Rizikové faktory a výhľad

Qatar enjoys strong economic growth, agreeable levels of inflation, and substantial fiscal and current account surpluses. Moreover, policy continuity will foster political stability while vast foreign assets – built up thanks to an abundant endowment of oil and gas – buttresses macroeconomic stability.

Add to that the tolerable level of short-term external debt, and this explains why Credendo Group assesses the short- term political risk in Qatar as very limited (category 1 on a scale from 1 to 7). Looking further ahead, Credendo Group sees additional risk in the high level of gross external debt (even if Qatar remains a net foreign creditor) and vulnerability to oil and gas prices (even if diversification efforts are underway). Therefore, the MLT political risk assessment is somewhat less favourable (category 3).

Finally, Credendo Group observes limited systemic commercial risk in Qatar (category A on a scale from A to C). Apart from strong economic growth, positive elements here include the availability of credit to the private sector at limited cost and the sustainable exchange rate peg of the Qatari riyal to the US dollar. On the negative side, the business environment remains to be improved.

Fakty & Čísla

Pozitíva

  • Domestic stability
  • Strong growth
  • Natural resource abundance
  • Vast financial reserves

Negatíva

  • Lack of transparency
  • Vulnerable to geopolitical tensions
  • Oil and gas dependency
  • High external debt

Main export products

  • Hydrocarbons (81.5% of 2013 current account receipts), investment income (4.1%), transport services (3.6%), tourism (2.2%)

Income group

  • High income

Per capita Income

  • USD 85,550

Population

  • 2.2 M

Description of electoral system

  • Consultative assembly: first elections have been repeatedly postponed
  • Municipal councils: 4-year term, next elections scheduled for 2015

Head of Government

  • Prime Minister Sheikh Abdullah Bin Nasser Bin Khalifa al- Thani

Head of State

  • Emir Sheikh Tamim Bin Hamad al-Thani

Hodnotenie rizikovosti krajiny

Wealth fosters domestic stability

The Gulf state of Qatar is ruled by the al-Thani royal family, whose political prominence dates back as far as the mid-19th century. As such, the dynasty outlived both Ottoman control and colonisation by the UK, of which Qatar became independent in 1971. The current Qatari head of state is Emir Sheikh Tamim. He came to power following the voluntary abdication in June 2013 of his father, Sheik Hamad. Notably, such an orderly leadership transition is unusual in the region (where most leaders rule for life) and even contrasts with past Qatari experience. In fact, Sheikh Hamad himself staged a bloodless coup against his father, Sheikh Khalifa, to seize power in 1995. That being said, still-existing factionalism within the al-Thany family is unlikely to bring about a new coup in the near future.

Major policy changes are not in the cards either. Sheikh Tamim has been involved in decision-making for some years already, and the current strategy of maintaining high levels of domestic spending has proven successful in sustaining public support for the government. Qatari citizens – unlike many of the foreign workers that make up some 90% of the labour force of 1.65 million and often suffer appalling working conditions – have indeed benefited substantially from the country’s huge hydrocarbon wealth (see below). Unemployment has remained low and GDP per capita is now among the highest in the world (see graph).

GraphQatar1EN

Economic success has diverted attention from the lack of political participation in Qatar, which ranks 136th out of 167 countries and is categorised as an “authoritarian regime” in the 2014 EIU Democracy Index. Organised opposition groups are banned and elections have so far been held only at the municipal level. Indeed, even though the constitution approved by popular referendum in 2003 calls for two-thirds of the members of the consultative assembly to be elected by universal suffrage, a legislative election never took place. It was postponed most recently upon the new emir’s coming to power in 2013.

Small country, big geopolitics

The al-Thani hold on power has been underpinned not only by spending largess, but also by support for political Islam abroad. Backing of Islamist groups in Egypt, Libya and Syria has indeed effectively curtailed domestic critique of the emirs’ “excessively Westernised” development policies.

However, the active foreign policy has strained Qatari relations with neighbouring Saudi Arabia and the United Arab Emirates (UAE), who consider the Islamist groups a serious threat to their domestic stability. Recent developments such as the demise of the Muslim Brotherhood regime in Egypt and the US-led intervention against the Islamic State group in Syria and Iraq indicate that Qatar may have overplayed its hand. Acknowledging this,   in order to safeguard relations with the US (see below) and counter allegations of being a state sponsor of terrorism, Sheikh Tamim has of late demonstrated more willingness to follow Saudi Arabia’s lead on regional security issues. For now this has improved cooperation within the Gulf Cooperation Council (GCC) – which in addition to Saudi Arabia, the UAE and Qatar includes Kuwait, Bahrain and Oman – but conflicting interests imply that tensions are likely to resurface in the future. In fact, because Qatar remains reluctant to crack down on its network of Islamist financiers, the proxy war it is engaged in with the UAE in Libya (where Nationalists are backed by the UAE while Islamists are funded by Qatari sponsors) is unlikely to abate. Yet even though the tense  relations may lead to some trade disruptions and to Qatari firms being disadvantaged in other GCC countries, an escalation into military conflict remains highly unlikely.

