Strong pub­lic in­vest­ment spurs Qatar growth

Kuwait Times - - BUSINESS -

KUWAIT: De­spite lower oil prices, high pub­lic in­vest­ment in the coun­try’s $200 bil­lion de­vel­op­ment plan and gas out­put gains linked to the launch of the Barzan pro­duc­tion fa­cil­ity should see Qatar’s eco­nomic per­for­mance re­main rel­a­tively strong through 2016 and 2017. In­fla­tion is ex­pected to edge up slowly, once the de­fla­tion­ary ef­fect of soft in­ter­na­tional food and com­mod­ity prices be­gins to ease and once rental costs re­sume their up­ward tra­jec­tory. A stronger dol­lar should keep im­ported in­fla­tion in check, how­ever.

With oil and gas rev­enues down by 40 per­cent, Qatar is ex­pected to record in 2016 its first fis­cal deficit since 1999. Con­se­quently, non-es­sen­tial cap­i­tal projects are likely to be scaled back amid a drive to ra­tio­nal­ize spend­ing and stim­u­late the pri­vate sec­tor. As low en­ergy prices feed through to the bank­ing sec­tor in the form of slow­ing de­posit, credit and as­set growth, liq­uid­ity has tight­ened and rates have risen. CDS spreads have also widened. Nev­er­the­less, with strong fis­cal and ex­ter­nal buf­fers, in­clud­ing net ex­ter­nal as­sets equiv­a­lent to 132 per­cent of GDP, Qatar is bet­ter placed than most of its peers to ne­go­ti­ate the cur­rent down­turn.

Risks to the out­look cen­ter on the tra­jec­tory of en­ergy prices, the per­for­mance of the global econ­omy, volatil­ity in fi­nan­cial mar­kets and de­liv­ery of the au­thor­i­ties’ do­mes­tic in­fra­struc­ture pro­gram ahead of the World Cup in 2022. Qatar’s po­si­tion as the lead­ing LNG ex­porter in the world is also likely to come un­der pres­sure by the ar­rival of Aus­tralia and the US as ma­jor LNG com­peti­tors in 2016.

Real eco­nomic growth

Real GDP is forecast to grow by 5.4 per­cent in 2016 and 5.1 per­cent in 2017, from an ex­pected in­crease of 4.9 per­cent in 2015. This fig­ure, while down from the 9.2 per­cent an­nual av­er­age wit­nessed dur­ing 2010-2014, still puts Qatar among the most dy­namic economies in the GCC.

Hy­dro­car­bon sec­tor out­put, hav­ing plateaued with the at­tain­ment of max­i­mum LNG ca­pac­ity in 2012, is ex­pected to re­ceive a boost from the com­mis­sion­ing of Barzan in late 2015, which should reach full pro­duc­tion of 1.4 bil­lion cu­bic feet per day (bcf/d) in 2016. Con­se­quently, real hy­dro­car­bon growth is ex­pected to clock in at 0.7 per­cent in 2015 and 1.7 per­cent in 2016, be­fore fall­ing to 1.0 per­cent in 2017.

Barzan was the last project sanc­tioned be­fore the 2005 mora­to­rium on gas ex­trac­tion from the coun­try’s gi­ant North Field was put in place. Once fully op­er­a­tional, the fa­cil­ity should sup­ply ad­di­tional vol­umes of gas by-prod­ucts such as con­den­sates and nat­u­ral gas liq­uids (NGLs). Th­ese took over from crude oil as the dom­i­nant liq­uid fuel prod­ucts once crude out­put from Qatar’s ma­tur­ing oil fields be­gan to de­cline in 2007. Crude out­put av­er­aged 0.66 mb/d 2015. (Chart 2.) Out­put had been as high as 0.85 mb/d in 2007.

In con­trast, the non-hy­dro­car­bon sec­tor re­mains the main de­ter­mi­nant of Qatar’s eco­nomic growth. Un­der­pinned by gov­ern­ment spend­ing, out­put is forecast to ex­pand by 9.1 per­cent y/y on av­er­age be­tween 2015 and 2017. Fi­nan­cial ser­vices, con­struc­tion and trade and hos­pi­tal­ity will con­tinue to drive Qatar’s non-hy­dro­car­bon sec­tor. Eco­nomic ex­pan­sion is also be­ing pro­pelled by bur­geon­ing pop­u­la­tion growth of 8.8 per­cent y/y, which is help­ing to boost do­mes­tic consumption.

The au­thor­i­ties have in­di­cated that they re­main com­mit­ted to ex­e­cut­ing the coun­try’s $200 bil­lion de­vel­op­ment and di­ver­si­fi­ca­tion plan re­gard­less of the de­cline in oil prices. The need to roll out World Cup and re­lated in­fra­struc­ture by 2022 im­parts a mea­sure of ur­gency to gov­ern­ment ef­forts. High pro­file projects such as the Qatar In­te­grated Rail­way ($40 bil­lion), Ha­mad Port ($7 bil­lion), the Lu­sail Mixed-Use De­vel­op­ment ($45 bil­lion) and the lo­cal roads and drainage pro­gram ($14.6 bil­lion) look set to pro­ceed apace. Non-es­sen­tial cap­i­tal projects, how­ever, will be down­graded and scaled back in the cur­rent cost­con­scious en­vi­ron­ment.

