Qatar focuses on improving the business climate

 

Rising oil prices and effective policy-making have played a significant role in returning Qatar to the healthy trade surplus it enjoyed prior to 2017, when political events caused substantial disruption to import and export activity. A swift response by a range of government ministries has secured new routes to global markets. In March 2018 Hamad Port, which officially opened in September 2017, celebrated the handling of its one millionth twenty-foot equivalent unit container, ahead of schedule.

Foreign investment also continues to rise on a year-on-year (y-o-y) basis. Legislators are overhauling laws and regulations in order to maintain this positive trend, a process that promises to open the economy still further to global capital. The recent past has presented the government with significant challenges, but in answering them it appears to have instigated a period of long-awaited reform.

Trading Activity

As the world’s biggest gas exporter, the value of Qatar’s outbound shipments is determined by global hydrocarbons prices. Its oil and gas exports were valued at $120bn in 2013, according to the IMF. However, over the next three years the Brent crude oil price declined from an annual average of $109 per barrel to $44. The centrality of hydrocarbons to the country’s trade mix is illustrated by the movement of its trade balance over this period: Qatar enjoyed a positive trade balance equivalent to 57% of GDP in 2012, but by 2016 this had fallen to 17%. However, firmer energy prices from 2017 onwards have powered a recovery in the trade balance, which increased to 21% of GDP in the first half of 2017. According to the Qatar National Bank (QNB), in October 2018 Qatar’s trade surplus expanded by 129.1% y-o-y to $5.2bn.

Booming demand for liquefied natural gas (LNG) across Asia is a key factor in this trend, with exports to Japan – formerly the world’s biggest LNG importer – a full QR2bn ($549.3m) higher in April 2018 than they were a year earlier. China’s LNG imports expanded by 35% over the first eight months of 2018, establishing it as the largest LNG importer in the world. In September 2018 Qatar signed a 22-year deal with PetroChina to export 3.4m tonnes of LNG annually to China.

Qatar’s largest export markets between 2013 and 2017 were Japan – which accepted nearly $11bn of Qatari production over the period – followed by South Korea, with $8.97bn, India ($7.4bn), China ($4.5bn) and the UAE ($3.8bn), according to the World Bank. Against this outward flow of natural gas, petroleum oils, crude oil and mixed alkylbenzenes came a broader stream of imports. The largest category of these in terms of value between 2013 and 2017 were automobiles, aircraft and aircraft parts, and transmission apparatus.

Blockade Effects

In June 2017 the governments of Saudi Arabia, the UAE, Bahrain, Egypt, the Maldives, Mauritania, Senegal, Djibouti, the Comoros, Jordan, the Tobruk-based Libyan government as well as the Yemeni government led by Abdrabbuh Mansour Hadi, severed diplomatic relations with Qatar.

Four countries – Saudi Arabia, the UAE, Bahrain and Egypt – announced an economic blockade of the country. At the onset of the diplomatic rift, approximately one-sixth of Qatar’s imports were produced in the blockading countries, and a significant portion of other imports transited through Saudi Arabia and the UAE.

Imports to Qatar declined by some 40% immediately after the blockade was imposed, and the government had to move quickly to manage the economic consequence of the development and establish new trade routes.

Economic links between Turkey and a range of Qatar’s other trading partners that are not involved in the blockade have flourished as a result of this process. In the days and weeks following the blockade, Turkish cargo planes ferried thousands of tonnes of fruits, vegetables and dry foodstuffs to Qatar, with Turkish exports to Qatar increasing by 50% y-o-y by the close of 2017 to reach $750m. Ties with Iran have been strengthened as well, with the Iranian Port of Bushehr emerging as an important hub for Qatar’s importing activity – both for Iranian goods and trans-shipments of goods from markets such as Turkey. An Iranian Customs report published in June 2018 showed that from March 21st to May 21st – the first two months of the Iranian calendar – exports to Qatar increased by 435% in value y-o-y.

Friendly nations within the GCC have also been providing Qatar with useful trans-shipment hubs. The Omani ports of Salalah and Sohar, in particular, are now important components of supply chain routes for goods flowing to and from Qatar. According to the Qatar Chamber, Qatari shipments to Oman increased by 49% from OR86m ($223.3m) in 2016 to OR128m ($332.4m) in 2017, while Oman’s exports to Qatar rose from OR93m ($241.5m) to OR549m ($1.4bn) over the same period.

