Qatar’s relatively small population and status as the world’s biggest gas exporter have helped it to become the world’s richest country in terms of GDP per capita. In recent years, however, it has faced strong economic headwinds. The oil price decline in the second half of 2014 was a challenge to hydrocarbons-producing states throughout the region, and Qatar was the only Gulf monarchy to avoid a budget shortfall in 2015. By 2016, however, it had slipped into its first budget deficit, prompting the government to cut costs and reinvigorate its long-standing policy of economic diversification. As oil prices stabilised and hydrocarbons revenues began to rise once again, the nation was faced with another challenge: the governments of Saudi Arabia, UAE, Bahrain and Egypt severed diplomatic relations with Qatar in June 2017 and announced an economic blockade of the country.
The nation’s sizeable hydrocarbons revenues and deep proven reserves have enabled it to mitigate the effects of this crisis, and Qatar entered 2019 with one of the fastest-growing economies in the region. Nevertheless, the episode has served as yet another reminder of the importance of broadening the economic base beyond hydrocarbons activity.
The effects of the blockade were immediately felt across the economy. The action cut the nation’s main trade routes – the land border with Saudi Arabia, and the busy shipping lanes between Doha and the re-export trading centre of Dubai’s Jebel Ali – and prevented national carrier Qatar Airways from overflying the airspace of the blockading countries. During the first six months of the blockade the number of flights to Doha declined by around one-quarter, while visitor numbers to the country fell by 20%, according to the independent macroeconomic research group Capital Economics.
The blockade also sharpened an already ongoing decline in real estate prices, combining with other factors such as oversupply and lower government spending to push residential rents down by 20% from their 2016 peak. With more than 21 malls, there was also an oversupply of retail space in the market, now deprived of its usual Gulf visitors. The government’s response to these challenges came quickly. It immediately boosted trade links with Turkey and Iran, establishing new supply routes for vital goods (see Trade & Investment chapter). Where traders have been unable to secure goods via new trade routes, they have been sourced by trans-shipment via neutral Oman.
The state has also supported a drive towards increased self-sufficiency, importing herds of cattle to replace the dairy products that were once transported from Saudi Arabia, and encouraging local firms to develop fruit and vegetable production. “Qatar invested a significant amount of resources in reaching self-sufficiency across several sectors, particularly agriculture and dairy products,” Abdulrahman Al Khayarin, CEO of Widam Food, told OBG. “The market reacted positively to the regional blockade, increasing the output of local products, backed by high-quality international experts,” he added.
Qatar has also been leveraging its most important natural resource by forging new contracts for liquefied natural gas (LNG) shipments. In April 2018 Qatar Petroleum inked a deal to send 2m tonnes of LNG and naphtha to Vietnam every year for 15 years, in order to feed the South-east Asian country’s first greenfield petrochemicals complex. In September 2018 Qatar began regular deliveries of LNG to Bangladesh, which will eventually be ramped up to 2.5m tonnes per year.
The government’s rapid response ensured that this economic growth was not significantly diminished by the blockade. While the IMF estimates that non-hydrocarbons GDP growth moderated to around 4% of GDP as a result of the rift, Qatar nevertheless recorded a 2.1% expansion of GDP in 2017, which was roughly equal to the previous year’s growth. Both Moody’s and Fitch upgraded Qatar’s sovereign debt rating to “Aa3” with a stable outlook in July 2018, recognising the improving macroeconomic scenario and the government’s successful resolution of the challenges associated with the ongoing economic blockade. “There is a clear will in Qatar to become more self-sufficient and put the emphasis on quality and efficiency. At the same time, the country is opening channels for new partnerships and joint ventures with the international community,” Sheikh Faisal Bin Qassim Al Thani, chairman of Al Faisal Holding, told OBG.
