OBG Event

07 Dec 2010

Firm footings and strong future prospects…

Qatar’s prominence on the world stage has increased dramatically since OBG began its coverage back in 2003. Last week’s award of the 2022 FIFA World Cup football tournament is strong testimony to the successes made to date – as well as a clear display of confidence in the ability of Doha to stage such an enormous event.

Indeed, the past decade has proved nothing short of a defining one for Qatar. A comparison of fundamentals between then and now demonstrates a transformation in the nation’s economy. GDP has grown by almost an order of magnitude – from $18bn in 2000 to perhaps $130bn at present. By some estimates, nominal GDP per capita reached six figures during the 2008 energy market boom, making people in Qatar the wealthiest on earth. Even during the choppy waters of the past two years, growth in the emirate has barely dipped below double figures.

The basis of this incredible growth has been timely investment in energy resources. Qatar was one of the pioneers in LNG, and gas exports now make up a larger share in national income than oil. Indeed, LNG investment ensured that the economy continued to grow throughout 2009, as exports almost doubled from 30m to 54m tonnes, thanks to the opening of Qatargas 2.

Continued pipeline and fleet transportation expansion means that Qatargas and Rasgas are likely to see their combined sale and purchase agreements reach 70m tonnes by the end of the year, while Qatargas 3 and 4 are also due to open shortly, adding a further 8m tonnes of capacity. The rapid upward trend means that Qatar’s balance of payments, already in credit to the tune of $18bn in 2008, is likely to improve yet further.

Next week, Qatar will be hosting a major official celebration at Ras Laffan marking the milestone that fulfils the Emir, His Highness Sheikh Hamad bin Khalifa Al Thani’s vision of achieving liquefied natural gas (LNG) production capacity of 77 million tonnes per annum (Mta).

Diversification into LNG has proved a sensible long-term strategy on the part of the authorities, and perhaps explains the limited see-saw effect of the recent global downturn on the local economy. Typically, one would expect a small nation with extreme and concentrated exposure to the global market to be open to major buffeting. Indeed, in nominal terms the drop in oil prices did cause a contraction in GDP. However, the fact that Qatar’s LNG is traded predominately through fixed price, long-term contracts, with only around 25% of production exposed to short-term fluctuations, means the domestic economy is insulated from sudden price shocks.

The market profile of Qatar’s LNG consumers is also solid: high-tech, developed markets such as Japan and South Korea dominate export share, while Thailand, India and Singapore – all dependable growth markets – make up the top 5. The opening of new LNG trains at Qatargas 3 and 4 will also see North American and European markets brought increasingly into play.

The dominance of hydrocarbons has also presented the authorities with the opportunity – and in many respects the challenge – of economic diversification. The capital windfall which has been accumulating in Qatar – magnified by the loose monetary policy of the Federal Reserve – has driven up inflation in recent years (though thankfully 2009 saw this trend abate somewhat). In common with other Gulf states, Qatar has followed a two-pronged strategy of foreign and domestic investment. In the field of foreign investment, QIA’s preference has been toward the conservative end of the sovereign wealth fund spectrum, with real estate and business investments in mature Western markets such as the UK proving a favourite strategy.

Given Qatar’s export relationship with south Asia however, combined with the likelihood of sluggish growth in the OECD for the next three to five years, QIA is expected to reposition its portfolio to include a greater focus on emerging markets to the east.

Domestically, QIA and the Qatar Foundation are leading the investment drive with major projects to develop public infrastructure. Perhaps most prominent is the $20bn Heart of Doha project being financed by the Qatar Foundation, though other big-ticket projects underway include the $14bn invested in Doha’s new airport, due to open in 2011, the $6bn proposed causeway to Bahrain, and the $4.4bn deepwater port at Messaieed.

Such path-breaking investments over time create the economic environment for independent growth, as they transform Qatar from a blank sheet to a significant player in several key sectors. A good example of the power of insightful horizontal investment is Qatar Airways, which alongside other neighbouring Gulf airlines such as Etihad and Emirates, has seized the initiative in developing a new global comparative advantage in aviation in the Gulf. Qatar Airways has managed to sustain phenomenal annual growth of around 40% in recent years, and currently has an order book of almost $40bn for new aircraft. The authorities will hope that similar investment in education, tourism and healthcare will lead to equal success.

Of course, true diversification involves more than simply reinvesting hydrocarbon profits. Qatar’s dynamic growth has been ably assisted by the government’s progressive fiscal policy, which has witnessed further pro-business reform in the past year. Full foreign ownership has been extended to several key areas targeted by the government for growth, notably consultancy and work services, IT, and distribution. The goal is to encourage a buoyant domestic service sector based in Doha, rather than servicing it from offshore. A new flat corporate tax rate of 10% will also help to attract new businesses to the emirate, and offset the impact of the end of the tax-free window at the Qatar Financial Centre.

A clear-sighted strategy for the future; Targeted investment at home and restraint abroad; and openness to international partnership: these have become the hallmarks of Qatar’s development, and they have now found their ideal expression in the nation’s successful bid to host the 2022 World Cup. Those who know Qatar well will have been unsurprised by the verdict of Fifa’s executive committee. Qatar has already demonstrated a commitment to development which takes into account more than shopping malls and penthouses. Through their successful hosting of the 2006 Asian games, and their successful bid to host the 2011 Asian Cup, the Qatari authorities have already shown they are keen to convert their new-found wealth into a tangible sporting and cultural contribution – putting not just Qatar on the map, but also the wider Middle East.

Some have questioned Qatar’s capacity to put on such a spectacle as the World Cup – yet as the spectacular growth of the past decade has demonstrated, those who write off Qatar do so at their own peril, and the coming decade here in Qatar looks set to proven even more exciting than the last.