid helium per year.
A boost to the sector may arrive with the NDS 2017-22, which will focus on manufacturing highvalue, competitive and tradeable goods, such as pharmaceuticals and downstream petrochemicals, as a target for economic diversification, according to MDPS figures. Delivery of the new strategy will most likely involve close collaboration with Manateq, Qatar’s economic zones authority, which is currently in the process of developing three major special economic zones (SEZs) across the country.
The three zones – Ras Bufontas, Um Alhoul and Al Karaana – are each at varying stages of development, with Ras Bufontas currently the closest to completion and due to open at the end of 2018. The SEZ will focus on logistics and warehousing and is located adjacent to Hamad International Airport on a 4-sq-km site. Um Alhoul and Al Karaana will focus on manufacturing and construction materials, respectively, and will receive larger tracts of 34 sq km and 38 sq km. Um Alhoul will begin operations in 2018, and Al Karaana – which is yet to begin construction – is expected to be completed towards the end of 2019. The SEZs each offer incentives to attract international investors, including opportunities for 100% foreign ownership.
The financial services industry saw its share of GDP rise to 8.2% in 2015, up from 5.9% the previous year. Despite challenging conditions, 2016 saw more positive growth in the sector, with total assets held by Qatar’s banks rising 13.5% to QR1.3trn ($357bn), and deposits up 11.8% to QR726.9bn ($199.6bn). Much of the deposit growth, however, came from overseas sources as the domestic banking sector suffered a tightening of liquidity resulting from depressed global oil prices and a subsequent withdrawal of government and government-related entity deposits, which fell from a total of QR209.1bn ($57.4bn) in December 2015 to a 12-month low of QR174.1bn ($47.8bn) in August 2016.
Tightening liquidity was reflected in broad money supply – which dropped 4.6% in 2016 – and the bank loan-to-deposit ratio, which in July 2017 hit 130.4%, the highest for the GCC. While the QCB initially kept a tight policy, maintaining a high repo rate and continuing with its schedule of Treasury bill auctions, it eventually brought some respite to the sector in the final quarter of 2016, cancelling some Treasury bills and halving the repo rate to 2.25%. Throughout 2017 there have been signs that the pressures on the system have begun to ease once more.
Nonetheless, with tougher operating conditions leading to stagnating profits for many banks, the potential is emerging for consolidation within the sector. Following the announcement in July 2016 of the merger of two UAE banks – National Bank of Abu Dhabi and First Gulf Bank – three Qatari banks look set to follow suit. In December 2016 Masraf Al Rayan, Barwa Bank and International Bank of Qatar announced that they were considering plans to merge, making a combined entity worth QR160bn ($43.9bn) in assets, which would make it the country’s second-largest lender. In June 2017 the banks announced they planned to complete the merger by the end of the year. There is speculation that the possible merger could prompt further consolidation within the financial sector, as Qatar’s banks look to gain the economies of scale necessary to expand beyond the domestic market.
While 2016 was a challenging year for hydrocarbons economies throughout the world, Qatar’s measured response to the downturn should encourage further confidence among international investors. Although additional private sector involvement on the financing side is possible moving forward, long-term infrastructure investments remain fully backed by the authorities. The government has also proven capable of exercising fiscal restraint over spending when necessary.
Conditions in 2017 have brought energy price recovery, and with it potential for fiscal balance. This should enable the NDS 2017-22 to be introduced on a positive footing, but success will also depend on both OPEC and non-OPEC members maintaining steady production quotas. Many aspects of the NDS 2017-22 are expected to be tailored in response to the economic blockade, ensuring the country can become more self-sufficient and continue to grow in key areas. The main challenge is determining how to successfully transition from the current growth cycle – built primarily on the conversion of trade surpluses into growth in non-tradeable sectors such as construction – into a more sustainable, long-term cycle built on a diversified knowledge economy.
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