Thursday, 7th May 2015

Qatar rides its economic miracle despite budgetary pressures

Even if its published national accounts are the sole criteria for assessing the emirate’s wealth – and they may not include some of the ruling Al-Thani’s huge investments abroad (see page 16) – Qatar’s economy is very healthy. The oil price crash has forced budget cuts, but Emir Sheikh Tamim Bin Hamad Al-Thani’s government has reacted prudently, as reflected in Standard & Poor’s end-March affirmation of Qatar’s AA long-term and A-1 short-term foreign and local currency credit ratings (with ‘stable’ outlook). Huge gas and investment income give extravagant scope for any number of huge deals – underlined by the long-awaited contract for France to supply 24 Rafale combat aircraft, much to the chagrin of Dassault Aviation’s US and UK rivals (see page 1).

But despite the scale of the economy, Qatar’s unprecedented plans to emerge from a dusty peninsula as a global force are not without risks. GSN in October 2013 warned that “years of dizzying economic expansion must [eventually] come to an end”, if and when oil prices soften (GSN 956/1). The report added: “Unless [the 2022 Fifa World Cup and other] divergent revenue and expenditure trends are carefully managed, Qatar could see its budget slip into deficit by 2015-16 for the first time since 1998.”

The International Monetary Fund (IMF)’s latest Article IV consultation document, published in March, made headlines with the observation that the impact of low oil prices – which feed into liquefied natural gas (LNG) pricing with a time lag – could mean the government risks posting a budget deficit in 2016. As the central government budget surplus increased to 14% of GDP in FY2013/14 (to end-March), this suggests potential discomfort not experienced by Qatari economic planners since the early days of former emir Sheikh Hamad Bin Khalifa’s then audacious play to make the emirate a world-scale natural gas producer. That gamble succeeded, if not without some anxious moments in the late 1990s, as oil prices dipped and creditors got nervous.

With more than 90% of the budget and exports stemming from energy sector activities, the oil price slump is badly timed, coming during a period of peak spending, as Qatar invests massively in preparations for the controversial World Cup. Qatari GDP rose by an average 6%/yr in 2012-14 (driven by the building boom), and the IMF forecast growth at around 7% in 2015, but said “lower oil prices will lead to a substantial deterioration of the fiscal and external balances” the following year. “In sharp contrast to previous years, the budget will be in deficit from 2016 onward and the current account surplus will largely be eliminated,” the IMF said.

There is no prize for guessing that the IMF renewed its calls for Qatar to accelerate ‘diversification’, improve its business climate and beware potentially negative impacts from the real estate boom. The IMF sees considerable savings – and benefits – from moving towards a more rational economy; thus the government should cut its opaque energy and water subsidy regimes. ‘Diversification’ is a word that requires some definition. While obviously referring to reducing dependence on hydrocarbons, the IMF also talked about the “intensification of diversification efforts through further improvements in the business environment, higher education quality and labour market reforms, which would also make growth more inclusive”. That could be interpreted as diversifying the fruits of Qatar’s gas-fuelled boom away from the uber-wealthy Al-Thani elite.

But local banks are well capitalised and the government has been prudent – departmental and state-funded institutions’ budgets were cut (and, in some cases, allocated for the first time) as it became clear oil prices were falling for a considerable period. The outlook might suggest macro-economic squalls, but the world’s largest LNG exporter should have little to fear from financial pressures; any storm clouds for Emir Sheikh Tamim will build from other directions.

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