Crucially, the energy exports which underpin Qatar’s economy, including the flow of gas to the UAE via the Dolphin pipeline, have not been disrupted. This has enabled Qatar to reduce the budget deficit that first appeared in 2016: the fiscal deficit narrowed to 1.6% in 2017, down from 4.7% the previous year, according to data from Qatar Central Bank (QCB). Rising energy prices are largely accountable for this improvement of the fiscal scenario, driving Qatar to a current account surplus of 3.8% of GDP in 2017. An ongoing process of fiscal reform has also played an important part in improving public finances. Measures included a restructuring of bureaucracy, which resulted in the number of ministries being reduced from 18 to 14, subsidy cuts across a range of products, including petrol and postal services, and the doubling of fines for wasteful use of electricity and water.
The nation’s most important revenue-raising prospect, meanwhile, is the planned introduction of a 5% value-added tax (VAT). Originally scheduled for implementation in 2018, the Ministry of Finance (MoF) recently announced that the new tax will not be introduced until after 2019. The delay is to allow Qatar to finalise the many processes involved in levying VAT, as well as to give the business community sufficient time to make necessary adjustments to their operations. When VAT is finally introduced it will be administered by the newly established General Tax Authority, which operates under the supervision of the MoF.
Bridging the Gap
Throughout the recent period of budget deficits, Qatar has had plenty of tools at its disposal to cover its fiscal gap. Its external reserves stood at 9.8% of GDP in 2017, and in the Qatar Investment Authority the country has the world’s 11th-largest sovereign wealth fund, holding assets of approximately $320bn. The government has also implemented a regular debt programme since 2013, initially issuing QR3bn ($823.9m) in conventional bonds and QR1bn ($274.6m) in sukuk (Islamic bonds) each quarter. In 2014 it issued its first seven-year debt and moved to a more flexible issuance policy, through which the type and volume of bonds it offers are governed by liquidity conditions and monetary policy rather than according to a timetable. Qatar’s most recent dollar issuance was of considerable interest to market observers. The three-tranche US-dollar sovereign bond issued in April 2018 was the first sovereign offering since 2016, and thus the first since the imposition of the economic blockade. A total of $12bn was raised from foreign investors in an oversubscribed offering, $3bn more than Qatar’s previous approach to the market. With general government gross debt standing at around 53% of GDP in 2018 (compared to levels in excess of 100% in some developed economies), the government has capacity to boost issuance if needed. In its Article IV Consultation with Qatar, the IMF found that the country has ample fiscal space to continue with gradual fiscal consolidation and ensure sufficient savings of hydrocarbons wealth for future generations.
Qatar’s economy continues to be dominated by its oil and gas industry, which in 2017 accounted for 48.2% of GDP, according to the QCB, down from 60.1% in 2011. While non-oil sectors accounted for 51.8% of GDP in 2017, many of them are in turn reliant on hydrocarbons revenues for their growth. Manufacturing, which accounts for around 20% of non-hydrocarbons GDP, has traditionally been driven by downstream petrochemicals and metals processes in which Qatar has a competitive advantage due to the availability of low-cost feedstock.
More recently, it has been further buoyed by projects associated with Qatar’s drive to become more self-sufficient. Construction accounts for around 21% of non-hydrocarbons output. Large infrastructure projects have radically altered Qatar’s transport capacities and acted as a catalyst for other economic activity (see analysis). Qatar’s ongoing development programme and projects associated with the 2022 FIFA World Cup helped push construction sector growth to 17.5% in 2017. Qatar is also home to a vibrant financial sector, with 18 banks licensed by the QCB. Despite the economic blockade, deposit growth has remained buoyant and profitability robust. In the first nine months of 2018 Qatar’s Big Five banks witnessed their aggregate assets expand by 5.35%, from approximately QR1.27trn ($348.8bn) to approximately QR1.33trn ($365.3bn) (see Banking chapter). The Qatar Stock Exchange, meanwhile, is home to 46 listed companies, among them major players in the corporate sector such as Qatar National Bank (QNB) and telecoms operator Ooredoo. Its 16.4% gain in the first half of 2018 made it the best-performing exchange in the region, a development which represented a welcome resurgence in investor confidence (see Capital Markets chapter).
