Over the past half-decade Qatar has posted robust economic growth on the back of strong hydrocarbons revenues, state-led infrastructure development and a rapidly maturing financial sector. According to Standard & Poor’s (S&P), from 2010 to 2015 it was one of the fastest-growing economies in the world, posting average annual GDP growth of 8.6%.
Qatar is the world’s top exporter of liquefied natural gas (LNG) and has the third-largest proven natural gas reserves on earth, at 872trn cu feet, according to the US Energy Information Administration. Consequently, Qatar’s indigenous population is among the wealthiest in the world, with the country reporting a per capita GDP in excess of $100,000, according to the Ministry of Development Planning and Statistics (MDPS). While gas and oil exports account for a majority of GDP, a handful of non-hydrocarbons sectors have expanded rapidly in recent years. Non-hydrocarbons growth was 7.8% in 2015, while hydrocarbons growth contracted by 0.1%.
Challenging Times
Qatar currently faces a number of economic challenges. Most pressing has been the rapid decline in the price of oil over the past 18 months. Brent crude – the international oil benchmark – was at $34.65 per barrel on March 16, 2016, down more than 65% from $115 per barrel in June 2014. Given that most of Qatar’s long-term gas export contracts are indexed to oil prices, the country’s income dropped off considerably over that period. However, the price situation is evolving and with progress of the state’s economic diversification drive there are some signs for optimism.
Consequently, like many of its neighbours across the Gulf region, the government is currently in the midst of a far-reaching effort to reduce expenditure and boost non-hydrocarbons revenues in order to shore up national accounts. Nonetheless, after more than a decade of double-digit budget surpluses, S&P forecasts both slowing GDP growth and budget deficits of around 4.1% for the period 2016-19. Furthermore, low energy prices and fiscal pressures have impacted the country’s well-developed financial industry, causing concerns about liquidity in the banking sector, and volatility at the nation’s stock market, the Qatar Stock Exchange (QSE).
Backup Plan
Despite declining revenues, and uniquely among the six GCC member states, Qatar’s current plans involve continuing to spend considerable sums on a raft of large-scale capital projects over the course of the coming decade. Indeed, since winning the hosting rights for the 2022 FIFA World Cup in December 2010, the country has embarked upon a vast infrastructure investment programme, with total costs estimated at around $220bn.
The government views this expenditure as necessary not only to prepare the nation for one of the world’s premier sporting events, but also as a medium-term means of boosting growth across the non-energy economy. As noted by the IMF, this effort has been broadly successful – in 2012-15 GDP growth in Qatar was driven primarily by double-digit expansion in non-hydrocarbons activities, with key contributors including construction, services and manufacturing. This shift from energy to non-energy growth is in line with Qatar National Vision 2030 (QNV 2030), the state’s long-term economic development plan. Qatar has a surplus-liquidity economy, and given the nation’s solid macroeconomic fundamentals and substantial fiscal and hydrocarbons reserves, many local players and Qatar-watchers are currently bullish on the country’s growth prospects, despite ongoing global and regional economic challenges.
“Qatar has not been much affected by the drop in oil prices and the economy has continued to grow as expected,” Sheikh Faisal bin Qassim Al Thani, chairman of Al Faisal Holding and chairman of Qatari Businessmen Association, told OBG. “The government is nevertheless keen to continue diversifying revenue streams as the economy grows, and the private sector is a major component of that process. So, in the years to come, I’m positive that the performance of the private sector will have a bigger influence on the economy’s overall performance.”
Rapid Rise
The pace of the nation’s economic expansion over the past two-and-a-half decades has been swift. Though Qatar’s significant North Field offshore gas reserves were initially discovered in the early 1970s, the government only began to develop the field in earnest in the early 1990s. Large-scale exports kicked off soon after, with the country quickly becoming a major bulk energy supplier to rising East Asian economies in particular.
