Qatar Growth Prospects Healthy

Transcription

1 Report Series Qatar Growth Prospects Healthy July 2014 Executive Summary Economics Department Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia (London) This and other publications can be Downloaded from The economy maintained its robust expansion in 2014 Q1 with the nonhydrocarbon sector propelling growth to 6.2 percent on strong performances from construction, government services, trade, restaurants & hotels and finance. The moratorium on natural gas production has kept hydrocarbon contribution broadly flat over 2013, turning negative at the end of the year thanks to receding oil production. Though it is due to be reviewed next year, the moratorium may well be extended as the government focuses instead on delivering a formidable pipeline of infrastructure projects. We expect hydrocarbons to remain broadly flat, with some potential positive impact from the new Barzan gas-to-liquids plant at the back end of Strong public investment spending should push growth to 6.7 percent in 2014 and 6.9 in The government s investment program will be one of the key determinants of economic performance over the medium-term. The scale of investment relative to the size of the country, and the looming deadline of the 2022 World Cup are challenging. The authorities are mindful of the issues that accompany such a rapid expansion of activity, particularly overheating, over-spending and poor yielding investments. Inflation rose to 3.4 percent in May, with the pressures from rising rents (7 percent) partly alleviated by soft global commodity prices. We expect commodity prices to continue to soften through 2015 as the impact of additional slack from China s deleveraging and anticipated strengthening of the USD are offset by strong population growth and project spending. On balance, we forecast moderate inflation at 3.4 percent in 2014 and 4 percent in Both house prices and the stock market surpassed their pre-crisis peaks earlier this year before the QSE fell 13.7 percent in June. Real estate price growth seems to be in line with fundamentals, though the dynamics are clouded by the lack of data. In the context of low global interest rates, both the real estate sector and the QSE are garnering more attention from international investors, attracted by strong economic performance, a stable exchange rate and large external buffers. The Qatar Stock Exchange has been upgraded from frontier to emerging by the MSCI and the cap for foreign ownership has been raised to 49 percent, helping the bourse to hit a historic high at the end of May this year. The banking sector is in good health and is well positioned to take advantage of increased demand for project finance and related facilities as it remains well capitalized and highly liquid. NPLs are low and the loandeposit ratio has fallen to 1.

2 Qatar f 2015f 2016f Nominal GDP ($bn) Real GDP growth (% change) Inflation (average %) Current account (% GDP) Fiscal balance (% GDP) External debt* (% GDP) M2 (% y-o-y)** Private sector credit(% y-o-y)** Source: QSA; f Samba forecast *including banks **June 2014 Qatar Real GDP (% change) % GDP Q Q Q Q1 Oil & gas Finance Govt Services Construction Manufacturing Trade, restaurants & hotels Transport & Communication Total GDP Hydrocarbon Non-Hydrocarbon Source: QSA List of significant projects Project Value ($bn) Sector Lusail mixed use development 33.0 Real estate Qatar integrated rail project 28.8 Transport Barzan Gas Development 10.3 Oil & gas Barwa City 8.3 Real estate Education City 6.6 Education Ras Laffan Olefins Complex 6.0 Petrochemicals Msheireb 5.5 Real estate FIFA World Cup Stadiums 4.0 Construction Broad-based non-hydrocarbon growth continues to propel economy The economy continued its strong growth in 2014 Q1, expanding by 6.2 percent on a 12 month basis, up from 5.5 percent in 2013 Q4. The growth was driven exclusively by the non-hydrocarbon sector (see chart), which is testament to the plans set out in the National Development Strategy. As the chart shows, finance, construction, trade, restaurants & hotels and government services each contributed between percentage points to GDP growth. These sectors have benefited from large government spending projects aimed at improving the country s infrastructure whilst proving a catalyst for the diversification of the economy. This spending is forecast at $210 billion up to $160 billion of which will be financed through the budget. The hydrocarbon sector detracted 0.5 percentage points from the total growth figure, mainly due to receding oil production and the moratorium on natural gas production. Oil production has fallen due to the maturing of oil fields such as Dukhan, Maydan Mahzam and Bul Hanine which were all first exploited more than thirty years ago. Recent reports have suggested that there will be an $11 billion redevelopment of the Bul Hanine field. The minister for energy said that the redevelopment would double the production rate (currently around 45,000 b/d) and prolong the lifespan of the ageing field. The new Barzan gas-to-liquids plant may also provide impetus for some hydrocarbon growth, but not until The moratorium on natural gas production is set to be reviewed in There has been no news of any imminent development plans as the government may well extend the suspension as they turn their focus to the infrastructure required for the World Cup in We expect hydrocarbon growth to be broadly flat - between 0 and 1 percent to the end of 2015, with overall GDP growth to hold at around 6.7 percent in 2014 and 6.5 percent in 2015 as infrastructure spending is ramped up and population growth underpins aggregate demand. Projects market dominated by transport and real estate as set out in the NDS The projects market is dominated by transport and real estate, with a quarter of all Qatar s infrastructure spending being dedicated to its rail projects in coming years. This includes the integrated rail project which comprises of the Doha Metro, Lusail Light Rail Transit and the overland railway. This will help to ease the congestion on Doha s roads, where at peak times, trucks are banned from the capital. Work started on the Doha Metro last year, with plans for 37 stations and 100km of track completed by 2019, with the other 55 stations online by Other transport projects include the $12.7bn worth of road infrastructure and the 2

