THE YEAR IN RE­VIEW

De­spite fall­ing oil prices, the econ­omy in Qatar main­tained a steady rate of ex­pan­sion through­out 2014, with tar­gets of even more ro­bust growth this year, fu­eled by the non-hy­dro­car­bon sec­tor.

Qatar Today - - INSIDE THE ISSUE -

De­spite fall­ing oil prices, the econ­omy in Qatar main­tained a steady rate of ex­pan­sion through­out 2014, with tar­gets of even more ro­bust growth this year, fu­elled by the non-hy­dro­car­bon sec­tor.

Qatar, the world's largest ex­porter of liq­ue­fied nat­u­ral gas (LNG) and one of the smaller oil pro­duc­ing coun­tries, es­ti­mates that the non-hy­dro­car­bon share of GDP will over­take that of oil and gas in 2015. Ac­cord­ing to of­fi­cial fig­ures in De­cem­ber, GDP is fore­cast to grow by 7.7% in 2015, com­pared with a pro­jected 6.3% in 2014. The Min­istry of Devel­op­ment Plan­ning and Statis­tics said that the over­all fis­cal bal­ance is ex­pected to stay in sur­plus in 2015, though it is set to nar­row as public spend­ing gath­ers pace. Do­mes­tic risks to the econ­omy are cen­tred around the scale and com­plex­ity of Qatar's planned in­fra­struc­ture projects be­fore it hosts the 2022 FIFA World Cup foot­ball tour­na­ment, the min­istry said.

How­ever, in­vestors across the re­gion have taken flight over a gloomy out­look for oil prices in 2015, with the Qatar Ex­change slump­ing in the fourth quar­ter and early Jan­uary af­ter post­ing strong growth in the first three quar­ters of 2014.

Gas over oil

Qatar may feel less pain than most other ma­jor pro­duc­ers due to its fo­cus on gas over oil in terms of ex­port com­modi­ties. With much of its LNG ex­ports locked in by long-term con­tracts, it is less vul­ner­a­ble to mar­ket fluc­tu­a­tions; nonethe­less, his­tor­i­cally gas prices lag oil prices by six months. An ad­di­tional fac­tor sup­port­ing earn­ings is that most of its LNG out­put is shipped to Asia, which is still ex­pected to post solid growth in 2015, thereby main­tain­ing de­mand for en­ergy.

With the price of Brent crude plung­ing from a mid-year high of $115 (QR422) to be­low $50 (QR180) at the start of Jan­uary, the fi­nances of en­ergy ex­porters around the world are un­der pres­sure. At the end of De­cem­ber, credit rat­ings agency Moody's put

Qatar's break-even oil price at $59 (QR216), one of the low­est of any ma­jor pro­ducer, while its bud­get this year is based on an as­sumed oil price of $65 (QR240).

In spite of the non-hy­dro­car­bon sec­tor be­ing the pri­mary driver of growth in re­cent years, hy­dro­car­bon re­ceipts gen­er­ated about 86% of the gov­ern­ment's rev­enues in 2013 and have been largely re­spon­si­ble for Qatar's fis­cal sur­pluses, ac­cord­ing to the re­port. Moody's added that oil prices could be­come a key risk to the eco­nomic out­look if their slide con­tin­ued, but noted that the wider econ­omy was likely to be shielded by the strength of state fi­nances.

In­fra­struc­ture boom

On­go­ing in­vest­ments in in­fra­struc­ture are pro­vid­ing fur­ther stim­u­lus. Some of th­ese are re­lated to host­ing the 2022 World Cup, while oth­ers are be­ing driven by in­creased spend­ing on trans­port and lo­gis­tics. Just un­der $27 bil­lion (QR100 bil­lion) worth of large-scale in­fra­struc­ture projects were awarded in 2014, ac­cord­ing to a Stan­dard Char­tered re­port, a fig­ure that is set to rise to around $34 bil­lion (QR125 bil­lion) in the com­ing year as Qatar moves to meet its ex­pand­ing so­cial and eco­nomic needs.

While th­ese in­vest­ments will sup­port growth in the con­struc­tion sec­tor, the grow­ing pace of devel­op­ment is putting up­ward pres­sure on both build­ing costs and the price of land, which was 73% higher year-on-year as of Oc­to­ber 2014. Much of this in­crease in con­struc­tion ac­tiv­ity was due to the sharp rise in pop­u­la­tion dur­ing 2014, which ex­panded by some 10% - a re­sult of both nat­u­ral growth and an in­flux of for­eign work­ers to sup­port new projects.

Although greater de­mand for hous­ing and ser­vices, along with ris­ing land and ma­te­ri­als costs, will seep into the con­sumer price in­dex (CPI), in­fla­tion re­mained steady in 2014, run­ning at an an­nu­alised 3.6% at the end of the third quar­ter. How­ever, this could rise, as in­creases in rental and ac­com­mo­da­tion costs, which have a sig­nif­i­cant weight in the CPI, have wit­nessed up­ward move­ment in the fi­nal months of the year.

Strong fis­cal fun­da­men­tals

The state is also tak­ing steps to re­duce bor­row­ing and pay down debt. Public loan lev­els fell 6% in the year-to-date in early De­cem­ber, ac­cord­ing to a Mor­gan Stan­ley re­port, while to­tal sys­tem loans were up 9%, the slow­est rate in nearly four years. De­spite the slow­ing of public bor­row­ing, the re­port fore­cast pri­vate loan growth to con­tinue at a strong pace, in the 10-20% range, with cor­po­rate credit de­mand to re­main el­e­vated. As of De­cem­ber, al­most 60% of do­mes­tic loans held by Qatari banks were taken out by the pri­vate sec­tor, up from 55% the year be­fore.

Much of this pri­vate bor­row­ing has been used to fund in­vest­ments and growth in the non-oil and non-state sec­tors of the econ­omy. As of early De­cem­ber, pri­vate sec­tor growth in 2014 was ex­pected to top the 11% seen in 2013 and nearly dou­ble the rate of GDP ex­pan­sion, ac­cord­ing to the Prime Min­is­ter, Sheikh Ab­dul­lah bin Nasser bin Khal­ifa Al Thani. Nonethe­less, a re­cent re­port by the IMF noted that banks in the GCC will strug­gle to di­ver­sify their credit port­fo­lios due to the de­pen­dence of the non-oil sec­tor on the hy­dro­car­bon seg­ment, with banks' net in­come highly cor­re­lated to oil-driven fis­cal de­vel­op­ments.

Higher do­mes­tic de­mand and rel­a­tively stead­ier en­ergy earn­ings should see Qatar's econ­omy main­tain solid growth into 2015, as pri­vate sec­tor ac­tiv­ity con­tin­ues to ex­pand and state-funded in­vest­ments broaden the base of eco­nomic devel­op­ment

In spite of the non­hy­dro­car­bon sec­tor be­ing the pri­mary driver of growth in re­cent years, hy­dro­car­bon re­ceipts gen­er­ated about 86% of the gov­ern­ment’s rev­enues in 2013 and have been largely re­spon­si­ble for Qatar’s fis­cal sur­pluses, ac­cord­ing to a Moody's re­port.

BY OLIVER CORNOCK The au­thor is the Re­gional Edi­tor of Ox­ford Busi­ness Group.

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