Reporting double-digit average GDP growth since 2004, the Qatari economy boasts a decade-long track record of extremely strong expansion. The state has risen to become one of the world’s richest countries on a per capita basis. Hydrocarbons production and exports support the state’s economy; Qatar is the world’s largest exporter of liquefied natural gas (LNG), and has witnessed a rapid expansion of LNG activities.
Due to the government’s long-standing moratorium on further development of the North Field, the hydrocarbons sector has slowed down, and the state has vigorously pursued non-hydrocarbons diversification, which is a key tenet of its Qatar National Vision 2030, a master plan for the country’s development.
AMBITIOUS PLANS: Leading non-hydrocarbons growth are the finance and construction sectors, while the upcoming 2022 FIFA World Cup stands as a mid-term deadline for multiple headline developments. The state’s banking sector has shown a strong performance in recent years, and in capital markets, the Qatar Stock Exchange (QSE) has seen tremendous growth in the wake of the country’s recent upgrade to emerging market status. As it rolls out a host of large-scale projects across nearly every economic sector, one of the challenges for Qatar will be to prevent its economy from overheating, with inflation already dampening growth forecasts in the real estate and construction sectors.
With oil prices dropping about 50% between June 2014 and March 2015, Qatar also faces the same challenges as many of its neighbours – how to curb expenditure in the event that oil and gas prices remain low. However, targeted small and medium-sized enterprise (SME) development programmes (see analysis), a sustained focus on non-hydrocarbons growth, and years of sizeable budget surpluses should keep Qatar on target towards meeting its 2030 development goals.
GDP GROWTH: Qatar has shown tremendous growth over the past decade: its population tripled, rising from 744,029 in 2004 to 2.22m as of January 2015, while GDP per capita stood at $93,715 in 2013, third worldwide behind Luxembourg and Norway, according to the World Bank. GDP growth averaged 13.46% annually between 2004 and 2013, and Qatar’s economy crossed a key threshold in 2013, passing the $200bn mark to reach a nominal GDP of QR739.8bn ($202.78bn), equating to real GDP growth of 6.5% in 2014, and driven largely by expansion of the non-hydrocarbons sector. This trajectory is forecast to continue, with growth rates between 6.5% and 7% projected for 2015-16.
Growth in the non-hydrocarbons sector averaged 11.9% in Q1 2014 to Q3 2014, according to Qatar National Bank (QNB). As in previous years, the expansion was led by the financial, real estate, construction and services sector, which together comprised 51% of total GDP and 85% of non-hydrocarbons GDP in 2014, according to the figures from Qatar Central Bank (QCB).
In March 2015 the Ministry of Development Planning and Statistics (MDPS) reported that real GDP growth picked up to 6.7% during Q4 2014 over Q4 2013 due to a rise seen mainly in electricity, construction, trade, hotels, transport and communication, and domestic services, as well as increasing population.
Qatar’s strong economic expansion is expected to continue on the back of non-hydrocarbons growth, especially in the construction, financial, trade and hospitality sectors. In a December 2014 report, National Bank of Kuwait (NBK) projected Qatar’s economic expansion will reach 6.5% and 7% in 2015 and 2016, respectively, from a projected 6.1% in 2014.
SPENDING: The QCB reports that Qatar’s economic activity remained relatively stable in 2013, with spending policies aimed largely at enhancing non-hydrocarbons diversification. Qatar’s current account balance to GDP ratio declined to 30.9% in 2013, from 32.7% in 2012, and the QCB reports that the trade balance stood at 54.3% of GDP in 2013, while the MDPS reported a slightly lower trade balance figure, 52.1%, in the same year. Government spending also slowed somewhat during the 2013/14 fiscal year ending in March, with spending increasing by 14.1%, the lowest rate in five years, according to figures by the MDPS. Still, expenditure rose to a record high of QR231.7bn ($63.5bn), compared to QR205.6bn ($56.4bn) in 2012/13, and while the previous year’s spending was 10% more than initially planned, the margin by which actual spending overshot the plan was the lowest it had been in five years, indicating the government has intensified efforts to rein in spending levels witnessed over the previous four years, in which it spent almost 25% more than originally planned (see analysis).
