Qatar eco­nomic growth to im­prove in 2017

But GCC dis­pute weighs on out­look

Kuwait Times - - BUSINESS -

KUWAIT: Qatar’s eco­nomic growth mod­er­ated to 2.2 per­cent in 2016 from 3.5 per­cent in 2015 on a con­trac­tion in oil and gas out­put (-1 per­cent) and a slow­down in non-hy­dro­car­bon sec­tor ac­tiv­ity (5.6 per­cent). In the for­mer, ma­tur­ing oil fields, main­te­nance of LNG fa­cil­i­ties and de­lays pre­vented the Barzan gas pro­cess­ing plant from reach­ing full ca­pac­ity and stymied po­ten­tial out­put growth. Over in the non-hy­dro­car­bon sec­tor, while con­struc­tion (15.4 per­cent y/y), fi­nan­cial ser­vices (7.9 per­cent y/y) and real es­tate (6.8 per­cent y/y) were the ma­jor con­trib­u­tors to growth, the econ­omy felt the neg­a­tive ef­fects of gov­ern­ment fis­cal con­sol­i­da­tion, tighter liq­uid­ity and pri­vate sec­tor credit, and gen­er­ally lower con­sumer con­fi­dence. Last year’s GDP growth rate was the slow­est since 2002.

Look­ing ahead, we ex­pect growth to ac­cel­er­ate slightly this year and next to 2.5 per­cent and 3.1 per­cent, re­spec­tively, thanks to gains in LNG, nat­u­ral gas and con­den­sates out­put on the hy­dro­car­bon side. Crude out­put is ex­pected to av­er­age 30,000 b/d less in 2017 as per Qatar’s obli­ga­tions un­der the terms of last Novem­ber’s OPEC pro­duc­tion cut agree­ment. Con­tin­ued growth in con­struc­tion, ser­vices and trans­porta­tion should con­trib­ute on the non-hy­dro­car­bon side. The gov­ern­ment’s $200 bil­lion public in­fra­struc­ture pro­gram, which it is ex­e­cut­ing as part of its Vi­sion 2030 di­ver­si­fi­ca­tion strat­egy and FIFA World Cup 2022 plan, will un­der­pin growth in this sec­tor, even while the gov­ern­ment con­tin­ues to keep a tight rein on cur­rent ex­pen­di­tures.

Of course, the re­cent diplo­matic rift be­tween Qatar and its neigh­bors, in which air, trans­port and even fi­nan­cial links have been sev­ered or lim­ited, does have the po­ten­tial to sig­nif­i­cantly al­ter the equa­tion and af­fect the out­look. De­pend­ing on how long the cri­sis lasts-two weeks and count­ing so far-the im­pact on the flow of goods and ser­vices, peo­ple and cap­i­tal could be sub­stan­tial, with neg­a­tive reper­cus­sions for Qatari trade, tourism, la­bor and bank­ing sec­tor liq­uid­ity. These are all key com­po­nents of Qatar’s di­ver­si­fi­ca­tion strat­egy; lim­i­ta­tions im­posed on any one of these would cause head­line growth to suf­fer. In­fla­tion would al­most cer­tainly spike, as con­sumer goods and ma­te­ri­als are rerouted, while the bank­ing sys­tem, with its el­e­vated share of for­eign li­a­bil­i­ties, could ex­pe­ri­ence out­flows and ris­ing costs.

Head­line in­fla­tion to ease in 2017

In­fla­tion av­er­aged 2.7 per­cent in 2016, in­creas­ing from 2015’s head­line fig­ure of 1.8 per­cent due to price hikes which were as­so­ci­ated with the re­moval of en­ergy and util­ity sub­si­dies. This also came de­spite a 2 per­cent de­cline in food prices that year. As of April 2017, in­fla­tion was 0.8 per­cent y/y, brought lower by de­clin­ing rental prices (-1.3 per­cent y/y) and falling costs in the recre­ation and cul­ture cat­e­gory (-2.6 per­cent y/y). Rent in­fla­tion, which feeds into the largest CPI con­trib­u­tor-the hous­ing and util­i­ties cat­e­gory-turned neg­a­tive in Fe­bru­ary for the first time in 5 years. The sup­ply of prop­er­ties ex­ceeds de­mand, and real es­tate prices, as mea­sured by the real es­tate price in­dex, were down al­most 10 per­cent y/y in March. We ex­pect in­fla­tion to ease to 1.5 per­cent in 2017 be­fore ris­ing to 3 per­cent next year on slowly re­bound­ing in­ter­na­tional food prices and im­prov­ing eco­nomic growth. Of course, were the diplo­matic dis­pute to drag on for sev­eral months, with the sup­ply of food and goods en­ter­ing Qatar ei­ther af­fected or sub­jected to costlier reroutes, then the im­pact on con­sumer prices could be pro­found.

