Steadier Growth

Qatar

Economic News

22 Jul 2010
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Qatar's economy may be booming, with Gross Domestic Product (GDP) growth, per capita income and energy production all at near record highs, but the world's largest exporter of liquid natural gas still has some hurdles to overcome on the road to economic strength and stability.



In its latest quarterly review of Qatar's economic and social development, released in late August, Qatar National Bank (QNB) estimated that GDP would grow by 19.5% this year. This rise is partly due to an increase in oil output from last year's average of 815,000 barrels per day (bpd) to nearly 840,000 bpd, continued high oil prices and high gas exports, tipped to hit a record 40m tonnes, the bank said.



While other studies predict less robust growth, with projections putting GDP expansion in the 13 to 15% range for this year, they still rank Qatar ahead of the rest of the pack in the Gulf region.



According to QNB, growth will remain strong in 2009, but is likely to fall back to around 16%, around half the rate enjoyed in the years 2004 to 2006. Meanwhile, the International Monetary Fund (IMF) has projected an annual rate of increase of just 12% between 2008 and 2012.



Even this lower rate would be healthy by most countries' standards, though it does indicate the Qatari economy may be entering a period of steadier growth. This could be partly due to uncertainty over long-term oil and gas prices, along with expectations that Qatar's fossil fuel production capacity will plateau out in the coming years.



Additionally, the weakening of the US dollar, to which the Qatari rial is pegged, as well as soaring commodities and construction materials prices have both contributed to the country's present near record inflation, which is hovering around 14%.



In a move to curb inflationary pressure, the Ministry of Economy and Finance issued instructions to food retailers and wholesalers in late August not to raise the price of any commodity without consent from the ministry. In June the government announced a three-year ban on increasing the prices of four main construction materials - sand, steel, cement and gabbro - in an effort to stabilise building costs.



With the majority of the country's food and construction materials being imported, rising prices for these items have been a strong contributor to Qatar's domestic inflation.



Another strain on the Qatari economy is the country's population boom, with the number of people registered as living in Qatar rising by 18% in the first half of the year, according to figures published by the Qatar Statistics Authority (QSA) on August 21. Coming on top of a 17% increase in 2007, Qatar's population reached 1.45m at the end of June, the authority's report said.



Like much of the country's inflation woes, its population explosion is largely imported, with around three quarters of Qatar's residents originating from overseas, the vast majority being temporary workers. While these workers are the mainstay of the country's expanding economy, providing the manpower needed to drive Qatar's energy and construction industries, their presence also fuels inflation, pushing up demand for housing, services and commodities.



While the Qatari government imposed a two-year freeze on rental increases in March, covering all contracts signed since 2005, a QSA report issued on August 25 showed local householders had to spend 29.3% of their income to meet housing, water and electricity needs. This was up from 17.6% in 2001, when the population was a more manageable 770,000. For expatriates, housing costs accounted for 30.8% of monthly spending.



Though a large overseas workforce is vital for Qatar's future growth, the expansion of the economy is currently not keeping up with the rate of new arrivals. While the spate of incoming workers may ease in the future, as Qatar's state-sponsored infrastructure and energy production expansion programme nears completion in the coming years, the high influx of workers will continue to put pressure on the economy in the short-term.



One other factor affecting Qatar's economy is the country's position in a potentially unstable region. According to the 2008 Gulf Cooperation Council Credit Survey conducted by ratings agency Standard & Poors, geopolitical issues are a significant contributor to Qatar not getting higher sovereign ratings.



Currently, the agency has assessed Qatar's sovereign rating at AA-. For Qatar's ratings to be raised even further, several things need to take place, the S&P report said.



"If there is progress in containing the geopolitical pressures, institutional reforms remain on track and continued economic growth combined with further improvements in the general government net asset position, this could lead to the rating being raised," it said.



While the agency said there was no great risk of a conflict breaking out between Iran, the US or Israel in the Gulf region, such considerations did play a part in assessing Qatar's sovereign ratings.



Inflation, location, population and global economic situation could all play a part in slowing down the rate of growth of the Qatari economy. However, having produced a series of strong budgetary surpluses over the past few years, the government is well- placed to ease the country through any downturn, that is if GDP growth of 12% can be called a downturn.

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