Since then, and especially from the early 2000s through to mid-2014, Qatar’s economy has grown at a faster rate than almost anywhere else in the world. In the process the government expanded its energy-related businesses, developing thriving petroleum and gas-to-liquids value chains, in addition to various other related products. Perhaps more importantly, in the eight years since MDPS launched QNV 2030 in 2008, Qatar, like many of its energy-exporting neighbours in the Gulf, has focused its significant financial resources on economic diversification. In the current climate this effort has taken on a new urgency.
Headline Performance
In 2015 Qatar posted real GDP growth of 3.7% to reach a nominal year-end GDP of QR600bn ($164.6bn). As might be expected given the decline in energy prices over the course of 2015, these figures are both down significantly on 2014, when the country posted GDP growth of 6.1% to reach QR771bn ($211.6bn) at the end of the year, according to data from the MDPS and S&P. Broadly, over the past five years Qatar has seen a declining GDP growth trend as reported on an annual basis, from 16.7% in 2010 to 13% in 2011, 6% in 2012 and 6.3% in 2013. Despite this decline, in both a recent and longer-term historical context, the country has consistently been one of the fastest-growing economies in the world, posted average annual GDP growth of 8.6% in 2010-15 and 8.25% between 1984-2013.
As energy prices have fallen in recent years, expenditure on infrastructure development has spiked, causing a major economic shift in Qatar. For at least 15 years leading up to 2010, the country’s economy was dominated by the energy sector. That year, for instance, Qatar’s hydrocarbons-related GDP posted growth of more than 28%, while the non-hydrocarbons economy rose by just under 9%.
However, in subsequent years the government’s diversification efforts, an influx of investment in World Cup-related projects and volatility in global energy markets have conspired to bring about robust expansion in the non-hydrocarbons economy. According to data published by Qatar National Bank (QNB) in late 2015, the non-energy sector saw top-line growth of 11.1% in 2011, 10.2% in 2012, and 10.6% in both 2013 and 2014, while the hydrocarbons sector posted expansion of 15% in 2011, 1.2% in 2012, 0.1% in 2013 and 1.5% in 2014. The MDPS’s “Qatar Economic Outlook 2016-2018” put non-hydrocarbons growth at 7.8% in 2015. Non-hydrocarbons activities will form an increasing share of Qatar’s economy.
New Budget
After posting the largest budget in Qatar’s history in 2014/15 – with expenditure at QR218.4bn ($59.9bn) and revenues reaching QR225.7bn ($61.9bn) – in early 2016 the government announced both a significantly more conservative budget for 2016 and the implementation of a new fiscal year. Whereas previously the state had budgeted according to an April-March fiscal year, from 2016 onwards the budget will align with the January-December calendar year. For 2016 Qatar has budgeted for expected revenues of QR156bn ($42.8bn) – down almost 31% on the previous year – and expenditure set at QR202.5bn ($55.6bn), down 7.5% from the previous budget. As the current budget suggests, Qatar expects to run a budget deficit of QR46.5bn ($12.8bn) in 2016, the first time the country has posted a deficit in more than a decade. Still, at just 0.7% of GDP, the deficit was the smallest in the GCC region.
The 2016 budget was drawn up on the basis of an assumed average oil price of $48 per barrel, which is well down on the $65 per barrel used in the previous budget assessment. Still, $48 per barrel was significantly higher than the prevailing price of crude – around $40 per barrel – as of late March 2016, which suggests that the country’s deficit could be larger than expected by the end of the year.
Given this pressure, one notable feature of Qatar’s 2016 budget is the high expenditure on capital projects. According to data compiled by the Middle East Institute, a non-partisan, US-based research group, some 25% of the government’s spending over the course of the year has been allocated to infrastructure development. While this will likely put continued pressure on public accounts, maintaining spending through to at least 2022 is considered both necessary – to ensure the country is prepared to host the World Cup – and economically sound, as high levels of public expenditure have the potential to foster continued growth in other non-hydrocarbons segments.