Current expenditure, comprised largely of public sector salaries, rose 6% in 2013/14 to reach QR163.2bn ($44.7bn), a sharp slowdown from the 24.4% jump recorded in both 2011/12 and 2012/13, caused by a drop in interest payments, as well as spending on supplies and services. Project spending, meanwhile, soared by 32.7% in 2013/14 to reach QR68.4bn ($18.7bn), compared to growth of just 1.9% in 2012/13.
REVENUES & SURPLUS: State revenues grew by 21.9% to reach a record QR346.6bn ($94bn) in fiscal year 2013/14, although this was slightly lower than the 27.8% rise recorded the previous year. Revenue growth would have been lower if Qatar Petroleum (QP), which controls all upstream and downstream production in the oil and gas sector, had not begun transferring its entire financial surplus directly to the government in 2013. Previously, a portion of QP profits would be used as investment income; another portion on provision of fresh capital to the state’s sovereign wealth fund, Qatar Investment Authority (QIA); while the remainder would be retained on QP’s balance sheet. As a result, the 2013/14 budget surplus surged to a record QR115bn ($31.5bn), or 15.6% of GDP, up from QR78.8bn ($21.6bn), or 11.3% of GDP, the previous year. The IMF estimated Qatar’s government debt stood at 34% of GDP as of March 2014, with authorities issuing Treasury bills and bonds to develop the financial market and manage liquidity, although net debt remains negative due to QIA’s considerable assets (see Trade & Investment chapter).
While Qatar’s surpluses continue to remain extremely healthy, the IMF has warned that rising government spending, flat LNG production, a reduction in crude oil output from mature fields and plummeting world oil prices could push the state’s fiscal balance into a medium-term deficit. A Reuters poll of financial analysts found that the country’s fiscal surplus is expected to total 7.7% of GDP in 2014/15, but then shrink to 5.2% in the following year, while the IMF reports that fiscal and current account surpluses are expected to narrow in the future, as public expenditures and imports outpace revenues and exports.
In March 2015 QNB released a report forecasting that the country will run a deficit in 2015 for the first time since the turn of the century. It expects the budget to be in the red to the tune of $3.91bn, or 2.2% of GDP, with the deficit rising to 3.7% of GDP by 2017. By regional standards, this represents comparatively little debt, with Oman and Bahrain projected to run deficits of 8% and 9.3%, respectively. However, the authorities are likely to rein in spending to compensate, meaning that projects not related to the 2022 FIFA World Cup may be cut. The Sharq crossing, for example, was widely reported to be shelved at the time of press.
FUTURE SPENDING: In December 2014, Morgan Stanley reported that growth in 2015 will continue to be driven by high public spending, albeit with more stringent planning and oversight of major infrastructure projects, lower domestic and external public debt, increased private sector participation and stricter banking sector regulations.
The 2014/15 budget is the largest in Qatar’s history, with the Qatar News Agency reporting in March 2014 that the state plans to spend QR218.4bn ($59.9bn), and projecting revenues will reach QR225.7bn ($61.9bn.) Sheikh Tamim bin Hamad Al Thani, who became emir in June 2013 following the abdication of his father, Sheikh Hamad bin Khalifa Al Thani, issued royal decree No. 49 of 2014 to endorse the budget, which was based on assumed oil prices of $65 per barrel.
While this was considered conservative at the time, Brent crude prices dropped by nearly 50% between June 2014 and early 2015, to hover at around $60 per barrel in March, making Qatar’s budget projections more realistic than expected.
The budget increase is being driven by expenditures for the completion and implementation of key development projects, with allocations for these projects expanding by 16.8% to reach QR87.5bn ($24bn.) In October 2011 it was reported that the government will allocate some 40% of its budget through 2016 to infrastructure projects. These investments include $20bn for tourism infrastructure; $15.5bn for construction of the Hamad International Airport, which opened its first phase in May 2014; $7.4bn for the new Hamad Port, formerly known as the New Port Project; and at least $35bn in railway investments.
