Report Series Qatar Economic Update Executive Summary A safe haven in stormy global seas: While the global economy continues to struggle and the outlook is fraught with risks, Qatar s strong macroeconomic fundamentals should allow it to weather through and deliver healthy economic growth, albeit sharply lower than the double digit levels achieved over the past 5 years when hydrocarbon output surged. Armed with abundant export revenues from its expanded hydrocarbons production capacity, the government is embarked on a huge infrastructure investment program mapped out in its National Development Strategy (NDS) and aimed at diversifying the economy. Recent data suggest it is on course to deliver targeted real nonhydrocarbons growth of around 9 percent which should generate near 7 percent real GDP growth this year and 4.7 percent in 2013. Government budgets continue to be directed at supporting implementation of the NDS and annual spending has nearly doubled in the last 5 years to around $50 billion. However, large hydrocarbon export revenues will ensure that the fiscal balance remains in surplus. Rising government domestic debt is a reflection of efforts to develop a local bond market, and monetary policy actions. External debt has continued to rise as the government, banks and coporates tap capital markets at favourable rates to fund large elements of the nation s development projects. Total debt to GDP is up around 70 percent, but Qatar remains a net external creditor given its large and growing external assets. The banking system is sound and credit growth is robust, but the increasing financing needs of the NDS are posing some challenges, particularly with respect to maturity mismatches. If necessary, the government is likely to recycle more of its wealth through local banks and provide support to its state owned enterprises. Office of the Chief Economist Economics Department Samba Financial Group P.O. Box 833, Riyadh 11241 Saudi Arabia ChiefEconomist@samba.com +4420-7659-8200 (London) This and other publications can be Downloaded from www.samba.com Sustained weakness in real estate markets has kept headline inflation subdued, although the index excluding rents is likely to be up around 5-6 percent this year. With no change in the dollar exchange rate peg on the cards, monetary policy will continue to be guided by the US and thus remain accommodative, although the central bank has shown greater independence in recent years and will be mindful that imbalances do not develop as lending and investment rise.
A safe haven in stormy global seas Qatar: Main Economic Indicators 2010 2011e 2012f 2013f Nominal GDP ($ bn) 127.3 173.1 179.9 188.9 GDP per capita ($) 82,685 108,173 109,058 111,143 Real GDP (% change) 16.3 14.1 6.8 4.7 Hydrocarbon GDP 23.8 15.5 3.5 1.0 Non-hydrocarbon GDP 8.4 12.4 10.8 9.0 Nominal GDP (% change) 29.5 35.9 4.0 5.0 Hydrocarbon GDP 55.8 49.5 1.3 0.0 Non-hydrocarbon GDP 11.7 14.0 8.2 12.4 CPI inflation (% change) -2.5 1.9 2.5 4.0 Hydrocarbon exports ($ bn) 58.7 96.4 96.3 98.0 C/A balance ($ bn) 21.8 47.0 52.3 47.0 (% GDP) 17.1 27.2 29.1 24.9 External debt ($ bn) 109.0 126.0 130.0 131.0 (% GDP) 85.6 72.8 72.2 69.3 Fiscal balance (RQ bn) 13.4 54.3 45.9 42.5 (% GDP) 2.9 8.6 7.0 6.2 Official reserevs ($ bn) 22.0 16.0 25.0 30.0 Memoranda: Oil price (Brent; $/b) 79.0 111.0 105.0 98.0 Crude oil prod (m b/d) 795 750 790 800 Nat gas prod (m boe/d) 1800 2500 2500 2600 The global economy continues to struggle and the outlook is clouded by the escalating crisis in the Eurozone, and uncertainty around how the USA will deal with the impending fiscal tightening scheduled under current laws its fiscal cliff. Financial stresses have mounted; growth in emerging markets has begun to slow, as has world trade. Global risks are elevated, and we now think world GDP growth could slip below 3 percent both this year and next. Despite these headwinds, Qatar s prospects remain bright, supported by the country s healthy public and external finances, and the government s intention to push ahead with its large public investment program which will drive economic growth. While Qatar does remain vulnerable to fluctuating hydrocarbon prices, this risk is mitigated by the fact that most of its LNG exports are sold under long-term contacts. In addition, developments in the oil markets to-date suggest that average