3 Sharq crossing ($12bn), which will link Doha s new airport with the city s cultural district and the business area of West Bay. The Hamad international airport was originally scheduled for a soft opening in April 2013 but only started cargo operations in Janurary 2014, and opened its doors to passengers in May Project Management The authorities have recently suggested that there will be a revision of the spending plan for the years leading up to the World Cup, as a certain number of projects will be prioritised in order to meet looming deadlines. Qatar has also recently announced that it will be cutting the number of World Cup stadia to 8, the minimum required by FIFA, from a more ambitious target of 12, as set out in the bid. To date, authorities have kept prices stable and growth robust amidst significant project spending, but with the scheduled pipeline of projects burgeoning, it presents a significant feat for the emerging economy, especially when the total spending equates to 110 percent of last year s GDP. The challenges can be broken down into three main issues, which will be addressed in this report, these are: over-spending, inflationary pressures, and overcapacity. With these pressures in mind, the IMF has stated that Qatar would benefit from further strengthening its medium-term fiscal policy and enhancing the framework for managing public investment. This would include putting in place rigid publicinvestment plans, setting clear appraisal standards and routine economic reviews of major projects. It has also recommended enhanced transparency on the bidding process, with more data available on bid-price, number of applicants, etc. Another Fiscal surplus in FY2013/14 The first challenge the authorities will be wary of is overspending. The projects size and tight deadlines makes them liable to cost overruns. The authorities have recognised this as an obstacle and announced in the 2014/15 budget that ministries must outline their budgets up to 2016/17 and share progress on the execution of ongoing projects. Though it is clearly an issue that the authorities are keeping an eye on, the government in Qatar has built up substantial fiscal surpluses and have $41.7 billion in liquid foreign assets, which will enable it to finance many of these projects, reducing the need for external funding and minimizing the impact of any cost overruns. In the first half of FY2013/14, government revenue came in at $31.6 billion (54 percent of the full year budgeted amount) and spending came in at $24.9 billion (44 percent of full-year budgeted amount). From these figures and previous trends, we anticipate a fiscal surplus of $25.3 billion, or 13.4 percent of GDP in 2013/14. We foresee hydrocarbon revenues once again driving the surplus as receipts from oil and 3

4 gas amounted to 94 percent of the full-year total at the half-way stage. Capital spending was at just 26.5 percent of the full-year budgeted amount. We expect this trend to extend to the full fiscal year as project implementation difficulties hold back capital spending. The half-year figures also affirm a trend of rising corporate income tax, which shows the diversification away from hydrocarbon revenues is gaining traction (though due to stronger spending, we still anticipate the non-hydrocarbon deficit to stand at around 13 percent), up from 8.7 percent the year before. We expect the non-hydrocarbon deficit to narrow over the next few years. Expansionary yet Prudent Budget for 2014/15 In a commitment to the outlined spending plans - the latest budget for FY2014/15 represents another expansion, albeit a modest one on the previous year. Expenditure is budgeted at $58.2 billion, which constitutes a rise of 3.7 percent over our estimated out turn for 2013/14 with spending on major infrastructure projects set to increase by 17 percent from last year s budget. On the revenue side, the oil price assumption is a very conservative $65/b, meaning that the budgeted surplus is just $1.95bn (1 % of GDP). In fact, we project a much higher surplus than the authorities. Based on our oil price projection of $107/b, we expect a surplus of $24bn (11.2 percent of GDP). On the spending side, we see the ability to execute the outlined capital spending as the main uncertainty. The figure has fallen short of budgeted amounts in recent years. This is in part testament to the emphasis placed on making investments more efficient, but this effort needs to be balanced against the needs of the World Cup, which probably come second. With capital out turn data for first half 2013/14 at just $5bn, we are sceptical of the ability to hit the $23.3 billion target. Although actual capital spending tends to undershoot budgeted outlays, there may still be cost overruns on individual projects, though the data are limited. In general however, the new rules on project progress reporting and prudential reviews of project importance suggest that the government is taking an appropriately active stance against the prospect of overspending. Inflation muted, but upside risks remain The second issue related to large-scale project spending is that of high inflation. Against the backdrop of such expansionary investment spending, rapid inflation can be the most obvious pressure point of the economy. Though it ticked up in May, to 3.4 percent, the headline CPI figure is still benefitting from soft 4