A total of QR664bn ($182bn) worth of projects is expected to be implemented during the next five years, according to the Ministry of Finance, with allocations to the education, health, infrastructure and transportation segments accounting for 54% of total 2014/15 expenditure, a 6% increase over 2013/14. Infrastructure alone will account for QR75.6bn ($20.7bn) of total spending in 2014/15, a 22% rise over the previous year.
HYDROCARBONS: Qatar is the second-smallest crude oil producer in the Organisation of Petroleum Exporting Countries (OPEC), but by contrast the US Energy Administration (EIA) reports that Qatar was the world’s fourth-largest dry natural gas producer in 2012, and has been the world’s largest LNG exporter since 2006. In addition to holding the world’s largest gas-to-liquids facility, Qatar has also increased production since 2000, with efforts at improving value addition leading to rising output of both gas and liquids production, including production of lease condensates, natural gas plant liquids and other petroleum liquids.
The state’s modern economic transformation began in 1971, when Shell discovered the North Field, the world’s largest gas reservoir. Although the field remained largely undeveloped for the next two decades, Shell partnered with Mobil to build its first LNG plants in Ras Laffan, with work finishing in 1996. The next 15 years saw construction of an additional 14 LNG trains, each in partnership with an international petroleum company, with present capacity at the 295-sq-km Ras Laffan Industrial City standing at 77m tonnes of LNG annually.
In 2002 Shell invested $21bn to build a new LNG plant at Ras Laffan, as well as Pearl GTL, the world’s largest gas-to-liquids plant in operation, with a natural gas conversion capacity of 140,000 barrels per day (bpd) of liquid fuels, including kerosene for jet fuel and base oil, which is used to make motor oil.
Qatar’s economy remains dependent on oil, gas and related industries, particularly on exploration and production activities in the North Field. The government enacted a moratorium on increasing production at the North Field in 2005 which has not yet been lifted.
At the same time, the Ministry of Energy and Industry has indicated that it may increase LNG production by 10m tonnes through efficiency upgrades.
According to the EIA, production of liquid fuels stood at 1.6m bpd in 2013, including crude oil, condensates, natural gas plant liquids and gas-to-liquids. Out of this, crude oil comprised 730,000 bpd. The state’s crude reserves stood at around 25.2m barrels as of January 2014, the ninth-largest reserves in OPEC, and 13thlargest in the world, with 85% of all crude oil produced at three main fields: Al Shaheen, Dukhan and Idd Al Sharqi (see Energy chapter).
In FY2013/14, fiscal income depended largely on hydrocarbons activity, directly contributing 57% of total revenue (85.7% if investment income from QP is added), according to MDPS data. Meanwhile, the EIA estimates the state earned $42bn in revenues from net oil exports in 2013, and a further $21bn between January and June 2014, compared to $55bn in 2012, demonstrating the impact of the North Field moratorium.
NEW COMPETITION & FALLING PRICES: New competition and global energy market volatility represent the two most significant challenges to Qatar’s hydrocarbons industry. As reported by Bloomberg in April 2014, Australia is constructing liquefaction plants that will more than triple its annual LNG-manufacturing capacity to 85m tonnes by 2018, enabling it to surpass Qatar’s output, while the shale gas boom in the US has put new pressure on Qatar’s global dominance.
According to Bloomberg data, LNG spot prices in north-east Asia, where Qatar shipped 63% of its LNG in 2012, were expected to fall as low as $12 per million British thermal units (Btu) by 2016, as new supply enters the market. Although prices climbed to a record $19.70 per million Btu in February 2014, Bloomberg’s mid-term estimates turned out to be overly-optimistic; gas prices experienced even more dramatic declines than crude oil in the ensuing months, with Reuters reporting in December 2014 that Asian spot LNG prices stood at $9.50 per million Btu for January, and $9.70 per million Btu for February. This could benefit Qatar: according to Reuters, at current prices it is more profitable for Atlantic basin producers to send cargo to Europe, rather than Asia. With Qatar’s share of LNG exports to Asia rising from 56.4% in 2012 to nearly 70% as of December 2014, Asia represents the state’s most important current and future LNG export market. With prices now less than $10 per million Btu, Qatar is advantageously positioned to continue profitable LNG exports to Asia, led by growing regional demand.