Qatar has been looking further afield to offset the blockade’s effects. In July 2018 the Ministry of Public Health signed a deal with Ireland’s Department of Agriculture, Food and the Marine, for the import of meat products, including lamb, beef and chicken. “The steps taken by Qatar in its food security strategy have been very positive, and are encouraging investments by the private sector in the local market, but also internationally,” Mohamed Badr Al Sadah, CEO of Hassad Food, told OBG. “It is essential to maintain a balance between investments in local production and abroad, in order to secure greater supply options,” he said.

Strategy

Another consequence of the economic blockade is a strengthening of the government’s resolve to open up the economy to global trade and investment. Qatar’s second National Development Strategy (NDS-2) 2018-22, which was launched in March 2018, makes clear the authorities’ intention to continue with policies of economic openness and foreign trade liberalisation. More specifically, the document establishes four areas of focus for improving the competitiveness of the country’s economy, namely, a more thorough implementation of the existing Competition and Investment Law; the liberalisation of the investment management process to encourage foreign direct investment (FDI); the improvement of Qatar’s standing in the World Bank’s “Doing Business” report; and furthering moves to liberalise service trade activities.

Regarding FDI, the NDS-2 recognises the importance of international capital in the provision of economic infrastructure. The government has placed it at the forefront of its priorities as it sets about securing funding for infrastructural necessities, such as water and wastewater networks that are capable of meeting anticipated demand from irrigation systems for fodder, green landscapes, district cooling, hotels, stadiums and other developments.

Domestic Drive

A key objective of the NDS-2 is the replacement of imports with locally produced products. Despite significant spending on domestic export-supporting infrastructure, outbound shipments of non-hydrocarbons products from Qatar expanded at a compound annual growth rate (CAGR) of just 0.6% between 2011 and 2016, according to government data. Instead, the bulk of the country’s export expansion has come from re-exported goods, which grew at a CAGR of 7.4% over the same period.

While the growth of re-exports demonstrates Qatar’s credentials as a trade hub, goods sourced abroad and trans-shipped to other foreign markets add little value to the domestic economy. The government’s local production drive started with dairy products, vegetables and other staples – the import of which was constricted by the economic blockade. The most visible result of this effort was the airlifting of 3400 Holstein cows to Doha in 2017, part of a plan to establish a 10,000-strong herd in order to gain self-sufficiency in dairy products.

Trade Agreements

As the country seeks to strengthen its international connections, it benefits from its already advanced integration with the global trade network. For example, through its membership of the GCC, the country is a co-signatory to seven bilateral agreements, including free trade agreements with the European Free Trade Association, Singapore and Lebanon, as well as framework agreements with India and the US. It has been a member of the Greater Arab Free Trade Area – which covers goods from 16 nations – since 1998, and the World Trade Organisation and General Agreement on Tariffs and Trade since the mid-1990s.

It has signed over 50 bilateral investment treaties, more than 20 of which have come into force. Additionally, Qatar adheres to 22 regional or multilateral investment-related instruments, including the fifth protocol of the General Agreement on Trade in Services and the 2011 UN Guiding Principles on Business and Human Rights.

Foreign Investment Levels

Despite the headwinds of recent years, Qatar remains an attractive destination for international capital, thanks in large part to a stable currency pegged to the US dollar, modern infrastructure and a 10% corporate tax rate – one of the lowest in the world. FDI in Qatar rose by around 27% in 2017 to reach almost $1bn, according to the “World Investment Report 2018”, released by the UN Conference on Trade and Development. This gain ran counter to a wider regional trend of FDI contraction, which saw FDI to West Asia fall by around 16% over the year. The total stock of FDI stood at $34.9bn, or 20.1% of GDP, in the same period, compared to an international average in 2017 of approximately 40%. In terms of FDI targets, the most popular destination for foreign capital in Qatar is the financial and insurance services sector, which in 2016 accounted for 36% of the total, according to the latest available data, followed by transportation, storage, information and communication (31%) and mining and quarrying (27%).

Qatar is also a significant outward investor, due to its sizeable foreign exchange reserves. Its activities on the global stage are largely channelled through the Qatar Investment Authority (QIA), which was established in 2005 as the nation’s sovereign wealth fund (SWF). In 2018 the QIA held assets of some $320bn, making it the 11th largest SWF in the world, according to the SWF Institute. Qatar’s SWF has interests in sectors as diverse as luxury Italian fashion, professional football and the European residential property market. It is the biggest shareholder in German carmaker Volkswagen AG, while in London its holdings include the Shard skyscraper, Savoy Hotel, Harrods department store and the HSBC Tower. Since the 2015 opening of its New York office, the QIA has established itself as a major investor in US commercial property and has outlined plans to diversify its portfolio, with a $45m outlay in the market by 2021.