5 (Meed) international commodity prices. We expect imported inflation to remain low as the dollar strengthens over the next two years, driving down prices via the pegged currency. The slowdown in investment in China will also help keep prices soft as countries that are plugged into the China supply train add slack to the market for construction related commodities such as steel. The upside risk to the commodity price outlook is based around the concentration of demand in the Gulf region. Locally, there may be greater competition for specific construction materials as a number of Gulf countries ramp up the value of major projects; MEED estimates that the value of projects planned or underway in the region currently stands at $3,293 billion, up 9.4 percent in the last 12 months. The minister of economy and trade stated that certain materials were being stockpiled to mitigate against this threat. The main driver of domestic inflation is that of rents, which has a 32 percent weight in the consumer price index. Rents grew by 7 percent in the year to May, having averaged 6 percent for the last 12 months. Rents are being driven primarily by strong population growth, which is unlikely to abate over the medium-term. Whilst we expect benign international factors to help keep a lid on prices, strong demographics and a congested projects market will see inflation to climb to 4 percent in Real estate prices surge but fundamentals appear to be solid A sharp rise in asset prices also has the potential to destabilise the economy s robust growth. Since the trough in June 2009, the average price of real estate in Qatar has rebounded by percent as of March 2014, and now stands 9 percent above its pre-recession peak. The pace of growth was especially marked in 2013 when prices rose by an average of 20 percent, though this is still well below the exuberant rate of increase seen prior to the crash in Year-on-year growth has moderated somewhat since the turn of the year, averaging 14.5 percent from January to March. But clearly the dangers of any emergent real estate bubble need to be carefully assessed. It is important to distinguish between growth underpinned by solid demand/supply dynamics and a rather more speculative and potentially destabilising element. Population growth and project spending point to strong fundamentals which are driving the house-price growth of recent years. However, Qatar s real estate market is also an asset class, which has seen increased investor appetite of late. It is not easy to quantify the demand from investors, but the particularly strong house-price growth in designated areas that allow foreign ownership (The Pearl, West Bay etc) point to a significant contribution. 5

6 Another sign of such speculation is off-plan sales, which are common in Qatar, and involve selling real-estate before construction has been completed. Off plan sales are a typical feature of property price bubbles, often becoming widespread as the frenzy to own property takes hold. Speculators take advantage of this desire by buying up the rights to unbuilt property and selling it on to make a profit (flipping). However, non-qataris must both buy and sell through the developer, perhaps allowing the process to be better regulated. If flipping does become a problem then the central bank may have to take measures such as those seen in the UAE, such as increasing property transaction costs. The authorities will be vigilant as to any possible price misalignments given the crash in 2008/9, which prompted a sharp correction in house prices of 54 percent over 9 months. Rapid house-price growth is not unique to Qatar; global house prices have attracted attention recently for being above their historic averages, with the IMF producing a new house price watch. The Central Bank of the UAE has also released a financial stability report warning of an overheating housing market in Dubai; though the rate of house price increase in Dubai surpasses that seen in Qatar. The other demand-side factor underpinning the growth in realestate prices is population growth. The population has expanded by 28.4 percent since May 2010 continuously outstripping the growth in the housing stock. There is reason for caution: although the total population in 2010 was 1.6 million, only 779,426 of these individuals lived in households, the implication being that the 820,000 others were housed in labour camps. Therefore the correlation between population growth and housing demand is perhaps not as strong as it might be. Accompanying this is the aforementioned demand added by investors which appears to be significant but the lack of data limits the clarity of the situation. In the 2010 census, there was a sizeable surplus of housing units in the country as a whole, as compared to households (see chart). House prices actually rose by 18.8 percent in 2010 and by 19.6 percent in 2011, suggesting that this apparent slack in the housing market was filled at least in part - by investors. The supply outlook is mixed, with data scarce. According to a report by Colliers, Doha s residential market comprised 129,000 units in 2014, whilst demand is estimated at 177,000. Taking into account the construction pipeline, Colliers projects the cumulative supply of residential units in Doha to be 151,000 by They foresee a compound average growth rate of 3 percent from 2014 onwards, lower than the 8 percent seen previously. The implication that the supply of housing stock will continue to grow at a slower pace than the population, gives some support 6

