Prudent & Proud

Conjecture is rife when it comes to the impact that falling oil prices, a result of global oversupply, could have on members of the GCC. But, for Qatar, the verdict is already in: the country remains one of the least vulnerable to shocks, according to Standard & Poor’s, thanks to sensible budgeting and the wider exploitation of natural gas as opposed to crude oil in the Gulf state.

Speaking in November 2014, Finance Minister HE Ali Sharif al-Emadi insisted that the country has enough liquidity and energy buffers to persevere with the enormous spend it has planned in the run up to the 2022 FIFA World Cup, with Qatar expected to sink some $200 billion into hosting the tournament. On top of that, US Energy Information Administration data suggests Qatar’s budget in 2012-13 assumed an average oil export cost of $65 per barrel despite fetching as much as $110 at the time. That isn’t to say the state isn’t fiscally reliant on its hydrocarbons sector; 60% of Qatar’s total revenues were derived from hydrocarbons in the five years up to 2013, the majority in the form of natural gas.

In GDP terms, the figures tell a story of continued diversification; the non-hydrocarbon sector now represents just over 40% of the economy, on par with the gas sector, while oil makes up the remainder. In 2013, the economy expanded by 6.5%, driven by an emboldened non-hydrocarbon services sector and led by the finance and real estate sectors, which, according to the Ministry of Development Planning and Statistics’ Qatar Economic Outlook 2014-15 report, made a five percentage-point contribution over the year.

For FY2014, the Ministry expects GDP growth of 6.3%, rising to 7.8% in 2015 as investment in the non-hydrocarbon sector accelerates and the vast Barzan Gas Project comes online. Barzan, one of the last projects to be approved before a moratorium on new natural gas projects took effect in the North Field, will cost $10.4 billion and feed the rising local thirst for gas, mainly from the power and water sectors. Despite having the world’s third-largest reserves of natural gas, Qatar is the world’s second largest exporter, shipping 4.3 trillion cubic feet (tcf) of the stuff abroad in 2012, according to the US Energy Information Administration.

THE FISCAL BALANCE

For the 2014-15 fiscal year (April to end-March), the government saw fit to earmark more cash for capital outlays, with state-backed, large-scale infrastructure projects set to define economic activity over the coming years. That comes at the expense of more expansive recurrent budget items, which received less attention. Moving forward, Qatar will maintain a healthy fiscal surplus, albeit narrowed, amidst a flurry of construction in preparation for the 2022 FIFA World Cup. At the close of FY2013/2014, Qatar’s fiscal surplus stood at 12.6% of nominal GDP, a tad wider than the 11.2% the previous fiscal year, according to the Ministry of Development Planning and Statistics. The widening was on account of increased investment income, while oil and gas income, along with corporate tax revenue, shrank. But from here on out, things could get tighter; in calendar year 2014, the Ministry anticipates the fiscal surplus narrowing to 9.3%, then falling to 5.5% in 2015, down from a preliminary estimate of 12.9% for 2013. As well as ramped-up public spending, the falling price of oil will also have an impact, as will the aging of some oil fields in the country. But despite the price of oil being in somewhat of a tailspin at the time of writing, in December 2014 the country’s natural gas-weighted hydrocarbons mix should act as a buffer should the cost per barrel drop to below $60.

INFLATION

Inflation remained low in 2014, backed up by moderating global commodity prices despite the expectation that strengthening domestic demand will exert upward pressure on prices over 2015. Inflation for 2013 came in at 3.1%, up from 2% in 2012 due to price increases in residential rents and utilities. In 2014, inflation is expected to come in around the 3% mark again, then rise to 3.4% in 2015 on the back of higher domestic spending, a reality that wasn’t reflected in the FY2014 figure due to a moderate first half. Increased domestic demand, according to the Ministry of Development Planning and Statistics, is expected to push up the cost of rents, especially in the low- to mid-income markets, yet calm inflation outlooks in major trading-partner countries, coupled with modest global food and commodity prices, mean that consumer prices will remain more than manageable barring any major increase in the cost of imported goods, a significant fall in the value of the US dollar, or unexpected global demand recovery.

THE CURRENT ACCOUNT

The current account surplus, despite facing a narrowing as a result of falling hydrocarbon revenues and increased imports to feed the multitude of megaprojects underway in the country, remains sizable compared to nominal GDP, at 30.9%. Higher worker remittances are also taking their toll, to some extent, on the width of the surplus. At end-2014, the current account surplus is expected to come in at 25.1% of GDP, then narrow to 19.5% in 2015. Diving into the details for 2013, the trade surplus was also a noteworthy 52.1% of nominal GDP, down just a touch on 2012. The current account surplus has afforded Qatar the ability to make foreign investments of its own, a reality that means the current account surplus stands greater than the overall balance of payments surplus, which, according to the Ministry of Development Planning and Statistics, is projected to decline to $3.9 billion in 2014 and $3.4 billion in 2015. This surplus supports the Qatar Central Bank’s own foreign reserve position, with the current kitty equivalent to 6.5 months of total goods and services imports.

FDI

Qatar continues to be one of the region’s largest sources of outbound FDI, moving into third place among the GCC at end-2013 with $8 billion, behind only Kuwait on $8.4 billion and ahead of Saudi Arabia on $5 billion. On the flip side, the country pulled in just $86.8 million over 2013, having been upgraded to emerging market status by Morgan Stanley Capital International (MSCI) in May of that year. Despite the low haul compared to some other markets in the region, there was cause for celebration in mid-2014 when the Ministry of Development Planning and Statistics reported that FDI stock in Qatar’s industrial sector had, as of May 2014, reached $35.4 billion, or 52% of total capital investment in the sector. The report brought smiles to many faces across the public establishment, happy that, in line with Qatar National Vision 2030, a program that envisages the increased diversification of the economy, it seems the non-hydrocarbon sector is not only expanding but also climbing the value chain.

While it remains to be seen how the greater region will deal with lower oil prices, or even how low those prices may go, Qatar’s insistence on prudent fiscal measures, coupled with the comfort afforded by its widening gas extraction matrix, will keep worried faces at bay as we move into 2015. With the countdown now on to the 2022 FIFA World Cup, a burst of construction activity will keep the economy warm in the medium term against a backdrop of increased domestic spending, as Qataris look to enjoy the trappings of wealth that the country’s natural resources have afforded them.