prices will remain well over $100/b again this year. A dip is possible in 2013, but the government has built up large financial cushions to mitigate any adverse impact. The state s substantial external assets are also likely to be employed should a deterioration in global financial markets squeeze credit flows to the country. With its exports also predominantly destined for the healthier emerging market economies, all of this suggests that Qatar s economic performance will be resilient to a weaker global outlook. Growth and inflation Real GDP Growth (% p.a.) % GDP 2008 2009 2010 2011 Q1-12 Oil & gas 45.0 13.2 4.5 28.8 15.7 4.6 Finance, real est.,business serv. 11.6 8.9 25.8 7.2 17.2 7.2 Governmnet services 11.1 8.9 23.6 4.1 29.6 13.9 Construction 9.0 79.2 6.9 0.4 2.3 6.1 Manufacturing 8.6 18.9 13.7 22.4 4.5 4.3 Trade & hospitality 7.5 6.4 15.7 9.0 6.0 11.4 Trans. & communications 6.5 51.0 22.7 10.2 16.5 12.7 Total GDP 100.0 17.7 12.0 16.7 14.1 6.9 Hydrocarbons 45.0 13.2 4.5 28.8 15.7 4.6 Non-hydrocarbons 55.0 21.3 17.6 8.6 12.9 8.8 Source: QSA 2010-11 = preliminary Growth dynamics start shifting away from hydrocarbons The large scale increases in hydrocarbons productions, particularly LNG which reached its maximum 77mt/y capacity in late 2011, have mainly been completed. As a result growth will slow from the double digit levels recorded over the last five years as the principal drivers of growth shift to the nonhydrocarbons sector. However, prospects here remain healthy as Qatar uses the large revenues now being generated from its hydrocarbon exports to implement its huge infrastructure investment program. The short-term outlook has also been boosted by recent large salary increases granted to public sector workers, while the implementation of the major Barzan gas projects will ensure positive momentum is sustained in the hydrocarbons sector. Overall real GDP growth is expected to come in around 6.8 percent this year, before slipping to just under 5 percent next year. In their National Development Strategy (NDS) the authorities are targeting 9 percent a year in real non-hydrocarbons sector growth. Data for the first quarter of 2012 show that the country 2
is currently on track to meet this target with non-hydrocarbons growth coming in at 8.8 percent. As expected, hydrocarbons growth has slowed sharply (4.6 percent), resulting in slower overall real GDP growth of 6.8 percent (see table). Government services continues to be a major contributor to growth, and the recovery in the construction sector is gathering pace as the authorities begin to ramp up project spending. We expect this trend will continue to accelerate with favourable multiplier effects throughout the economy. Box: National Development Strategy 2011-16 Qatar: Spending considered for the NDS ($ bn) Central Government 95.0 Infrastructure 66.0 power, water, Doha port, airport, roads ITC & national fibre optic network Rail and metro 27.0 Non-Hydro Q Companies 36.0 Barwa & Qatar Diar 27.0 residential & business construction projects inc. Doha festival city, Bawra city Sidra Hospital & Education City 5.0 Real estate under construction The Pearl 14.0 Lusail 5.5 Specific World Cup Expenditures Stadiums 3.0 Accomodation 12.4 Qatar Petroleum & related cos. 23.0 QP/Exxon Barzan gas project 8.6 Qatar is embarked on a 5-year National Development Strategy covering 2011-16 which aims to deliver on the goals outlined in Qatar s Vision 2020. Having spent the last 20 years building up a world class gas industry, the aim is now to broaden the development focus and diversify the economy. Spending over the plan period to achieve this is estimated at $226 billion, of which $65 billion is envisaged from the central government. Much of the investment was planned irrespective of the World Cup bid, although hosting the event in 2022 will require additional investment in stadia and hotels. A key factor in the NDS is the recognition that the contribution from the hydrocarbons sector to growth will drop off dramatically. Forecast real GDP growth under the plan is thus much more measured at around 4-5 percent a year, driven mainly by targeted growth in the non-hydrocarbons sector of 9 percent a year. This seems well within reach, and in fact recent Medium-term Economic Projections 2012 2013 2014 2015 2016 NDS Real GDP growth (%) 7.1 4.0 4.7 4.7 5.1 Hydrocarbon