While the figures may not be as spectacular as they once were, the outlook for Qatar’s economy is still one of the brightest in Mena, with few immediate downside risks, says a special report in The Gulf.

Despite some relatively distant downside risks clouding an otherwise sunny outlook, Qatar’s economy is set to remain the Mena’s best performing economy over the next few years. According to the country’s Ministry of Development Planning and Statistics (MDPS), real GDP growth will reach 6.3 per cent this year, down slightly from 6.5 per cent in 2013, before rising to 7.8 per cent in 2015.

“Although we do think that growth may be a touch weaker than the authorities anticipate… even at six to seven per cent growth will remain the fastest in the whole of the Mena region,” notes Capital Economics, a research firm. Growth will be driven by rising public spending - the government recently earmarked $182 billion for development projects to be spent over the next five years.

Qatar National Bank is similarly upbeat about the country’s growth prospects. It anticipates that as the diversification of the economy continues, real GDP growth will accelerate from around 6.8 per cent in 2014, to 7.8 per cent in 2016.

It expects growth outside the oil and gas sector to remain in “double digits” fuelled by state investment projects. QNB estimates that the implementation of major projects created around 120,000 jobs in 2013 alone. As a result, immigration and population growth are also soaring. QNB expects that population growth will reach 10.1 per cent in 2014 and average six per cent in 2015-16.

A new metro, with connections to the Gulf Co-operation Council (GCC) rail network, roads, ports, bridges along and waterfront developments, such as Lusail - to the north of Doha which will include commercial and residential districts - are getting underway. As a result, credit growth is expanding rapidly due to lending to the public sector.

Although most of Qatar’s major infrastructure projects would be built independently of the World Cup which the country is set to host in 2022 the tournament has provided a deadline for numerous major infrastructure projects. The investigation into allegations of corruption associated with FIFA’s decision to award the World Cup to Qatar has only slightly dampened the state’s economic outlook. The equity market tumbled as a result of concerns that Qatar would not be allowed to host the tournament.

Indeed, according to a report from Bank of America Merrill Lynch, Qatar’s real GDP growth would slow by around half a percentage point annually if the country is stripped of its right to host the 2022 World Cup.

Jean Michel Saliba, economist at Bank of America-Merrill Lynch estimated that the direct World Cup-related spending on stadiums and hotels is relatively small at around $16 billion, “7.5 per cent of GDP, or an annual 1 to 1.5 per cent of GDP over the period.” Many of Qatar’s key infrastructure projects would proceed regardless of the World Cup, yet losing the event and the 2022 deadline could result in delays to the project pipeline. Far more damagingly, depending on the outcome of the investigation, would be the hit to Qatar’s reputation. Should any wrongdoing be uncovered, this could significantly dent it’s goal of becoming a services hub for the region.

Although the economy is still dependent on gas and oil revenue, growth is now being driven primarily by non-hydrocarbons, which made up almost 60 per cent of GDP in 2013. Growth in the hydrocarbon sector has plateaued and growth in the gas sector will remain modest owing to the country’s moratorium on further gas developments in its North Field. The moratorium looks set to continue beyond 2015, the Economist Intelligence Unit predicts. In 2013 hydrocarbon growth slowed to 0.9 per cent as the expansion of liquefied natural gas (LNG) production has come to an end and oil production stabilised.

Nonetheless, hydrocarbons will remain the major source of the country’s wealth. At current extraction rates (Qatar produces around 77 million tonnes per year (t/y) of LNG), the country’s proven gas reserves would last another 160 years, according to QNB. Qatar has the third largest gas reserves in the world after Russia and Iran, with an estimated at 885 trillion cubic feet. The country became the world’s biggest LNG exporter in 2006, propelling it to become the world’s richest country on a GDP per capita basis, at around $100,000, according to the Intentional Monetary Fund (IMF).

Although the hydrocarbons sector has slowed, QNB notes that other developments such as three additional petrochemical plants are under way which should help to boost downstream capacity. Qatar plans to raise petrochemical production from 16 million t/y to 23 million t/y by 2020. This year Qatar is also set to complete its $10.3 billion Barzan gas project, which should help to fuel growth in 2014 and 2015. The field aims to produce an additional 1.7 billion cubic feet per day of gas from the North Field.

Meanwhile, Qatar’s large fiscal surpluses are expected to narrow as capital spending rises and hydrocarbon revenue falls on lower oil prices. QNB projects a fiscal surplus of 9.6 per cent of GDP in 2014/15, falling to 4.7 per cent in 2016/17, “in line with the increase in capital spending.” According to Qatar’s 2014/15 budget, government spending is expected to increase 3.7 per cent to $60 billion (28.1 per cent of GDP). QNB anticipates that while the wage bill is budgeted to rise, other current expenditures will be slightly reduced. The capital spending budget ($27.4 billion, up 12.3 per cent from the previous budget) will be reoriented to the implementation of major capital projects, it says.

Despite the sunny picture there are some clouds gathering on the horizon. “While Qatar has among the best near-term growth prospects in the emerging world, we think that there some growing downside risks to the medium-term outlook,” Capital Economics argues. It points to the fact that the rapid growth of domestic demand could cause the economy to overheat. However, at this stage, inflation remains relatively contained, and low by historical standards at around three per cent in 2013. However, the influx of foreign workers needed to build Qatar’s ambitious infrastructure projects could mean that rents are pushed up. As Capital Economics notes, higher inflation would “erode household income” and “run the risk of stoking social discontent.”

Another risk is if there is a sustained drop in energy prices. “Admittedly, Qatar is among the best placed countries in the Gulf to cope with a fall in energy prices. Foreign exchange reserves and assets held by the sovereign wealth fund are equivalent to around 100 per cent of GDP. In addition, the government requires an oil price of just $60-65 per barrel to balance its budget” says Capital Economics. However, if oil prices were to fall to beneath $100 per barrel and potentially to around $85 per barrel - a possible scenario over the next few years - the government will be more reluctant to raise spending at the same levels it has in recent years.

A third risk that Capital Economics identifies is among local banks. For the most part the outlook for Qatar’s banking is positive. The country’s fiscal surplus (estimated by QNB to be around 9.6 per cent this year) should be reflected in rapid deposit growth. Furthermore, banks have large capital buffers and a low non-performing loan ratio. Bank lending is expected to rise on accelerated public spending. Lending will continue to expand on the back of infrastructure development and population growth.

However as Capital Economics notes, “the rapid expansion of credit over the past decade is a concern. Historically, increases in the credit-to-GDP ratio of three percentage points or more in a year have been a good predictor of future financial stress. Qatar’s credit-to-GDP ratio has risen by almost 35 percentage points in seven years.”

Although most of this lending has been for infrastructure projects, the hope that it will generate greater returns than lending to consumers, for instance, rests on the projects realising their potential.

“We think that there is a real risk that intense competition between the Gulf states to mould themselves into global services hubs could result in overcapacity, as happened in Dubai in the run-up to its crisis in 2008/09. Local companies could then struggle to repay their loans,” Capital Economics argues.

The firm also points out that bank lending is concentrated in a handful of large projects. Should they fail, then the rise in non-performing loans would increase. Yet the likelihood of a banking sector crisis is extremely slim, while the government would easily be able to bail out banks.

Overall, Qatar’s economy looks set to continue to outperform, though perhaps at a less stellar pace than it has in recent years. – TradeArabia News Service

This feature appeared in the August issue of The Gulf.