Inflation & Monteray Policy
Qatar passed through the recent political crisis without being compelled to make any significant alterations to its monetary policy. The inflation which affected some parts of the consumer basket was offset by softening house prices and rents in 2018 (see analysis). In May 2018 the QCB raised it deposit rate by 25 basis points to 1.75%, and decided to maintain its lending rate to banks at 5%. This action was undertaken in direct response to the US Federal Reserve’s 25-basis-point hike on the dollar, to which the Qatari riyal has been pegged at a fixed rate since 1980.
The riyal’s tie to the US dollar means that domestic monetary policy will gradually tighten in tandem with the policy of the Federal Reserve. However, the pace of interest rate hikes in 2019 may be slower than was widely forecast last year: in February 2019 the Federal Reserve revealed in its semi-annual report that the combination of the slowing global economy and financial market turmoil seen in the final quarter of 2018 meant it would be patient in determining when to make interest rate changes.
Opening the Economy
The political events of 2017 have spurred on Qatar’s programme of economic reform. Since the publication of Qatar National Vision 2030 in 2008, the country has been attempting to diversify its economy away from a hydrocarbons base which still accounts for around 80% of its export earnings. This effort continues in the wake of the blockade, but the new economic scenario has prompted the government to take further steps in the shorter term. In 2017 the Ministry of Interior, Qatar Tourism Authority and Qatar Airways announced the waiver of entry visa requirements for citizens of 80 countries. Depending on nationality, visitors are entitled to a waiver of between 30 and 180 days’ duration, with the possibility of further extensions.
The move was the culmination of a series of measures taken over the year, including the launch of an e-visa platform, through which travellers of all nationalities can apply for tourist visas. As a result of these changes, Qatar has become the most open country in the Middle East in terms of visa facilitation, according to the World Tourism Organisation – a significant improvement on its ranking of 177th in 2014, when the country first commissioned a visa facilitation company. Since the beginning of the visa reform process, year-on-year arrivals from Russia have risen by 366%, while those from China and India have grown by 43% and 18%, respectively. Qatar has also sought to make it simpler for its estimated 2m foreign workers to leave the country, in September 2018 scrapping the controversial exit visa requirement. Under new legislation, only a small number of senior company employees, estimated at 5% of the foreign workforce, are still required to obtain permission to leave Qatar. The UN’s International Labour Organisation (ILO), which opened a Doha office in 2018, welcomed the move as a useful first step in the reform of the labour market. Other reforms agreed by Qatar and the ILO as part of a three-year reform programme include the introduction of a minimum wage, workers’ committees and a fund to ensure people receive unpaid wages.
In August 2017 the Cabinet approved a draft law on the issuance of permanent residency cards to some of its foreign population. The move grants some expatriates property rights and access to public services, as well as placing them second in line behind Qataris for military and civilian public jobs. Although limited to a small segment of the population, including the children of Qatari women married to foreigners, foreign people with talents required by the state and those who have provided exceptional services to the country, the legislative change is the first of its kind to be put in place among the Gulf states.
The government’s ambition to promote the private sector as an engine of growth also predates the economic blockade. Recent events, however, have added fresh impetus to the drive. Part of the government’s approach involves the tried-andtested model of pumping capital into the segment: in January 2018 Qatar revealed plans to award contracts worth roughly $29bn to the private sector as part of a short-term policy that is focused on increasing food security as well as a longer-term ambition to diversify the economy and boost support for small and medium-sized enterprises (SMEs).