Chiefly because Qatar and Iran share the world’s largest gas field (see below), bilateral relations between both countries have been cordial and pragmatic. That is not to say that Qatar is immune to the tensions between Iran and those GCC members – notably Saudi Arabia – that are extremely suspicious of Persian military ambitions and potential inciting influence on their Shia minorities. The Qatari economy for example remains vulnerable to cargo disruptions in the Strait of Hormuz, which serves as a transport route for about one fifth of global traded oil and liquefied natural gas (LNG).

In general terms, Qatar’s geopolitical moves reflect its desire to gain international influence so as to ensure that neither Saudi Arabia nor Iran becomes too dominant in the region. As such, the country has actively positioned itself politically not only by backing foreign Islamist opposition groups in the wake of the Arab uprisings of 2011, but also by acting as a mediator in various conflicts (Lebanon, Palestine, Pakistan and Yemen). Moreover, Qatar has sought to acquire international status through strategic investments. Extensive natural resource wealth has bankrolled the country’s sovereign wealth fund, the Qatar Investment Authority (QIA), which now has participations in various high-profile Western and Asian companies (Barclays, Volkswagen, Shell...). Also, al- Thani family funds have been instrumental in the rise to prominence of Doha-based broadcaster Al Jazeera.

All in all, Qatar faces limited external risks. This is explained to a large extent by an increasingly close strategic relationship with the US, which has withstood concerns about Qatari backing of foreign Islamists. Qatar hosts important US military basis and acts as a US-ally in the region. In return, the US guarantees security.

Gas-fuelled growth engine

Over the past decade, economic performance in Qatar has been phenomenal. Real GDP on average expanded by 12% per year and as a result, the country has become one of the richest in the world. Meanwhile, despite the combination of strong growth and an accommodative monetary policy – imported from the US to preserve the riyal’s peg to the dollar in the context of a relatively open capital account – inflation has dramatically declined on the back of depressed rents. Down from double digits as recent as 2008, the rate now amounts to less than 3% and – despite potential overheating pressure (see below) – stands to stay low in the years ahead.

Qatar’s extraordinary wealth has everything to do with natural resource abundance. For one thing, the country possesses oil and is a member of the OPEC cartel. According to the US Energy Information Administration, Qatar produced just over 2 million barrels of oil per day in 2013, making it the 14th largest supplier in the world. At that production level, proved reserves would still last some 33 years. Still, this endowment pales compared to Qatar’s enormous natural gas reserves, only surpassed by Russia’s and Iran’s (see graph). If gas production were to continue at the 2012 level, when Qatar was the sixth producer worldwide, these reserves would still last for more than a century and a half.

GraphQatar2EN

Gas production has pretty much continuously increased over the past twenty years. Yet though it has the  potential to rise further, output is expected to stagnate beyond 2015. That is mainly due to the moratorium on new projects in the North Field that Qatar imposed in 2005 in order to allow time to define an optimal field  development strategy. To see the relevance of this policy, note that the North Field – which is located in the Persian Gulf and shared between Qatar and Iran – is the largest conventional gas reserve in the world.

Oil and gas are all-important for Qatar. This is also illustrated by the fact that the hydrocarbon sector represents about half of the economic output, more than 80% of current account receipts and almost two-thirds of government revenues. Yet while the sector has in recent years benefited from high commodity prices, the effects of the moratorium are being felt. Since 2012, annual economic growth has barely surpassed 6% of GDP. That is still a healthy figure, but less than half of the rate of expansion observed during the six prior years.

Qatari hydrocarbon dependency obviously also raises concern about the recent drop in oil and gas prices. Yet because the impact will be mitigated by large reserves (output could be increased), low production costs, export market diversification (most gas is exported to Asia and Europe, where gas prices have remained much higher than in the US), beneficial long-term contracts (at relatively high prices and with guaranteed quantities) and significant financial buffers (see below), the short-term financial risks are low. That being said, lower prices will clearly weigh on fiscal and external balances, thus demonstrating the longer-term benefits of increased economic diversification.