Fis­cal re­straint to con­tinue

Qatar recorded its sec­ond con­sec­u­tive fis­cal deficit in 2016, at -9 per­cent of GDP. Lower oil and gas rev­enues as a re­sult of the oil price down­turn have sig­nif­i­cantly af­fected the gov­ern­ment’s

fi­nances. In re­sponse, the au­thor­i­ties em­barked on fis­cal con­sol­i­da­tion, cut­ting cur­rent ex­pen­di­tures through freezes in public sec­tor pay, re­duc­tions in ex­pa­tri­ate em­ploy­ees and in the num­ber of min­istries. Fuel and util­ity sub­si­dies were cut, and non-es­sen­tial in­fra­struc­ture scaled back, as in other GCC states. This year should see fur­ther fis­cal re­straint, but with spend­ing tar­geted to a greater ex­tent at in­fra­struc­ture projects, many of which need to be com­pleted in time for the FIFA World Cup in 2022. The deficit is ex­pected to nar­row to -5.1 per­cent of GDP in 2017 and to -3.5 per­cent of GDP in 2018, thanks largely to an ex­pected im­prove­ment in en­ergy prices.

Debt mar­kets

Qatar sold more than $17 bil­lion in bonds and sukuk in 2016, $14.5 bil­lion of which was raised from in­ter­na­tional in­vestors. This in­cluded a $9.0 bil­lion triple-tranche USD-de­nom­i­nated in­ter­na­tional bond last May. Con­se­quently, cen­tral gov­ern­ment debt (gross) in­creased sig­nif­i­cantly in 2016 to 67.2 per­cent of GDP from 44.6 per­cent in 2015. Re­course to the debt mar­kets has helped Qatar’s fi­nances and in­jected much-needed liq­uid­ity into the bank­ing sys­tem.

In­creas­ing debt is­suance has not stemmed the de­cline in the coun­try’s in­ter­na­tional re­serves, how­ever, which fell to $34.4 bil­lion in April, a y/y de­cline of 3.6 per­cent. April’s fig­ure also rep­re­sents a fall of $11.6 bil­lion, or 25 per­cent, from the coun­try’s all-time high re­serve level of $46 bil­lion in Novem­ber 2014. Im­port cover is still around 6.6 months, how­ever, which is more than twice the 3 months rec­om­mended by the IMF for fixed ex­change-rate regimes.

Credit growth

In 2016, to­tal credit growth re­bounded from the sin­gle digit lows of early 2015 to come in at a ro­bust 12.1 per­cent, driven by public sec­tor lend­ing. By the end of April, credit growth was rang­ing around 9 per­cent y/y, with public and pri­vate sec­tor lend­ing growth at 15.9 per­cent y/y and 5.1 per­cent y/y, re­spec­tively. Pri­vate credit growth is be­low where it needs to be to get the pri­vate sec­tor fully en­gaged in the coun­try’s de­vel­op­ment plan. Real es­tate lend­ing is es­pe­cially lack­lus­ter, while de­mand from in­dus­try, con­trac­tors and re­tail con­sumers re­mains soft.

De­posit growth

Mean­while, the bank­ing sys­tem has wit­nessed dou­ble-digit de­posit growth since last De­cem­ber as oil prices firmed over that pe­riod. To­tal de­posits rose by 16.4 per­cent y/y by the end of April. Both public and pri­vate sec­tor de­posits have led the way, ris­ing by 0.3 per­cent y/y and 12.1 per­cent y/y, re­spec­tively. Mean­while, non-res­i­dent de­posits, though still in­creas­ing at the rate of 56 per­cent y/y, are not dou­bling as they were last year.