GDP 5.2-0.9 0.0-0.2 0.0 Nonhydrocarbon GDP 9.0 9.0 9.0 9.0 9.0 Nominal GDP ($bn) 168 180 193 209 213 Population (millions) 1.76 1.78 1.81 1.84 1.86 GDP per capita ($) 95,373 101,401 106,854 113,324 114,469 IMF Real GDP growth (%) 6.0 4.6 4.6 5.9 5.9 Hydrocarbon GDP 2.9-0.3-1.2 0.3 0.0 Nonhydrocarbon GDP 9.0 9.0 9.5 10 10 Nominal GDP ($bn) 180 187 195 207 220 GDP per capita ($)* 102,242 104,951 107,462 112,727 118,309 Source: NDS, IMF * using NDS population data medium-term projections from the IMF suggest performance could be even stronger (see table). Nominal GDP is projected to exceed $200 billion by 2015, ensuring that already exceptionally high per-capita income continues to rise strongly. 3
Inflation still muted but pressures mounting Recent data show inflation continues to be modest with the CPI index up just 1.6 percent year-on-year in June. However, while the sustained weakness in the heavily weighted rental component (32.3 percent weight, -5 percent year-on-year in June) continues to dampen the headline index, inflationary pressures are bubbling elsewhere. The authorities alternative index which excludes rents is running much higher at 4 percent and is probably more reflective of inflationary trends in the country. Food inflation is holding at around 3.7 percent, but increases in other areas such as household goods and entertainment are holding at between 5-7 percent. Looking ahead we now expect that the headline inflation rate will come in at around 2.5 percent this year, held back by declines in rents, while the index excluding rents is likely to be double this. Food price increases are a threat given droughts in the USA which are affecting wheat and corn prices, although Qatar is likely to seek to shield the population from any severe spikes. Offsetting this is a general downward trend in global nonoil commodity prices which will help tame potential pressures from this source as Qatar ramps up construction investment. Nonetheless, the anticipated increase in spending and growing aggregate demand is likely to push inflation up to 4 percent in 2013. Public Finances Budget surpluses despite higher spending Qatar Fiscal Outurn (US$ billion) 2008/09 2009/10 2010/11*2011/12* Total Revenue 38.7 46.5 42.8 60.5 Oil and Gas 22.0 22.7 26.6 42.1 Investment 9.1 14.8 9.9 7.1 Others 7.6 8.9 6.3 11.3 Total Expenditure 27.3 31.6 39.1 45.5 Current 18.1 20.8 27.0 31.8 Salaries & Wages 5.1 5.9 6.3 8.1 Interest Payment 0.6 1.1 1.5 2.6 Supplies & Services 2.5 2.2 4.2 3.2 Others 9.9 11.6 14.9 17.8 Dev.Expenditure 9.2 10.8 12.2 13.8 Balance 11.5 14.9 3.7 14.9 % GDP 10.4 15.1 2.9 8.6 * preliminary, s ource: QNB, Minis try of Economy & Finance The delayed 2012/13 budget has been released and continues to be supportive of Qatar s development agenda. Planned spending is up 28 percent over last year s budget to $49.2 billion with an increased surplus projected (see table). Revenues are budgeted to increase 27 percent to $56.6 billion over last year, based on a low oil price assumption of $65/b. As is usual, actual spending and revenue outcomes will be markedly higher (see table on fiscal outruns) making fiscal analysis difficult, especially as it is sometimes hard to reconcile past and current data presentations. Nonetheless, the budget does provide a general sense of the government s spending priorities. Notable for 2012/13 is the increase in current spending, largely reflecting the increases in public sector salaries announced last year. The full year application of these increases is likely to see wages and salaries exceed $9 billion, having already jumped 28 percent to $8.1 billion in 2011/12. Meanwhile the planned $17 billion in capital spending continues to be directed towards realising the goals laid out in the NDS. Communication and transport get the single largest allocation of $4.8 billion, while 4