7 for further price rises. Colliers state that Doha is now a significantly undersupplied market. Adding to this is the ongoing pipeline of infrastructure project which is eating up land in Qatar, exacerbating the perceived supply shortage. This has been particularly prominent around Doha, where land sales accounted for 77 percent of total real estate transactions in Q The IMF recently stated that assessing when house prices are out of line with economic fundamentals is as much art as science. Without up-to-date population data it is hard to get a firm picture on the supply/demand balance, and how much influence speculative investors are having on price rises. There is little doubt that real estate in Qatar is now an asset class and is therefore exposed to swings in investor sentiment. But we also note that Qatar s house-price growth has been relatively modest when compared to some of its GCC neighbours. Coupled with the strong demand-side population growth and supply-side project expansion eating up land, we are reasonably comfortable that the real-estate market is in line with fundamentals. However, the data issues provide reason for caution, and the need for a more highly regulated environment and an improvement to the country s early warning system. Early warning system The IMF emphasize the need for comprehensive real estate data Indeed, the IMF has concluded that it would be prudent for the Qatari authorities to deepen their monitoring of the real estate sector. The recommendation is to look for house price misalignment through the price-to-rent ratio, price-to-income ratio, and the use of a regression model of the changes in house prices. The IMF notes a point for improvement would be a closer monitoring of asset valuations, households balance sheet positions, mortgage market characteristics and the importance of real estate-related activity to the economy (estimated impact of house price drop on GDP). Data on housing vacancies by segment should also be collected and monitored. The Fund does however praise the authorities for what they say is their proactive approach to addressing such issues. Precedents point to medium-term over-capacity challenges The third potential concern related to the investment spending is that of avoiding overcapacity in the medium-to-long term. When bidding for the 2022 World Cup, Qatar promised to adhere to the minimum requirements needed to facilitate the world s most watched event, attended by hundreds of thousands of fans. Many of these requirements are in line with the general infrastructure plans of the country as set out in the NDS, such as road and rail infrastructure, etc. However there are specific elements to the bid that may struggle to find an end user once the World Cup has 7

8 Hosting the World Cup presents challenges finished, or indeed if the World Cup fails to take place in Qatar. The fact that some facilities specific to the World Cup will not be used to their full capacity thereafter is a problem common with host cities of major sporting events and not a prospect unique to Qatar. For example, following the 2010 World Cup in South Africa, Cape Town found itself with an over-supply of luxury hotels and the average revenue per room declined substantially in the years that followed. On paper, the requirements present a considerable challenge of over-capacity. The number of hotel rooms, as required by FIFA, is 60,000. According to the Qatar Tourism Authority, the number of rooms in the country at end 2013 was just 13,551. These rooms achieved an average occupancy rate of 65 percent over 2013 by attracting 1.2 million visitors. In comparison, Dubai had 84,534 rooms at the end of 2013, attracting 11 million visitors and achieving an occupancy rate of 82 percent. Although the recent growth of the tourism industry in Qatar has been robust, it will be difficult for the country to achieve the level of visitor growth which will garner enough demand to support a 400 percent expansion in the number of hotel rooms in 8 years. In fact, it will require an annual average compound growth rate of 27.2 percent until Further, the latest statistics show that average revenue per room in Doha is down to $222 in March from $261 in 2013 despite increasing demand. The sector is seen as a key area for growth in the NDS and there are various projects in the development stage which underscore this commitment. The ambitious target of 7 million visitors annually by 2030 may well be on track, but it is difficult to monitor given a lack of data. Although the issue of hotel overcapacity is concern, the level of investment related to the stadia and potential surplus of hotels is minimal in the context of the total infrastructure spend. As recent allegations over the conduct of FIFA hit the headlines, there has been some pressure to take the award for hosting the 2022 World Cup to a re-vote. In the event that the competition takes place elsewhere, the impact on Qatar will be far less substantial than one might think. The majority of the infrastructure that is needed for the competition were set out in the National Development Strategy prior to the bidding process and will therefore go ahead regardless. The planned stadium expenditure constitutes just 2 percent of total investment spending over the next 6 years. If Qatar lost the World Cup then the direct impact on investment spending would be limited; however there would clearly also be less quantifiable impacts on confidence and reputation. 8