Responsible Planning
The government’s strategy appears to be working well. In February 2016 S&P cut its sovereign ratings for a host of GCC oil-exporting nations, including Bahrain, Oman and Saudi Arabia, but left Qatar’s “AA” long-term and “A-1+” short-term foreign and local-currency sovereign credit ratings untouched. As cited by S&P, reasons for optimism about Qatar include the country’s political stability and the fact that it relies largely on long-term gas contracts, which serve as a guaranteed source of income for many years to come. The credit ratings agency also noted the increased importance of the non-hydrocarbons economy to GDP in recent years, the government’s strong fiscal position and its willingness to institute far-reaching structural economic changes in response to lower hydrocarbons receipts.
Indeed, in recent years Qatar has worked to cut expenditures and generate new revenues in an effort to offset any decline in energy earnings, all while maintaining capital spending on infrastructure projects. In 2015 and early 2016 the state raised rates for postal services, utilities and, notably, petrol, the latter of which saw a 30% price jump in January 2016 due to reduced subsidies. The state has also cut electricity subsidies and raised rates for both electricity and water. At the same time, the government has cut its public spending commitments for a range of state-owned institutions, including Qatar Foundation, Qatar Museums and the state-owned global media organisation Al Jazeera. Similarly, in the past two years state-owned firms like Qatar Petroleum (QP), the national oil company, and the Sidra Medical and Research Centre, have cancelled projects and laid off workers in an effort to trim costs.
Innovative Strategy
Since the launch of QNV 2030 in 2008, the country’s development has progressed rapidly across a wide range of areas. As laid out in this plan, the long-term strategy is organised around four pillars, or broad areas of focus, namely human development, social development, economic development and environmental development.
To help meet the plan’s objectives, in 2011 the MDPS launched a medium-term development plan, the National Development Strategy (NDS), covering the period 2011-16. The NDS included a series of concrete aims and initiatives in support of the longer-term QNV 2030. The document tackled central challenges faced by Qatar in 2011, including facilitating continued modernisation while preserving cultural traditions; balancing the needs of the current population with those of future generations; building up the country sustainably, with an eye towards avoiding uncontrolled expansion; matching future development needs with concerns about the size of the migrant labour population; and economic diversification. While such concerns remain central to Qatar’s long-term development strategy, by early 2016 – the final year of the current NDS – new issues had come to the fore. Indeed, much has changed in Qatar since the MDPS unveiled the strategy five years ago. Soon after the announcement, Qatar was named host of the World Cup, and the state launched an enormous infrastructure development programme. The price of oil was well above $100 per barrel at the time; as of late May 2016 it is hovering at around $48 per barrel for Brent crude. Finally, according to MDPS data, Qatar’s population grew by nearly 40% between 2010 and 2015, largely as a result of the construction industry’s increased need for foreign labourers.
It is in this environment that the MDPS, the Ministry of Finance and other state entities have been working to draw up a new medium-term NDS, which will cover the period 2017-22. These plans have been greeted with enthusiasm by major private sector players. “Our government has undertaken several initiatives in recent years aimed at supporting and strengthening the role of private businesses. All business leaders in Qatar should utilise the variety of opportunities arising from the diversification of the economy, and take advantage of the country’s healthy investment environment,” Sheikh Faisal told OBG.
While the 2011-16 strategy focused largely, and successfully, on building institutional capacity in government ministries, departments and among publicly held firms, the new NDS, which is being developed in conjunction with a wide range of domestic and international stakeholders, is expected to target a handful of key social issues, such as population growth and environmental management.
While details of the new plan had yet to be released at time of press, most forecasts see Qatar’s labour force and capital expenditure on infrastructure projects growing through to at least 2017, in line with World Cup building plans, before levelling off in 2018-19 and beginning to decline over 2020-22, as projects are wrapped up (see analysis). The new NDS is expected to adhere to this structure.
Financing Development
One major expected shift in the new NDS has to do with financing Qatar’s continued development. Whereas in the 2011-16 plan the state took on a considerable amount of the financial burden, declining government revenues point to the growing importance of private sector involvement in this regard. This is not to say that Qatar’s government will not play a central role in ongoing development. Indeed, despite a year-and-a-half of oil price volatility and the 2016 budget deficit, the country is in a strong position. In addition to its considerable energy reserves, which will likely provide guaranteed income for decades to come, the government boasts substantial financial reserves in the form of the Qatar Investment Authority (QIA), the nation’s sovereign wealth fund (SWF), which had $256bn under management as of 2015, according to the US-based Sovereign Wealth Fund Institute.
