QATAR'S DI­VER­SI­FI­CA­TION: HOW FAR DO WE NEED TO GO?

Con­sumers in the US and across Europe are cheer­ing as prices at the pump are fall­ing ahead of the hol­i­day sea­son, mak­ing travel cheaper. This is of course on the back of fall­ing oil prices – the WTI bench­mark hit a new low of QR280.28 ($77) a bar­rel from

Qatar Today - - INSIDE THIS ISSUE -

Di­ver­si­fi­ca­tion is to be pushed not only in the coun­try's eco­nomic out­put. Fi­nan­cial di­ver­si­fi­ca­tion, through rev­enue from its sovereign wealth fund, will have a big im­pact on the com­po­si­tion of Qatar's bud­get rev­enue.

The change is the re­sult of both cycli­cal and struc­tural fac­tors that are likely to persist, ac­cord­ing to in­dus­try ex­perts while the rapid change in en­ergy prices high­lights the im­por­tance of eco­nomic and fi­nan­cial di­ver­si­fi­ca­tion for Qatar.

But what ex­actly is driv­ing lower oil prices? On the cycli­cal side, re­gional in­sta­bil­ity ini­tially pulled up the price over the sum­mer pe­riod with panic buy­ing but the pic­ture quickly changed when sup­ply in trou­bled coun­tries turned out to be higher than ex­pected. Ad­di­tional sup­ply by Saudi Ara­bia along with a weaker than ex­pected global eco­nomic out­look trans­lated into down­ward pres­sure on oil bench­marks.

The big­ger pic­ture how­ever has to do with higher pro­duc­tion in the US, the world's largest con­sumer of oil, driven by new frack­ing tech­nol­ogy that has caused the tra­di­tional sup­ply-de­mand dy­nam­ics of decades past to break down: ac­cord­ing to the En­ergy In­for­ma­tion Ad­min­is­tra­tion, the United States' net im­port share of oil stands at around 30% in 2014 down from a high of 60% in 2005.

Is an oil price re­bound in the off­ing? On the cycli­cal side, down­ward pres­sure due to weak de­mand is likely to persist in the first half of 2015, ac­cord­ing to a re­cent re­port by the In­ter­nal En­ergy Agency. On the struc­tural side, “there may be some slow­ing [pro­duc­tion in the US], but it's not go­ing to be dra­matic if we stay around QR291.2 ($80) a bar­rel,” ac­cord­ing to a se­nior Vice Pres­i­dent at the Dal­las Fed­eral Re­serve Bank ( NY­times.com.)

Lower oil prices

Over­all, the GCC will likely have to live with lower oil prices in the medium term. In the longer term, the 2024 fore­cast for the US is for its share of im­ported oil to fall to 15%, half of its cur­rent level, ac­cord­ing to the US En­ergy In­for­ma­tion Ad­min­is­tra­tion.

As men­tioned ear­lier, th­ese chang­ing en­ergy price dy­nam­ics – which are also at work in the nat­u­ral gas sec­tor – im­ply that Qatar's re­liance on oil and gas needs to be re­duced fur­ther. One mea­sure of re­liance on hy­dro­car­bons is the rev­enue share of oil and gas in ex­ported prod­ucts.

Over 92% of Qatar's prod­uct ex­port rev­enue is from min­eral prod­ucts ( gas, crude and re­fined petroleum prod­ucts). For the re­main­ing 8%, the big­gest ex­port items are chem­i­cal prod­ucts (3%), plas­tics and rub- bers (2%) and met­als (1%). The over-re­liance on oil and gas im­plies that changes in en­ergy prices have a big im­pact on Qatar's prod­uct ex­port rev­enue.

But other coun­tries in the Gulf have shown that coun­tries' ex­port per­for­mance can im­prove with the right ini­tia­tives in place. The UAE, for ex­am­ple, has man­aged to di­ver­sify its ex­port base: min­eral prod­ucts ac­count for only 68% of its prod­uct ex­port rev­enue, fol­lowed sec­ond by met­als (20%) and third, ma­chin­ery (4%).

The UAE has man­aged to di­ver­sify its econ­omy through var­i­ous ini­tia­tives, not least of which is the cre­ation of highly suc­cess­ful eco­nomic zones. As Qatar em­barks on the cre­ation of three new eco­nomic zones, the right poli­cies can have a big im­pact on the coun­try's prod­uct ex­port per­for­mance, po­ten­tially boost­ing Qatar's non-hy­dro­car­bon rev­enue share by nearly 25 per­cent­age points.

Fi­nan­cial di­ver­si­fi­ca­tion

But di­ver­si­fi­ca­tion is not only to be found in the coun­try's eco­nomic out­put. Fi­nan­cial di­ver­si­fi­ca­tion, through rev­enue from its sovereign wealth fund will have a big im­pact on the com­po­si­tion of Qatar's bud­get rev­enue. The Qatar In­vest­ment Author­ity (QIA), es­ti­mated to be cur­rently hold­ing as­sets worth over QR618.8 bil­lion ($170 bil­lion), is a rel­a­tive new­comer among sovereign wealth funds but has ac­tively ac­quired eq­uity par­tic­i­pa­tion in banks, real es­tate and com­mer­cial en­ter­prises across the world. Oil and gas rev­enues cur­rently con­trib­ute 64% of gov­ern­ment rev­enue while in­vest­ment in­come ac­counts for only 14%. As the QIA grows in size, rev­enues from its in­come gen­er­at­ing as­sets will al­low Qatar's gov­ern­ment to be­come less de­pen­dent on the va­garies of the oil and gas mar­kets.

Fi­nan­cial di­ver­si­fi­ca­tion is also in­di­rectly linked to the do­mes­tic non-oil and gas sec­tors. In­deed, gov­ern­ment rev­enue stem­ming from cor­po­rate prof­its and other sources of rev­enue cur­rently con­sti­tute only 21% of over­all rev­enue.

When com­pared to re­gional bench­marks, di­ver­si­fi­ca­tion in prod­ucts ex­ported through its eco­nomic zones can in­crease the gov­ern­ment's rev­enue share from cor­po­rate prof­its. This would not only en­sure that Qatar re­mains on a sta­ble foot­ing in a pe­riod of low en­ergy prices, it would also al­low the gov­ern­ment to re­duce Qatar's fis­cal breakeven price for oil Over­all, the GCC will likely have to live with lower oil prices in the medium term. In the longer term, the 2024 fore­cast for the US is for its share of im­ported oil to fall to 15%, half of its cur­rent level, ac­cord­ing to the US En­ergy In­for­ma­tion Ad­min­is­tra­tion.

BY DR TAREK COURY

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