While this is useful, more encouraging still is a heightened level of collaboration between government agencies and the private sector in their approach to SMEs. The 2018 Government Procurement and Contracting Conference and Exhibition (Moushtarayat), for example, was co-ordinated by the Public Works Authority (Ashghal), MoF, QNB and Qatar Development Bank (QDB), and presented SMEs with approximately 2000 job opportunities, with an estimated cumulative value of up to QR6.5bn ($1.8bn). The annual event is one of the most important contact points between the government and the private sector. It provides smaller firms with an opportunity to find out about and partake in tenders issued by Qatar’s big buyers – with these ranging from larger private sector companies, to semi-governmental and governmental bodies.
The Ministry of Transport and Communications, meanwhile, is leading the effort to extend ICT products and services to the nation’s SMEs. The Digital Transformation for SMEs programme is a multi-agency effort, involving the participation of QDB, Qatar Chamber, the Communications Regulatory Authority, QNB, Ooredoo and Microsoft. More than 5000 SMEs are expected to benefit from a range of digital and consulting services before the close of 2019. Elsewhere, institutions that have historically underpinned private sector development are ramping up their activities. In April 2018, for example, the QDB announced the launch of its first SME toolkit, intended to guide smaller companies through the various processes involved in establishing, operating and expanding their business. Formulated after a consultation period with SMEs in 2017, it is a coordinated effort of the QDB, a specialised legal office and a number of ministries and government departments. The toolkit adds to the QDB’s already extensive range of business support services, which includes the direct and indirect financing of a number of targeted sectors, the promotion of exports through its Tasdeer programme and skill-building initiatives.
According to Zuhair Naqvi, managing director of Dicotech, a local company specialising in construction and IT services, streamlining registration processes would be a welcome improvement for local businesses. “Companies have had to adapt since 2017 and reconfigure broader supply chains to source materials, components and other products,” he told OBG. “These all need to be registered and approved by clients and relevant government authorities, so steps towards streamlining this process would help improve the flexibility of local contractors and reduce costs.”
Naqvi also noted that aid from financial institutions will be especially crucial to growing local businesses in emerging industries. “Local companies will need to adjust to a more challenging business environment in the medium term,” he said. “Although opportunities are present in emerging sectors such as facilities management, waste management and agriculture, banks will need to ease access to funds to support the growth and viability of these new industries.”
The government is also reassessing the legal basis on which it cooperates with private enterprise to develop infrastructure. Qatar’s use of public-private partnership (PPP) agreements to date has been limited to the water and power sectors, most notably the $3bn water and power project at Ras Laffan and a power project in Mesaieed. Like other countries in the region, extending the PPP principle to a greater number of sectors has proved challenging, primarily due to the lack of a comprehensive legal framework for PPPs and the uncertainty of future revenue for investors. The government’s desire to harness private sector capital to generate economic growth has resulted in the formulation of a new PPP draft law, aimed at combatting these challenges.
Expected to be issued as part of the second National Development Strategy, covering the 2018-22 period, the new draft law establishes a clear legal basis for PPPs, as well as a governance and approval framework. The Ministry of Commerce and Industry has identified a number of potential PPP projects of varying sizes and across a range of sectors, with a total estimated value of $20bn. These include public and private schools, hospitals, power and water facilities, agricultural projects, logistics centres and entertainment developments, among other projects.
The flexibility of the economy has been demonstrated by the modest and largely temporary effects of the economic blockade. The nation’s economic growth over the short to medium term is underpinned by a more stable oil price, an ongoing process of economic reform and the investment push associated with the 2022 FIFA World Cup.
The IMF foresees an increase in Qatar’s GDP growth to 2.8% in 2019, compared to an estimated 2.7% in 2018 and 1.6% in 2017. Furthermore, the country’s GDP growth is forecast at 2.6% in 2020. Qatar’s recent decision to increase its LNG production by up to 40% with the construction of four super-trains at Ras Laffan will drive the nation’s next development phase, as the current development pipeline begins to slow (see Energy chapter). Potential risks include a worsening of regional relations and, as always, a decline in global energy prices. However, with oil price predictions for 2019 and 2020 generally above the $60 per barrel mark, Qatar’s government planners have every right to be optimistic with respect to the upcoming period.