However, Qatar is not expected to dip into QIA’s portfolio to cover the deficit, as the SWF has been designated to provide for future generations and not as a stabilisation tool. Instead, in the coming years the state will likely look to domestic and international debt markets to finance ongoing expenditures. As noted by S&P in a 2015 review of Qatar’s economy, “We expect that Qatar’s fiscal deficits, caused by lower hydrocarbons prices and high infrastructure expenditures, will be financed through debt only.” The government has also officially announced they will not use any QIA funds to finance projects.
As of early 2016 Qatar’s domestic debt market remained underdeveloped by international standards. Prior to 2011 the nation’s capital markets dealt only in equities. Near the end of that year, the Qatar Central Bank (QCB) announced that it would begin selling Treasury bills (T-bills) on the QSE in what was widely seen as a move to launch a domestic bond market. From 2011 through to 2013 the QCB sold short-term sovereign debt in Qatar on a regular basis, most of which was purchased and held by local banks and other financial institutions. From 2013 onward the state expanded its offerings to include instruments with maturities of up to seven years, thereby broadening the nascent yield curve and laying the groundwork for corporate debt issuance. At the time of writing, regulations allowing the issuance of corporate bonds on the QSE were expected to be approved by the end of 2016.
Monetary Policy
These developments bode well for the financial sector, in what has been widely regarded as a challenging period. Since the price of oil began to fall in mid-2014, Qatar’s banks have reported tightening liquidity, as the Ministry of Finance and other government institutions have withdrawn some long-standing deposits as part of the state’s ongoing fiscal rationalisation programme.
As of the end of November 2015 public sector deposits made up 38.7% of the domestic deposit base, down from 44% at the end of 2014, according to S&P. Given the high rate of future loan growth among domestic banks – to government, publicly held entities and the private sector alike – the banking sector’s loan-to-deposit ratio is expected to rise. Indeed, between the end of 2014 and November 2015 the ratio of domestic credit to deposits in Qatari banks jumped by 10 points, from 93% to 103%, according to S&P. MDPS data showed that the ratio had reached a regional high of 130% by April 2016.
Given the banking sector’s strong capitalisation rates – the overall capital adequacy ratio was above 16% by late 2015 – and the government’s plan to shift a larger percentage of financing activities to the private sector in the coming years, most local players remain cautiously optimistic about the future. This position was shored up in mid-March 2016, when the QCB announced it had stepped up its efforts to monitor liquidity in the banking system, and was prepared to move to improve the situation if necessary. While details were unavailable, most local lenders have expressed confidence in the government.
Gas Production
Despite the recent drop in the global oil prices, hydrocarbons remained Qatar’s largest industry in 2015. Energy-related earnings accounted for 49% of government revenues in 2014, according to the US-based Energy Information Administration (EIA). The country’s key energy export is natural gas, almost all of which comes from the North Gas Field (NGF), a 6000-sq-km area located mostly offshore. The NGF forms about 60% of the single largest natural gas deposit in the world, with the other 40% made up of the adjoining South Pars gas field, controlled by Iran. In 2014 Qatar exported 4.3tn cu feet of natural gas, making it the world’s second-largest gas exporter after Russia. Some 83% of its gas exports took the form of LNG.
The energy sector is dominated by Qatar Petroleum (QP), a state-run firm, which controls all aspects of the country’s upstream and downstream oil and gas sectors. QP is the dominant shareholder in both the Qatargas Operating Company (Qatargas) and RasGas Company (RasGas), which together cover gas-related activities in the country. Qatargas, a joint venture between QP and the international oil companies Total, ExxonMobil, Mitsui, Marubeni, ConocoPhillips and Shell, operates four LNG ventures in Qatar. RasGas, meanwhile, which is a joint venture between QP (70%) and ExxonMobil (30%), operate three projects in the country. The two firms contribute LNG export capacity of 42m tonnes per year (Qatargas) and 35m tonnes per year (RasGas). These two figures combined made Qatar the world’s largest LNG exporter in 2014, according to the EIA.