In­fla­tion likely to rise

Head­line in­fla­tion is pro­jected to rise grad­u­ally over the next two years, from an ex­pected 1.7 per­cent in 2015 to 3.0 per­cent in 2017 (on an an­nual av­er­age ba­sis). Ris­ing rental costs and slowly re­bound­ing global food and com­mod­ity prices are likely to be the pre­dom­i­nant in­fla­tion­ary im­pulses. While rental in­fla­tion slowed to 1.8 per­cent y/y in Oc­to­ber, rapid pop­u­la­tion growth owing to the in­flux of ex­pa­tri­ate work­ers is ex­pected to con­tinue ex­ert­ing pres­sure on the coun­try’s lim­ited res­i­den­tial hous­ing stock. The price of land and build­ings, as mea­sured by the real es­tate price in­dex (REPI), was up 18.2 per­cent y/y last Septem­ber, al­though it has been mod­er­at­ing over the last year. (Chart 4.) A strength­en­ing US dol­lar-to which the Qatari riyal is pegged-has helped re­strain im­ported in­fla­tion.

Fis­cal and cur­rent ac­count sur­pluses

Qatar’s fis­cal bal­ance is likely to swing into deficit in 2016, for the first time since 1999. With spend­ing lev­els re­main­ing rel­a­tively el­e­vated amid a 40 per­cent de­cline in hy­dro­car­bon rev­enues, the fis­cal sur­plus is forecast to nar­row from 16.1 per­cent of GDP in 2014 to -0.5 per­cent of GDP in 2016. In 2017, the fis­cal ac­count should just about bal­ance. Sim­i­larly, the cur­rent ac­count sur­plus is likely to nar­row con­sid­er­ably.

On the fis­cal side, fu­ture spend­ing is likely to be ra­tio­nal­ized. While cur­rent spend­ing will be re­strained, cap­i­tal spend­ing will need to rise as the au­thor­i­ties make up for pre­vi­ous be­low-bud­get out­lays, due to de­lays and ca­pac­ity con­straints, and push ahead with im­ple­ment­ing their de­vel­op­ment plan ahead of the World Cup in 2022. As men­tioned, how­ever, non-es­sen­tial projects will be scaled back.

The prospect of a sus­tained pe­riod of low en­ergy prices has prompted the gov­ern­ment to pro­ceed with re­form­ing the state’s fi­nances. New mea­sures in­clude: the in­tro­duc­tion of a QAR 600 bil­lion ($165 bil­lion) spend­ing cap on new in­vest­ment projects for 10 years; the cre­ation of a macro-fis­cal unit and pub­lic in­vest­ment man­age­ment depart­ment (PIM); the shift to a cal­en­dar rather than a fis­cal year bud­get (ef­fec­tive in 2016); the with­drawal of sub­si­dies to cer­tain state in­sti­tu­tions; and the pri­va­ti­za­tion of semi-gov­ern­ment in­sti­tu­tions. The last two mea­sures were an­nounced by the Amir in Novem­ber 2015 and form part of an ef­fort to shrink state mo­nop­o­lies and boost the eco­nomic con­tri­bu­tion of the pri­vate sec­tor.

Suf­fi­cient fis­cal buf­fers

With $39.6 bil­lion in in­ter­na­tional re­serves (ex­clud­ing the $256 bil­lion SWF)-equiv­a­lent to 7.4 months of im­ports-and strong credit rat­ings, how­ever, Qatar has suf­fi­cient as­sets to fi­nance cap­i­tal spend­ing and weather the fall in en­ergy prices-cer­tainly over the forecast pe­riod. Were oil prices (and gas prices by ex­ten­sion) to re­main in the $40-50 range for longer, then, like Saudi Ara­bia, the au­thor­i­ties would prob­a­bly en­vis­age step­ping up bond is­suance, per­haps with a view to at­tract in­ter­na­tional in­vestors, given do­mes­tic liq­uid­ity con­cerns. Gross cen­tral gov­ern­ment debt had dropped to 31.0 per­cent of GDP in 2014 from a high of 42.0 per­cent of GDP in 2010 af­ter the au­thor­i­ties paid back ma­tur­ing pub­lic debt. This trend could re­verse, how­ever.

Bank­ing sec­tor

Credit growth has been mod­er­at­ing over the last year owing to a slow­down and con­trac­tion in pub­lic sec­tor bor­row­ing. The most re­cent data showed over­all bank credit grow­ing by 12.0 per­cent y/y in Septem­ber, with credit to the pub­lic sec­tor con­tract­ing by -6.6 per­cent y/y. In con­trast, credit growth to the pri­vate sec­tor has av­er­aged 22.0 per­cent y/y for most of the year (com­pared to 15.6 per­cent in 2014), as banks con­tinue ex­pand­ing credit lines to the real es­tate, in­dus­trial and re­tail sec­tors of the econ­omy. For­eign lend­ing has also pro­ceeded apace, with growth av­er­ag­ing 45.2 per­cent y/y in 2015. In view of the gov­ern­ment’s com­mit­ment to con­tinue spend­ing on in­fra­struc­ture and ex­pand pri­vate sec­tor par­tic­i­pa­tion in the de­vel­op­ment plan, the out­look for credit growth re­mains pos­i­tive.