The im­prove­ment in liq­uid­ity is re­flected in the bank­ing sec­tor’s loan-to-de­posit ra­tio (LDR), which has fallen since the start of the year as de­posit growth has out­paced credit growth. As of April, it stood at 111.6 per­cent, hav­ing been as high as 119.9 per­cent in Fe­bru­ary 2016. The de­cline in gov­ern­ment de­posits (-11.1 per­cent) last year and ane­mic pri­vate de­posit growth (0.9 per­cent) has­tened com­mer­cial banks re­liance on for­eign funds and led to an in­crease in over­seas li­a­bil­i­ties. Net for­eign li­a­bil­i­ties reached QR 182.5 bil­lion ($50.1 bil­lion) in April, up 28 per­cent y/y. Al­most all of the li­a­bil­i­ties are non-res­i­dent de­posits, in­ter­bank funds and debt se­cu­ri­ties. They are also largely short-term in na­ture i.e. less than 12 months.

Most of the funds raised from over­seas have been di­rected to­wards lo­cal lend­ing, a sig­nif­i­cant por­tion of which is fi­nanc­ing for the gov­ern­ment’s in­fra­struc­ture projects, which tend to be long term. This large for­eign cur­rency mis­match plus the ex­tent of the bank­ing sys­tem’s re­liance on for­eign funds-38 per­cent of to­tal bank li­a­bil­i­ties and 167 per­cent of for­eign as­sets as of April-are part of the rea­son that Qatar found its long term sov­er­eign rat­ing low­ered. S&P cut it by one notch to AA- re­cently, fol­low­ing the coun­try’s diplo­matic iso­la­tion by Saudi Ara­bia and its other neigh­bors.

All its rat­ings (in­clud­ing the coun­try’s four largest banks) were placed on neg­a­tive credit watch, a move that was also echoed by Fitch. The key con­cern is the po­ten­tial for out­flows of ex­ter­nal funds should the cri­sis con­tinue un­re­solved. The UAE cen­tral bank, for ex­am­ple, is re­port­edly al­ready pre­par­ing in­struc­tions for UAE en­ti­ties to un­wind their ex­po­sure to Qatar, while SAMA, the Saudi cen­tral bank, has told banks not to process Qatari riyal-de­nom­i­nated pay­ments and to limit ex­po­sure to Qatar.

And while Qatari banks’ ex­po­sure to GCC-sourced funds is no more than 8 per­cent of to­tal for­eign li­a­bil­i­ties (QR 75 bil­lion or $26 bil­lion), the po­ten­tial for non-GCC funds to de­part in the event of a cri­sis es­ca­la­tion is acute; for­eign en­ti­ties may de­cide that ex­po­sure to Qatar is just not worth the risk. Rec­og­niz­ing this, Qatari banks are re­port­edly rais­ing their de­posit rates in re­sponse by as much as 100 bps over LIBOR.

This com­pares with an av­er­age dif­fer­en­tial of 20 bps be­fore the cri­sis. Mar­kets moved im­me­di­ately to re-price Qatari risk, with bor­row­ing costs up, spreads widen­ing and equities falling. The im­pact on the mar­kets has been pro­nounced, with strong repric­ing of Qatari risk: bor­row­ing costs have al­ready spiked, with in­ter­bank rates ris­ing 29 bps to 2.21 per­cent over the last week; CDS spreads have widened from 58 bps be­fore the cri­sis to 92.5 bps as of 12 June; yields on Qatari bonds (2021) are up 35 bps; and the QE in­dex, the main equities in­dex, is down 7 per­cent ytd at 9,135, hav­ing been in pos­i­tive ter­ri­tory in early June.

The riyal is also un­der pres­sure in the for­wards mar­ket, with spec­u­la­tion in­creas­ing that a to­tal fi­nan­cial boy­cott by Qatar’s neigh­bors would lead to fi­nan­cial out­flows and tighter credit con­di­tions and force the Qataris to aban­don the US dol­lar peg. We view this as highly un­likely, how­ever. The au­thor­i­ties are stead­fast in their com­mit­ment to the peg with more than enough re­sources to de­fend it.

The au­thor­i­ties, with $335 bil­lion in sov­er­eign wealth fund as­sets with the Qatar In­vest­ment Au­thor­ity (QIA), as well as $34 bil­lion in cen­tral bank in­ter­na­tional re­serves, would have am­ple fi­nan­cial re­sources to weather a fi­nan­cial dis­lo­ca­tion of this sort (as­set cov­er­age of Qatari banks’ GCC ex­po­sure would stand at 14 times). Fur­ther­more, the po­lit­i­cal and eco­nomic costs of a de-peg would dwarf any po­ten­tial ben­e­fit to Qatar.

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