In 2005 Qatar established a moratorium on new projects in the NGF in order to allow operators to study ways of ensuring long-term sustainability in the field. Initially scheduled to run through to 2008, the moratorium was extended and as of mid-2016 had yet to be lifted. Given the large number of new gas production projects expected to come on-line during the 2018-23 period in the US, Canada, Australia, Russia and East Africa, among others, Qatar’s government is widely expected to formally extend the moratorium once again in 2016-17. Meanwhile, the $10bn Barzan Gas Project – the last new production initiative approved before the moratorium was put in place – is expected to come on-stream before the end of 2016 and reach full capacity by 2017. The project, which includes both onshore and offshore developments including platforms, a pipeline network and a processing facility, is capable of processing 1.4bn cu feet per day of natural gas (see Energy chapter).
Oil & Liquids
In addition to gas, as of early 2016 Qatar controlled proven oil reserves estimated at around 25.24bn barrels, according to the Oil & Gas Journal, plus a growing industry producing condensates and other natural gas by-products. In 2014 the country produced 2.1m barrels per day of petroleum, including crude, condensates and gas plant liquids, according to the EIA. This figure is up 64% since 2005. Non-crude liquids output topped crude production in Qatar in 2012 and is widely considered a key potential growth driver in the country today. Indeed, in 2014 non-crude oil liquids made up 65% of the country’s total supply of petroleum and other liquids.
Qatar’s crude production, meanwhile, is centred on three oil fields, which together account for 85% of capacity. The Al Shaheen field, operated by Maersk Oil, produced around 300,000 barrels per day (bpd) in 2015, according to the EIA. QP’s Dukhan field, meanwhile, produced 225,000 bpd in the same year, while Occidental Petroleum’s Idd Al Sharqi field generated some 100,000 bpd. With two operating refineries boasting a total combined capacity of 338,700 bpd, as of early 2015 Qatar was able to meet all domestic demand for petroleum products with a significant surplus. As such, much of the country’s petroleum exports take the form of refined products, which draw higher prices than crude.
In late 2014 QP announced the beginning of a corporate restructuring programme. Over the following eight months, the firm shut down non-core activities, consolidated its business lines and released an unspecified number of expatriate employees, in an effort to improve efficiently. “We are now in a down cycle in the industry, and we need to be very efficient as an organisation,” Saad Sherida Al Kaabi, QP’s president and CEO, told local media upon completion of the restructuring in mid-2015. “While we have no control over markets and prices, we do have control over our cost and expenditure.”
Banking On Growth
Qatar’s banking and capital markets sectors have become a major component of the country’s economy over the past few decades. By the end of the first half of 2015 the country’s lenders boasted assets of $288bn in total, making up the third-largest banking sector in the GCC. Qatar is home to 18 banks, including 11 domestic lenders (four of which are fully sharia-compliant) and seven foreign players. The top-five largest institutions in Qatar are all domestic banks, and together hold more than 75% of total sector assets, according to data from QNB. In the five years leading up to 2014, the banking sector as a whole grew at a compound annual rate of more than 15%, the fastest in the GCC. The sector’s rapid expansion in recent years is a result of an influx of public and private sector lending, and deposits linked to the state’s ongoing infrastructure work. Given this situation, as of early 2016 many lenders were working to streamline their expenditure in preparation for a period of slower growth in the coming years, as declining hydrocarbons revenues and tightening liquidity have the potential to impact government and corporate spending alike.
Qatar’s largest bank is QNB, which was established by the state in 1964 and is still controlled by the government. With more than 40% of Qatari banking sector assets, QNB dominates the country’s financial market, and is as one of the leading financial institutions in the Middle East by assets, deposits and lending, according to data from the bank. QNB’s total assets in March 2016 increased by 10% from March 2015 to reach QR550bn ($150.9bn). This was followed by Qatar Islamic Bank, the country’s largest sharia-compliant lender, with QR127bn ($34.8bn) in total assets. The next-largest deposit-taking entity is Commercial Bank of Qatar, which reported total assets of QR123.4bn ($33.9bn) in its 2015 annual report, followed by Doha Bank with total assets of QR83.3bn ($22.9bn) and Masraf Al Rayan, another Islamic bank, with QR83.03bn ($22.8bn).