The fund is also broadening its interests in Qatar’s oil markets, investing in Singapore office space and announcing that it intends to place as much as $20bn in Asia by 2020. The QIA also plays an important role in the domestic economy: as well as its interest in flag carrier Qatar Airways, it is the biggest investor in the stock market and maintains majority stakes in QNB and telecoms provider Ooredoo.

Legal Framework

Under the previous Foreign Investment Law, which was promulgated in 2000 and underwent significant amendments, overseas investors could enter most economic sectors provided a Qatari partner held at least 51% of the capital. In a limited number of sectors, such as health, education, tourism, agriculture and industry, the Ministry of Commerce and Industry (MoCI) had the discretionary power to allow foreign investment up to 100%.

However, the economic blockade prompted the government to reassess its position with regard to foreign ownership limits. In May 2018 the MoCI announced that it had formulated a draft law, which was issued in January 2019. The law allows up to 100% ownership of companies by foreign parties, regardless of what sector those companies operate in, upon approval from the relevant government department. The new law aims at promoting economic development; encouraging foreign investment in all economic and commercial activities; attracting 100% foreign capital inflows; accomplishing economic diversification in line with Qatar National Vision 2030; facilitating foreign investor access to the market; and bolstering the confidence and investment security index. The law has provided several investment incentives for non-Qatari investors, including the allocation of land to a non-Qatari investor to establish an investment project through rent or usufruct in accordance with the legislation.

Business Environment

Both domestic and international investors will also benefit if the government succeeds in its recently restated ambition of improving the country’s position in the World Bank’s “Doing Business” report. In 2019 Qatar ranked 83rd out of 190 countries in the bank’s ease of doing business index, significantly down from its 2011 ranking of 39th out of 183 countries.

The latest report identified three developments which have made doing business in Qatar more challenging over the past seven years: the addition of a procedure to register for taxes and obtain a company seal in 2011; changes to the construction permit process in 2012; and a weakening in the position of minority investors resulting from regulatory changes in 2017. For the most part, however, the alterations to Qatar’s business environment since 2011 have been positive ones. These developments include improved access to credit information in 2018; a reduction in minimum capital requirements for new businesses and increases to land registry transparency in 2017; and a streamlining of income tax for companies in 2014. Qatar ranks highly in some indicators: it placed second overall for paying taxes and 20th for both registering property and dealing with construction permits.

In other areas, there is significant room for improvement, including obtaining credit, for which it ranked 124th; resolving insolvency (120th); enforcing contracts (122nd); and protecting minority investors (178th). However, the government is overseeing a number of initiatives aimed at improving the country’s performance in the annual survey, including promulgating the Commercial Companies Law; shifting 51 processes associated with the establishment of a business onto online and mobile platforms; and abolishing the minimum capital requirement of QR200,000 ($54,900) previously required of new companies.

Zoned Investment

The establishment of special economic zones is another way in which the government is making it easier for both domestic and foreign investors to deploy their capital in the country. Thusly, the MoCI established the Economic Zones Company (Manateq) in 2011 to oversee the development of a number of such zones across the country. The first two were launched in 2015 in Ras Bufontas and Um Alhoul, with an area of 4 sq km and 30.3 sq km, respectively.

Ras Bufontas is being developed as an advanced technology and logistics hub, leveraging its proximity to Doha’s new Hamad International Airport, while Um Alhoul, adjacent to Hamad Port, is being marketed to companies seeking access to international markets via the sea. A third Manateq zone was originally scheduled to open in Al Karaana in 2018, but is still under development.

Outlook

Trading and investment activity is likely to benefit from Qatar’s continued economic expansion over the medium and long term. The IMF forecasts real GDP growth of 2.9% in 2019, underpinned by increased oil prices and prudent macroeconomic policies. Between 2020 and 2023, real annual GDP growth of 2.7% is anticipated, driven by government spending on infrastructure development, rising LNG production and the 2022 FIFA World Cup.

However, the real test for the authorities over the coming period will be the extent to which they are able to implement the necessary legislative and regulatory reforms to fully harness the power of private investment in wider economic development. A successful expansion of public-private partnership (PPP) activity, would not only ease the burden of the public purse in project development, but also link domestic developers with international expertise – an important outcome in terms of the country’s long-term development. Accordingly, the government is currently finalising a draft PPP Law. The legislation aims to establish a clear legal basis for PPPs, as well as a governance and approval framework.

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The Report: Qatar 2019

Trade & Investment chapter from The Report: Qatar 2019

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