Lower de­posit flows

Re­duced gov­ern­ment de­posits in the bank­ing sys­tem re­sult­ing from lower oil and gas prices have slowed over­all de­posit growth con­sid­er­ably over the pre­vi­ous year. To­tal bank­ing sec­tor de­posits grew by 7.1 per­cent y/y as of endSeptem­ber, down from the av­er­age an­nual growth rates of 13.8 per­cent and 30.6 per­cent in 2014 and 2013, re­spec­tively. Pub­lic sec­tor de­posits were down by -13.9 per­cent y/y last Septem­ber-the steep­est con­trac­tion since the fi­nan­cial cri­sis. Pub­lic sec­tor de­posits, as a share of to­tal bank de­posits, stood at 25.0 per­cent, which is a de­cline from their high of 32.0 per­cent in 2013 and 2014. (Chart 11.) Pri­vate sec­tor de­posit growth has re­mained in dou­ble dig­its, how­ever.

With de­posit growth slow­ing and trail­ing credit growththe loan-to-de­posit ra­tio (LDR) re­mained el­e­vated at 111.4 per­cent last Septem­ber-banks are in­creas­ingly fac­ing fund­ing pres­sures. In re­sponse, banks are in­creas­ing their ex­po­sure to the costlier and more volatile in­ter­bank funds as well as to the debt mar­kets; in­ter­bank funds as a share of to­tal funds was back up to 21.4 per­cent in Septem­ber 2015.

In­ter­bank rates tacked sharply up­ward since July, re­flect­ing once again con­cerns over tight­en­ing liq­uid­ity. In or­der to al­le­vi­ate po­ten­tial liq­uid­ity con­straints, the In­ter­na­tional Mon­e­tary Fund (IMF), in its Ar­ti­cle IV Con­sul­ta­tion, sug­gested that the au­thor­i­ties re­al­lo­cate de­posits from gov­ern­ment and re­lated in­sti­tu­tions, in­clud­ing from the over­seas SWF, and re­duce the size of the cen­tral bank’s T-bill and bond auc­tions.

Gov­ern­ment se­cu­ri­ties form the bulk of com­mer­cial banks’ liq­uid as­sets, and, along with de­posits at the cen­tral bank, pro­vide some mea­sure of liq­uid­ity cover. While liq­uid bank­ing as­sets ac­counted for 27.0 per­cent of to­tal tan­gi­ble as­sets in De­cem­ber 2015, this fig­ure looks likely to fall to be­tween 22.0-25.0 per­cent by the end of 2015.

With the Qatari riyal pegged to the US dol­lar, do­mes­tic in­ter­est rates tend to be closely aligned with US in­ter­est rates. The US Fed­eral Re­serve is ex­pected to raise its bench­mark Fed­eral Funds rate by the turn of 2016, which will likely mean that Qatar’s key lend­ing and de­posit rates will fol­low suit, pos­si­bly with some lag.

Qatari eq­ui­ties roiled

With the oil price slump con­tin­u­ing to neg­a­tively af­fect mar­ket sen­ti­ment, the bench­mark Qatar Ex­change In­dex (QE) had been in neg­a­tive ter­ri­tory (ytd) for close to 7 months by mid-Novem­ber 2015. This is de­spite the fact that Qatari cor­po­rates had posted the high­est earn­ings growth in the GCC, of 13 per­cent, dur­ing the first 6 months of 2015. As of 20 Novem­ber, the in­dex was down -8.1 per­cent to 10,860. Low trad­ing vol­umes have re­flected weak buyer in­ter­est. In­vestors have also been con­cerned that the gov­ern­ment would be forced to rein in spend­ing, in­clud­ing cut­ting sub­si­dies, and con­sider cor­po­rate tax in­creases in a bid to boost state cof­fers.

The tra­jec­tory of en­ergy prices

With its size­able fis­cal buf­fers and AA credit rat­ing, Qatar re­mains well po­si­tioned to weather the cur­rent pe­riod of low en­ergy prices. Nev­er­the­less, the longer oil and gas prices re­main de­pressed, the more pres­sure Qatar will face on its fi­nances and bank­ing sec­tor. Growth will un­doubt­edly be af­fected. In a sign of ris­ing pres­sures, along with a rise in the for­ward cur­rency curve, the 5-year sov­er­eign credit de­fault swap spread widened sig­nif­i­cantly, by 14 bps, dur­ing the sec­ond half of the year. The likely ar­rival in 2016 of Aus­tralia and the US as LNG ex­porters is an­other con­cern, as it will chal­lenge Qatar’s po­si­tion as the world’s largest LNG ex­porter. Qatar’s low gas pro­duc­tion cost base, how­ever, should en­able it to com­pete ef­fec­tively in this new en­vi­ron­ment.

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