In recent years the QCB has introduced a number of new regulations aimed at consolidating Qatar’s financial sectors under a single regulatory framework, namely that of the central bank. Prior to 2012 separate oversight entities regulated capital markets, insurance and banking. Under a law passed that year, however, the QCB took charge of all of these sectors. Though the plan was still being implemented as of early 2016, it was widely expected to result in a more streamlined, competitive financial market for the foreseeable future (see Banking chapter).
After a period of rapid expansion and development in 2013 and 2014, in 2015 and early 2016 Qatar’s capital markets saw increased volatility, with investment sentiment affected by the fall in the oil price and the state’s fiscal tightening efforts. The QSE ended 2015 at just under 10,430 points, down some 15% a year earlier. The slide follows on from annual double-digit growth over the preceding two years. Strong performers on the QSE in 2015 included sharia-compliant securities, the transport segment and the real estate industry. The Al Rayan Islamic Index, which tracks Islamic equities, fell by only 6% over the course of the year, while the transport index grew by 5% and listed property firms expanded by almost 4%.
In late 2015 the QSE was upgraded to “secondary emerging market” status by the global index firm FTSE Russell, in what was widely regarded as a signal of the bourse’s growing importance. This came on the heels of the exchange’s upgrade by Morgan Stanley Capital International (MSCI) to emerging market status in May of 2014. The move by MSCI is a major sign of approval from institutional investors for the country’s stock markets, and is expected to attract more stable sources of capital to local equities.
Despite its sluggish recent performance, many local players expect Qatar’s capital markets to be a major potential beneficiary of the government’s ongoing effort to shift more of the financial burden of development to the private sector, and particularly the domestic financial industry.
Construction
The growth of Qatar’s non-hydrocarbons economy in recent years has been driven primarily by the government’s numerous ongoing infrastructure development projects, which have served as a key source of new business for the country’s banks, insurance companies, investors and contractors, as well as a range of other industries. Construction growth was 17.8% in 2015. Major projects currently under way include $35bn worth of new municipal and national rail networks designed by Qatar Rail, billions of riyals worth of new roads and expressways commissioned by the Public Works Authority (Ashghal), and new hotel, housing and other facilities in preparation for an expected influx of visitors as the 2022 FIFA World Cup preparations ramp up in the coming years.
The eight proposed World Cup stadia, six of which were under construction as of early 2016, as well as the finishing touches on the new Hamad Port, which opened for partial operations in December 2015 (see Transport and Construction chapters), also helped to drive construction growth. Between end-2015 and 2022, Doha plans to spend some $220bn on these and other infrastructure projects. The government has maintained that this expenditure will go forward, regardless of oil price fluctuations.
Outlook
Taking into account the government’s apparent dedication to maintaining spending for at least the next six years, most local players agree that Qatar is better situated than many of its energy-exporting neighbours to ride out the current period of lower oil and gas prices. Nonetheless, in 2015 and 2016 many industries have undertaken belt-tightening measures. Regulatory enhancements recently introduced by the QCB and other financial oversight entities are widely seen as a positive development in the banking and capital markets segments.
Given the state’s recent announcement that it plans to rely increasingly on the domestic private sector to finance and carry out its development plans in the coming years, the QSE, domestic lenders and the local construction sector are all broadly – albeit cautiously – optimistic about the future. There are several reasons, most of them centred on energy markets. As noted in an MDPS report released in mid-2015, “most risks to the outlook are grounded in international oil-price movements.” All the same, the country’s strong finances and non-hydrocarbons growth in recent years has shown it to be relatively well insulated against global economic volatility. With an ambitious – and sustainable – spending plan under way, the nation is preparing for continued expansion.
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