Fiscal support for diversification efforts

The moratorium on new gas development projects has made for economic growth to become increasingly non- hydrocarbon sector-based. Moreover, considering the prospects of falling oil output, flat gas production and depressed energy prices, this is unlikely to change in the years ahead. Booming sectors include construction, trade, government services and finance. But it is increased public investment that has most firmly underpinned strong economic performance. This reflects the Qatari authorities’ ambitious economic diversification plan, exemplified by the successful bid to organise the FIFA World Cup in 2022. All in all, public infrastructure projects lined up to be completed before 2022 – which apart from stadiums include utility upgrades, a metro system, railways, an international airport and a new port – are worth more than 100% of the 2013 GDP.

Along with lower oil and gas prices, spending of this magnitude obviously has a significant impact on public finances. Hence, while the energy bonanza facilitated significant fiscal saving since the turn of the century (with revenues rising more quickly than expenditures), the budget surplus declined steeply from 14.4% of GDP in 2013 to 9.2% in 2014, and the expectation is for a 1.5% deficit in 2015 and one of 5.3% in 2016. Public indebtedness will continue its downward path, however. Given the expectation of a still solid annual economic expansion of about 7%, the public debt-to-GDP ratio stands to decline from 30.6% in 2014 to 24.9% by 2016 (see graph). Moreover, net public debt remains negative when taking into account sovereign wealth fund QIA’s large assets.

GraphQatar3EN

Nonetheless, the risk of sustained lower energy prices highlights the need for fiscal consolidation and diversification. Acknowledging this, the Qatari rulers have taken modest steps to scale back on energy subsidies and public sector wages. Also, they want to eliminate the large non-hydrocarbon fiscal deficit by 2020, among other things by broadening the tax base and boosting investment income.

Uncertainty about the diversification efforts’ success constitutes another important risk. While it is a step in the right direction that the government intends to reassess the merits of projects in the pipeline, more is needed to improve the efficiency of public spending. In particular, public finance sustainability would benefit from the introduction of a comprehensive public investment management system and a more detailed budgeting framework.

To spur economic diversification, the Qatari authorities have complemented their public investment strategy with efforts to further develop financial markets. Partly reflecting recent improvements in sector regulation and oversight, the banking system has remained sound (even if some institution had to raise capital as a result of a rapid rise in lending). Credit to the private sector has continued to grow strongly, also aided by a slowdown in growth of credit to the public sector due to prudential restrictions imposed by the Ministry of Finance.

In line with IMF advice, various such macro-prudential policies have of late gained ground. This is evidenced for instance by the fact that inflation is forecasted to remain low, even though high domestic demand – related to public investments and the need to accommodate the needs of the growing population – may create supply bottlenecks. Indeed, should overheating occur, policymakers are expected to implement adequate measures such as expenditure smoothing or liquidity withdrawal.

External assets surpass liabilities

Unsurprisingly, the recent period of booming hydrocarbon production and prices has also benefited Qatari external accounts. With the sole exception of 2009 – when the effect of the global financial crisis was felt – the current account surplus has continuously surpassed 20% of GDP since 2001. This has allowed Qatar to acquire foreign assets, as indicated by the 2013 outward FDI flow equivalent to 4% of GDP. That being said, softer oil and gas prices stand to quickly erode the surplus in the years ahead, while projected hikes in investment-related imports and remittance outflows will not be helping either. From almost 31% of GDP in 2013, the current account surplus is estimated to have fallen to 23% in 2014, and stands to further decline to a mere 1% in 2015 (see graph). Export diversification could help reduce current account volatility, but requires measures to further competitiveness. Indeed, while Qatar honourably ranks 16th in the latest WEF Global Competitiveness Index (second in the region only to the UAE), it still lags in terms of educational quality and ease of setting up a business.

GraphQatar4EN

The adverse evolution of energy prices has also worsened the external debt outlook. As such, the downward trend observed during the last two years will be reversed and it is expected that by the end of this year, gross external debt will again amount to 87.5% of GDP, the same high level as at the end of 2010. External debt service payments (expressed as a share of current account receipts) will remain low, however, thus limiting financial risk.

When taking into account Qatar’s external assets, the picture becomes even rosier. Foreign exchange reserves covered almost six months of goods and services imports at the end of 2014, a solid level. So even though these reserves are expected to significantly decline during 2015 as they will be needed to defend the riyal’s peg to the US dollar, a liquidity crisis is very unlikely. That point is reinforced by the fact that sovereign wealth fund QIA holds a vast amount of additional foreign assets, even if limited transparency regarding the fund’s balance sheet (as well as statistics in general, as the IMF complains) raises questions about its liquidity profile and asset valuation. All in all, it is clear that foreign assets far outweigh total external debt. In fact, Qatar’s net foreign asset position is estimated to amount to more than 110% of GDP. This clearly reduces vulnerability to external shocks, but of course does not eliminate it.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com