9 Banking system reveals no strain.. The banking sector appears well placed to take advantage of the anticipated call on them for project financing. NPLs remain below 2 percent and liquid assets represent 50 percent of total assets. Foreign funding of commercial banks has been reduced from 30 percent of liabilities in 2012 to 23 percent at present, and the maturity profile has improved with short term loans gradually replacing longer term facilities. Rising public sector deposits have helped the domestic loan to deposit ratio ease to 1, from 1.2 in March All of this puts banks in a strong position to take advantage of the swathe of funding opportunities that the infrastructure projects should produce - this can already be seen in the rise in credit growth to contractors (47.3 percent year on year in May) albeit from a small base. We expect total domestic credit growth to increase to around percent over the next two years. One of the perennial risks for the banking system in Qatar and the region in general is the exposure to large, single-name obligors. This is a consequence of the narrow (but widening) base of the economy, with a strong concentration in risk from the real estate (16 percent of total domestic credit) and oil and gas sectors. Though the situation does not warrant policy action, the IMF have advised authorities to further develop their early warning system in order to monitor systemic risks which straddle all sectors of the economy. External balances strong Qatar has accumulated significant external buffers from its consistent current account surpluses over many years. We expect a current account surplus of 30 percent of GDP for 2013, slightly down on the 2012 figure of We expect this trend of narrowing current account surpluses to continue as oil prices eventually begin to soften, and imports (mainly related to construction) increase. Nevertheless the Central Bank holds ample forex reserves, totalling $41.7 billion (nearly 8 months imports of goods and services). We project the external debt to GDP ratio to maintain its declining trend, coming in at around 75 percent of GDP in 2014, having fallen from 82 percent in 2013 as GDP growth begins to outstrip external liabilities. The assets of the Qatar Investment Authority make the country a net creditor, though the exact value of assets under the fund s control is unknown. The IMF estimates that revenue accruing to the fund stands at over $20 billion a year since 2010 and will remain around this figure through to 2019 (see chart). 9

10 Not just real estate soaring After breakneck growth in the first half of 2014, the Qatar Stock Exchange slipped 13.7 percent in June as investors booked profit and geo-political concerns tainted sentiment. Despite the recent slip, the QSE was up 13.8 percent year-to-date as of 30 th June. The price earnings ratio is at 14.7, which looks to be in line with other regional bourses. The figure has come down from 15.7 percent in May following the fall in June. The rapid growth over the previous 12 months was caused by the announcement of the bourse being reclassified from frontier to emerging by the MSCI. This was formally implemented on June 1st, but the announcement in June of last year had already helped generate sustained gains. These have been driven by the expectations of investor inflows of around $500m into the bourse, mainly from funds that passively track the emerging market index. With investors demonstrating increased discrimination between EMs following the generalized sell-off at the start of the year, Qatar s macroeconomic strengths are likely to be appreciated by investors, though they will likely look for further progress on corporate transparency. Despite the heightened geo-political concerns in the region, with the troubling developments in Iraq and the corruption allegations surrounding the World Cup, risk metrics for Qatar are largely unmoved. The CDS spread has ticked up just two bps on the dollar but remains well down year-to-date; likewise bond yields have increased only slightly. In May the Emir announced the raising of foreign ownership caps from 29 percent to 49 percent. This is one of the issues that had stopped an earlier MSCI upgrade and is seen as a major step forward for investment in the region. Each individual company must decide as to whether they implement the change, which must then go through board approval, delaying any immediate impact. Both the MSCI upgrade and the higher foreign ownership cap should attract more institutional investment from outside of Qatar. Although one could argue the downside risk is an increased exposure to external events, it is likely to help stabilise the market as it promises to attract institutional inflows rather than those from the more volatile, locally-domiciled investors. This should be seen as a precursor to a better regulated and more stable stock exchange, which should help in achieving Qatar s long term vision of becoming a regional financing hub. 10

11 James Reeve Deputy Chief Economist Andrew Gilmour Deputy Chief Economist Thomas Simmons Economist Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and should not be treated as a substitute for specific advice and due diligence concerning individual situations; 2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or 3. Are not intended to constitute a guarantee of future performance. Accordingly, no representation or warranty is made or implied, in fact or in law, including but not limited to the implied warranties of merchantability and fitness for a particular purpose notwithstanding the form (e.g., contract, negligence or otherwise), in which any legal or equitable action may be brought against SAMBA. Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia 11