While Qatar has made great strides to diversify its economy, government revenues are still heavily dependent on the hydrocarbons industry. As a result, low global oil prices caused a major contraction in state income. This coincides with an already planned peak in government spending on infrastructure, including preparations for the 2022 FIFA World Cup.
Fortunately, a combination of factors has ensured that public finances remain robust and are able to absorb weaker oil revenues without affecting the rest of the economy. Through a mixture of fiscal discipline in current spending and increased debt financing in international markets, Qatar has managed to cover the gap in funding without cutting back on capital investments. As oil prices have recovered, the deficit looks set to narrow without any need to wind down overseas investments.
Numbers
Qatar Central Bank (QCB) figures show that oil and gas revenue more than doubled between 2010/11 and 2014/15, from QR96.9bn ($26.6bn) to QR287bn ($78.8bn), growing to account for 87.7% of total government income. However, by the end of 2015 oil and gas revenue had contracted to QR170.6bn ($46.9bn). The rapid deceleration in oil revenue caused the budget to shift from a surplus of QR105bn ($28.8bn) in 2014 to deficits of QR5.6bn ($1.5bn) in 2015 and QR49.8bn ($13.7bn) in 2016, reaching 8.99% of GDP. This swift turnaround in fiscal position marked Qatar’s first deficit in over a decade, as government revenues dropped dramatically from 43.6% of GDP in FY 2014/15 to 23.9% in 2016.
Plan Of Action
Faced with this major contraction in income, the government reduced current spending equivalent to 7.9% of GDP and embarked on a countercyclical boost to capital spending equal almost to an extra percentage point of GDP, bringing the total to 14.4%. Rather than making further cutbacks in attempts to balance the budget and draw down illiquid foreign assets – which could have prompted contractionary effects in the domestic economy – the government instead decided to finance the remainder of the shortfall.
In total Qatar raised $14.5bn in external debt, with a $9bn eurobond in May 2016 particularly well received by international markets, and a further $2.6bn being issued in domestic bonds and sukuk (Islamic bonds). For 2017 the authorities have largely continued with the same policy, with the first half of 2017 reporting a QR13.7bn ($3.8bn) deficit. The initial projected 2017 budget deficit of QR28.3bn ($7.8bn), announced in December 2016, will be covered by local and international debt issues, according to Ali Shareef Al Emadi, the minister of finance.
Government Borrowing
Because of this new borrowing, gross government debt rose from 34.9% of GDP in 2015 to 56.5% in 2016, and is declining to 54.4% in 2017, according to the IMF. In the concluding statement of the 2016 Article IV mission, the fund was broadly supportive of the policy choice to cover the deficit through borrowing.
However, experts at the institution also noted that introducing asset drawdown may become appropriate “taking into consideration the risk-return trade-off between the cost of external borrowing versus the return on accumulated assets”.
Some have interpreted this as a reference to the Qatar Investment Authority (QIA) – the state’s sovereign wealth fund – with its estimated $335bn in overseas investments. If oil prices should drop again, the government may eventually need to consider unwinding some of those investments to finance its domestic capital spending, a move that could prove more cost-effective than taking on additional debt. However, the government does not consider the QIA to be a stabilisation fund, but rather an investment vehicle for future generations. As such, authorities are likely to employ the more conventional policy instruments of fiscal restraint and debt financing.
Given that budget plans were based on a conservative oil price estimate of $45 per barrel, a further deterioration in the government’s predicted financial situation appears unlikely. From January to October 2017 oil prices averaged $54.92, which has made revenues higher than initially projected. As such, the IMF projects the deficit narrowing to 1% of GDP in 2017 and becoming a modest surplus again from 2018, while debt as a share of GDP is expected to hover around 55% for 2017-20. Depending on the fiscal environment in coming years, the government may become more willing to engage in the risk-return trade-off, especially if the cost of borrowing on international markets should rise.
In early 2017 the domestic sovereign credit rating was robust, and Capital Intelligence upgraded Qatar’s outlook from “negative” to “stable”. In terms of downside risks, Standard & Poor’s (S&P) noted that fiscal concerns would arise if the government’s gross liquid assets should fall “significantly below” 100% of GDP, or if interest payments were to account for over 5% of government revenues.
Regarding the latter possibility, which may be more salient in the current context, interest payments in FY 2014/15 – the most recent for which figures are available – amounted to QR6.7bn ($1.8bn), equal to just below 2% of government revenues. This suggests that even with the recent rise in debt taken on, the government has ample room to manoeuvre. In August 2017 – following the economic blockade imposed in June by several of Qatar’s neighbours – S&P maintained the country’s sovereign credit rating at “AA-” and revised its outlook to negative.
Additional Action
Beyond reducing expenditure and increasing debt, the authorities have the option to expand non-oil revenues. In 2017 taxes generated from the non-oil sector continue to account for only a small proportion of public income, and they are subsumed in government accounts under the heading “other”, after oil and gas, and investment earnings. Revenue from such sources has risen substantially, from QR23bn ($6.3bn) in FY 2010/11 to QR61bn ($16.8bn) in FY 2014/15, the most recent year for which figures are available. This may grow further in 2018 following the January 2017 agreement to introduce a GCC-wide value-added tax (VAT) in 2018 that will be initially set at 5%.
According to IMF estimates, the introduction of a VAT could be worth 1-1.2% of GDP in 2018, generating QR6.7bn ($1.8bn) to QR7.9bn ($2.2bn), based on forecast nominal GDP. The deficit was initially projected at QR28.3bn ($7.8bn) for 2017, but a VAT was ratified in May 2017, further reducing this figure. This will help the government bridge the deficit and reduce the need for additional borrowing.
Excise Tax
In addition to the VAT and in alignment with the GCC-wide policy, Qatar enacted an excise tax in May 2017. Also known as a “sin tax”, this will be applied to a group of goods that are believed to bring harm with their consumption, such as tobacco and sugary beverages. While the effects will be less substantial than VAT, the excise tax will likely still help boost revenues. However, as is the case with many forms of taxes, this will be mitigated somewhat by any eventual increase in the consumer price index.
Equally, measures taken in early 2016 to reduce petrol and utilities subsidies for expatriates will continue to have an indirect easing effect on the deficit. It is also possible that stamp duty on property sales may rise to bolster government revenues. While GCC neighbours, such as Saudi Arabia and Oman, have raised taxes on GCC companies and remitted incomes, the Treasury is unlikely to follow suit.
The deficit, particularly during a planned peak in capital investment, seems to have incentivised the government to obtain value for money in major contracts and keep a lid on inflationary pressures, during what might otherwise be a period of profligacy.
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