investment in health and education is put at $3.4 billion (see chart). Looking ahead, we expect that spending will increasingly align with the NDS as the introduction of the multi-year budgeting framework becomes fully operational (the cause of the delayed release of the 2012/13 budget). Spending is thus likely to remain elevated. But with revenue prospects healthy on the back of strong hydrocarbon earnings -the bulk of which will accrue through the operations of Qatar Petroleum (QP) - the fiscal accounts are expected to remain in surplus. These are likely to decrease in size in the coming years, although we project that they will hold in the 6-7 percent of GDP range through 2014. In addition, the government fiscal accounts understate the strength of public finances as around 30 percent of revenues from QP flow directly to the state (i.e. off budget) where it is, among others, accumulated in the QIA. Bulk of domestic debt issued for monetary policy purposes Government domestic debt has jumped from just under $3 billion in 2008 to $32.8 billion as of March 2012, approaching 20 percent of GDP. However, given the fiscal surpluses this increased issuance is not related to any particular funding requirements. Instead, the bulk reflects large issuance of bonds by the central bank on behalf of the state in 2010 aimed at helping develop a domestic bond market, the subsequent introduction of treasury bills as part of monetary policy, and additional bond issuance during 2010-11 aimed at absorbing excess liquidity at that time External balances Hydrocarbon exports provide large revenue flows Qatar s external balances are very healthy and are expected to remain so despite a steady build up in debt since 2007. Key to this financial strength are the revenues flowing to the state from increased hydrocarbons exports. These have more than tripled between 2005 and 2011 when they reached $98 billion, driven by a surge in exports of LNG, condensates, propane, butane and refined petrochemicals. Strong oil prices have also boosted oil earnings despite some reported troubles with maintaining output levels. While future levels will fluctuate with price movements, Qatar can now look forward to total export earnings of around $100 billion a year. Imports have also risen strongly as the economy has grown and investment increased. In addition, Qatar experiences large transfer outflows (mainly remittances) and service import costs. However, the strength of exports and increasingly healthy 5
income receipts from investments abroad, mean that the current account balance has posted a consistently large surplus since 1997. This surged to around $48 billion in 2011 (28 percent of GDP), and is expected to hold at around this level over the next 3-5 years. Qatar remains a net external creditor Large current account surpluses have allowed Qatar to build up substantial external assets, most of which are held by the Qatar Investment Authority (QIA). Accurate data on such holding are not readily available, but the IIF estimate that total foreign assets rose to $175 billion in 2011, with the QIA accounting for around $126 billion. Meanwhile total external debt is estimated to have risen to around $130 billion, implying a net credit position of around $45 billion. Qatar s external debt has risen rapidly in recent years, jumping from $20 billion in 2005 to nearly $130 billion in 2011. Much of this reflects increased government and bank borrowing stemming both from the 2008-09 global crisis, and from the rising infrastructure funding needs of the NDS. According to the IIF, commercial bank liabilities make up the largest component, representing around $64 billion, while sovereign debt is expected to reach $28 billion this year following the July $4 billion Sukuk. This follows $5 billion in sovereign bond issuance last year and $7 billion in 2009. The remainder of the total principally reflects debt of state owned companies incurred in the development and expansion of LNG projects, power generation and other industrial enterprises. Markets favourably inclined towards Qatar Qatar s growing healthy public finances and growing economy continue to be viewed very favourably by international capital markets. The sovereign is rated Aa2 by Moody s and AA by S&P, CDS spreads have tightened this year despite the intensification of the Eurozone crisis, and the country has become to be viewed as somewhat of a safe haven in to-day s uncertain world. Its recent $4 billion sukuk issuance attracted orders of $24 billion, and secured competitive pricing with the ten-year tranche yielding 3.2 percent. The success of the issue could lead to further fund raising by state owned enterprises and banks given Qatar s inclination to use loans and bonds to finance a large element of its development projects. 6