In a November 2014 report published by Energy Boardroom, Sheikh Khalid bin Khalifa Al Thani, CEO of state-owned LNG supplier Qatargas, said LNG demand in Asia is expected to rise from 237m tonnes in 2013 to 450m tonnes by 2025. Qatargas projects that an additional 150m tonnes per year of LNG supply will be required to meet global demand by 2025, with Sheikh Khalid predicting the LNG market will remain tight in the short- and medium-term as a result.
INFLATION: Although the IMF identified a sharp decline in oil and gas prices as the biggest risk to Qatar’s sustained economic expansion, the second-largest risk factor cited by the IMF was near-term overheating of its economy, and indeed, inflation has gained pace in recent years, especially in the real estate and land segments, before moderating slightly in 2014.
In its March 2015 Economic Insight report, QNB reported that domestic inflation has been on an upwards trajectory in recent years, progressively rising from -6.2% in 2009 to 3.3% in 2014, though this is actually down slightly on 3.5% in 2013.
Overall inflation is being driven by rental inflation, which comprises 32% of the consumer price index (CPI) basket and rose by 7% in 2014, driven by rapid population growth and increased demand for housing.
In January 2015 the state’s revised cost of living index for the first time included education, dining and hospitality, which rose 3.4% that month. Higher rents and transport costs – in addition to costlier education, tobacco, furnishing, clothing and restaurant charges – led the CPI inflation rise compared to 2013, the new base year, according to the MDPS.
In the new CPI, the classification of individual consumption according to purpose has been used, which divides the price basket into 12 main groups compared to eight with 2007 as base year. The weights of recreation and culture, hotels and restaurants, miscellaneous goods and services, and communication have been increased, while other groups such as housing, water, electricity and gas now have a reduced weight.
Housing, water, electricity and gas – which have a 21.89% weight in the revised index (against a weight of 32.2% previously) – jumped 8.2% in January 2015. The CPI, excluding “housing, water, electricity, gas and other fuels”, shows an increase of 2% compared to the base year 2013. The MDPS said cost of living in Qatar is set to rise 3.7% in 2016 due to rising rents, especially in the affordable housing segment.
QNB has projected inflation will reach 2.5% in 2015, while NBK’s December 2014 report estimated headline inflation in Qatar will reach 4.1% in 2015 and 2016.
Rents will remain a significant inflationary driver during the next two years, as a result of limited supply of residential housing units, coupled with significant population growth. Qatar added 208,000 new residents between January 2014 and January 2015 alone, 10.3% growth year-on-year (y-o-y), according to QNB, while Colliers International estimated the state’s residential shortfall stood at some 48,000 units as of June 2014 (see Real Estate chapter).
BANKING SECTOR: Non-hydrocarbons growth is led by Qatar’s financial services and construction sectors, with the state’s banking sector recording the highest growth among all GCC economies in 2013, according to the QCB. The MDPS reported that the finance, insurance, real estate and business services sector comprised 12% of GDP in 2013, a moderate rise over 11.2% in 2012, but still making it the state’s largest non-hydrocarbons sector. In its quarterly statistical bulletin published in October 2014, the MDPS reported that the financial services sector expanded by 21.3% y-o-y as of Q2 2014, with the sector’s quarterly activities standing at total value of QR27.46bn ($7.5bn), compared to QR22.63bn ($6.2bn) in Q2 2013. The banking sector remains well-capitalised and profitable, maintaining a critical role in major infrastructure development.
According to the IMF’s Article IV Consultation for Qatar, published in May 2014, banks’ Tier I capital stood at 15% of risk-weighted assets at the end of 2013, with the non-performing loan ratio remaining below 2%, despite marginal increases in early 2014.
Liquid assets remain strong, according to the IMF, representing 50% of total banking assets, while foreign funding of non-commercial banks has been pared back from 30% of total liabilities in 2012 to 23% as of mid-2014.
In a December 2014 report, Middle East Economic Digest (MEED) found that the sector’s macro-indicators are favourable, with sound capital and liquidity buffers, which will allow them to capitalise on the state’s growing construction boom.
Although the government has tended to fund larger projects, domestic banks are poised to play a greater role in financing new infrastructure schemes, providing credit to contractors working on government-funded projects. Deutsche Bank anticipates bank funding will accommodate $75bn worth of new infrastructure credits, which are forecast to yield loan growth rates of 17% over the next several years.
Qatar’s aggregate loan-to-deposit ratio fell from 1.2 to around 1 in May 2014, which the IMF attributes to rising public sector deposits, and the QCB announced in October 2014 that it plans to reduce the state’s total loan-to-deposit ratio to less than 100% in 2015, from current levels of around 102.6%.
The IMF reports that banks remain highly profitable, showing a 2% return on assets. Meanwhile, QNB reported in February 2015 that overall banking assets reached QR1.012trn ($277.4bn) in December 2014, a 10.5% increase over QR916bn ($251.1bn) in 2013.
The banking sector’s total deposits stood at QR601.1bn ($164.8bn) in 2014, and total credit reached QR653.4bn ($179.1bn), representing increases of 9.6% and 13%, respectively, over the year prior.
The compound annual growth rate (CAGR) of total bank assets over the past five years stood at 17.7% as of 2013, with Islamic banks reporting 26.8% CAGR in assets over the same period.
According to the QCB’s 2013 annual report, its main objective that year was to maintain Qatar’s exchange rate peg. The Qatari riyal is pegged to the US dollar at a rate of 3.64:1, and the QCB has supported the IMF’s assertion that pegged exchange rate regimes require robust implementation of macro-prudential tools, in order to maintain financial stability.
In December 2013 the QCB published its strategic plan for financial sector regulation, which was developed in partnership with the Qatar Financial Markets Authority (QFMA) and the Qatar Financial Centre Regulatory Authority. Key targets include enhancing regulation, expanding macro-prudential oversight, strengthening market infrastructure, and improving consumer and investor protection.
BASEL STANDARDS: The QCB’s second priority in 2013 was to ensure monetary and financial stability in the wake of rapid growth. The bank reports that its proactive liquidity management kept conditions stable, even as inflation rose during the second half of the year to reach 3.1%, compared to 1.9% in 2012, and 2013 saw a number of major steps taken to strengthen the financial sector, including implementation of the Basel III standards on capital adequacy, leverage and liquidity.
In July 2013, the QCB sent a consultative circular regarding new Basel III capital adequacy rules to commercial banks under its supervision, which covered treatment of Tier I core and Tier II supplementary capital under Basel III standards.
In Basel I and Basel II, the minimum capital banks needed to hold was 8% on a risk-adjusted basis, with at least 4% sourced from Tier I capital. Although Basel III maintains the 8% minimum requirement, it stipulates that 6% must be Tier I, and 4.5% from common equity Tier I capital. Basel III was adopted by Qatar’s banks during the first quarter of 2014.
While the magnitude of Basel III’s impact will vary by country, a November 2014 report published by Strategy& found that the new rules will significantly slow Middle East banks’ rapid expansion, particularly in the fast-growing economies of Qatar, Kuwait and the Levant, with the regional sector projected to experience average annual capital shortfalls of between 25% and 28% of the total regulatory capital required by 2019, or slightly more than $35bn.
Strategy& reported that even with more aggressive growth generating internal capital, shortfalls across the Middle East are still projected to reach no less than 18% of the regulatory capital required by Basel III, and in December 2014, Morgan Stanley echoed this assertion, reporting that it expects both the Commercial Bank of Qatar and Doha Bank will need to raise more capital, possibly as early as 2015.