Money and finance Domestic credit grows strongly The domestic banking sector is in good shape, having benefited from robust state support in the aftermath of the global crisis in the form of capital injections, and purchases of bank equity and real estate loan books. Capital adequacy ratios have been built up (20 percent) and profitability is healthy. However, the increasing financing needs of the nation s economic development projects are posing some challenges, particularly with respect to maturity mismatches. Lending has continued at a robust pace through July this year, with total domestic credit up 35 percent year-on-year, driven largely by lending to the public sector which was up nearly 80 percent. Lending to the private sector remains healthy at 13 percent year-on-year, driven by strong growth in real estate credit, but also a healthy expansion in consumption lending, which could see further growth given the higher public sector salaries. However, after surging in 2010-11, deposit growth has not kept pace with the expansion in credit. Growth has slowed sharply (see table) principally reflecting a 14 percent year-to-date drop in public deposits through June. As a result the aggregate loan to deposit ratio has risen back to around 114 percent. Banks have successfully turned to international capital markets to raise funds to support their activities, taking advantage of low interest rates and strong investor demand. However, they are also increasingly dependent on short-term foreign interbank funding, which leaves them vulnerable to changing market conditions. Monetary policy likely to remain accommodative Looking ahead we would expect to see some pick up in deposits as the government looks to recycle its large financial resources, thus easing liquidity conditions. Credit growth is likely to hold in the 20-25 percent range through 2013. In addition, monetary policy is likely to remain accommodative with interest rates low in line with policy rates in the USA which the Federal Reserve indicates will not be raised before end-2014. The exchange rate peg to the US dollar (which will be retained) compels Qatar to closely follow US monetary policy options, although the Qatar Central Bank (QCB) has shown some independence by not initially following US rate cuts in the wake of the financial crisis (see chart). However, the QCB deposit rate now stands at 0.75 percent, closer in line with its GCC peers who also peg to the dollar, while its lending rate (on which the maximum lending rate for Qatari citizens and non-qatari residents is based i.e. plus 1.5 percentage points) currently stands at 4.5 percent. 7
The shift from the surplus liquidity conditions that prevailed in 2010-11 will need to be closely monitored by the authorities. They face a delicate balancing act of trying to support credit growth needed to advance the development agenda while also ensuring imbalances do not develop in the system (the deficit on commercial bank s net foreign asset position rose to a record $28.3 billion deficit in June), including too rapid credit growth that could generate inflationary pressures, and asset quality concerns particularly in the oversupplied real estate sector. Interbank rates have trended gently upwards The authorities are mindful of the challenges and have been working to expand and develop the financial system, including moves to develop local debt markets. As part of this process the central bank has recently launched the Qatar Inter-bank Offered Rate (Qibor) with Bloomberg. A daily benchmark rate for unsecured interbank lending, this benchmark should help to enhance transparency and liquidity in the local banking system. Available data on Bloomberg shows that, in contrast to US rates, Qatar interbank rates have been gently trending up so far this year, leading to some widening in spreads -rates on the 6 month (1.4 percent) are double those on similar US Libor (0.72 percent). While substantially lower than the spreads that existed during 2010 before the QCB lowered its policy rates, the continued positive differential combined with safe haven perceptions may explain why non-resident bank deposits in Qatar were back near record highs in June (see chart). 8
James Reeve Deputy Chief Economist James.Reeve@samba.com Andrew Gilmour Deputy Chief Economist Andrew.Gilmour@samba.com 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 11421 Saudi Arabia 9