CAPITAL MARKETS DEVELOPMENTS: The QSE has shown promising growth in the past few years, led by international and domestic reforms that have encouraged new investment in the index.
The most significant of these was Morgan Stanley Capital International’s June 2013 decision to upgrade Qatar to emerging market status, effective June 2014. QSE’s benchmark index advanced to its highest level in nearly five years in 2013, expanding by 24.2% to close the year at 10,379.59 points, according to the QCB’s 2013 annual report.
The upgrade is expected to open the QSE to increased global investment flows targeting emerging markets and attract considerably more foreign portfolio investment, with more listings expected as a result.
The year 2014 witnessed QP’s landmark January launch of a 26% stake in Mesaieed Petrochemical Holding Company, Qatar’s first initial public offering (IPO) since 2010. The sale raised QR3.2bn ($877.1m), representing the QSE’s largest share sale since Vodafone Qatar raised $1bn in 2009. Further IPOs are also expected in the future, including two new investment funds announced in November 2014.
With 43 companies now listed, the QSE’s market capitalisation has expanded strongly recently, rising 22% to reach QR676.79bn ($181.51bn) in full-year 2014, compared to QR555.6bn ($152.3bn) in December 2013. Trading volumes also more than doubled, rising from 7.21m shares at the end of 2013 to more than 14.68m shares by November 2014.
Recent regulatory changes will enhance the government’s ongoing efforts to mature and diversify the market. In October 2014, the QFMA issued a number of new regulations for the sector, opening up the QSE to margin trading, which is often considered a precursor to introducing derivatives trading, which includes futures and options.
CONSTRUCTION & INFRASTRUCTURE: Underpinning expansion in the non-hydrocarbons sector is the government’s infrastructure investment programme, which will see gross investments as a share of GDP reach 30% in 2014, as the government ramps up spending on a host of critical infrastructure projects. Construction is thriving as a result, and the sector is now the fastest growing in the country, expanding by 22% y-o-y between Q2 2013 and Q2 2014.
The state’s current portfolio of large-scale projects is sizeable. Qatar Rail is building a 260-km Doha metro system, which will connect to the Lusail Light Rapid Transit and Qatar long-distance freight and passenger network, with total investments estimated to reach $35bn. Ashghal (the Public Works Authority) is constructing a multi-billion network of expressways, comprising 32 projects and 900 km of roads, while the new Hamad Port’s first phase is scheduled to open in 2016, tripling existing capacity (see Transport chapter).
A number of large real estate projects are also under construction, including Lusail City, a $45bn waterfront development in northern Doha, which could eventually house 450,000 people (see Real Estate chapter).
After winning the rights to host the 2022 FIFA World Cup in 2010, several key infrastructure projects were decided to be completed by 2022, and despite the persistent challenges of material and land inflation, late payments and resulting project delays, progress has been steady in 2014. Ashghal, for example, reported in November 2014 that the value of contracts awarded in 2013/14 jumped by 200% to reach QR38.4bn ($10.5bn.) As highlighted by the IMF, cost overruns and project delays pose a threat to the sector, and with land prices witnessing dramatic inflation in 2014, in addition to existing supply bottlenecks at the Doha Port that could drive up the cost of construction materials, the sector will continue to face challenges in the lead-up to 2022. At the same time, construction stakeholders are still awaiting promised reforms to the kafala labour system, with the issue frequently dominating international headlines as the state prepares to host the World Cup (see Construction chapter).
OUTLOOK: Although growth may not reach the same double-digit increases witnessed in previous years, Qatar’s government has shown commitment to sustainable economic expansion through development of its non-hydrocarbons sector, which will continue to lead growth in 2015. Fiscal reforms and more stringent regulation of the banking sector will ensure steady long-term expansion, despite the near-term growing pains expected as a result of implementing Basel III standards. Although sharp declines in world oil and gas prices have shaken the market, Qatar remains well-insulated from the worst global shocks, and despite growing inflationary pressures in the real estate and construction sectors, delivery of new residential units, coupled with the opening of the new Hamad Port, will help the state accommodate growing demand.
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