Qatar’s FY2000-2001 budget, unveiled on 29 March, is notably more upbeat than the previous year’s, with a 50% increase in the oil price assumption from $10/B to $15/B, a 19.8% increase in projected revenues to QR12,617mn ($3,466mn) and an 8.9% increase in expenditures to QR15,400mn ($4,231mn – see table below). Qatari Minister of Finance and Economy Yusuf Husain Kamal told the Qatar New Agency that the year 2000 would be marked by a focus on investing in infrastructure projects, suggesting a move away from the austerity drive of the country’s FY1999-2000 budget (MEES , 5 April 1999).

Qatari Budgets: 1996-97 To 2000-2001

(QRMn)

A boost to Qatar’s financial health was predicted last year when Mr Kamal was repeatedly quoted in the Arabic media as saying that the budget for 1999-2000 could be the first in 12 years to not record a deficit. He attributed the improved fiscal outlook to measures taken by the government to curb spending and higher oil prices. Since closed accounts have yet to be published, Mr Kamal’s projections cannot be verified. However, given the low oil price assumption of $10/B compared to the average price for Qatari crude for the calendar year 1999 of around $17.60/B, a more positive outcome than the QR3.6bn ($989mn) deficit projected in the budget seems likely.

One local banker told MEES that while it was disappointing that no closed account figures were released with the budget, it was likely that Qatar would record a surplus for FY1999-2000 or as much as $200mn, "just from the oil situation and from keeping a tight rein on expenditures." The absence of closed accounts frustrates financial analysis in many Gulf countries, where the relatively fruitless exercise of comparing budget-to-budget figures rather than actual out-turns is common practice. As one analyst pointed out, both the domestic and the international financial community welcome sovereign bond issues because the associated documentation brings with it "some concrete numbers."

Notwithstanding the issue of transparency, oil analysts describe this year’s $15/B assumption as reasonable in light of last year’s average price and last month’s OPEC decision to increase production and lower prices. In the latest OPEC agreement, Qatar’s previous production quota of 593,000 b/d is set to increase by 47,000 b/d, or 7.9%, to 640,000 b/d. Actual production as of February this year stood at an estimated 650,000 b/d (MEES , 4 April).

The oil price assumption also suggests a bullish outlook for economic prospects in comparison to regional counterparts. Kuwait’s forthcoming budget oil price assumption is $13/B while the Saudi budget is believed to have been based on a price of $12/B (MEES , 27 December 1999/3 January 2000). Oman based its budget on an oil price assumption of $14.50/B (MEES , 24 January).

Mr Kamal was also optimistic about Qatar’s notorious debt burden – which still stands at around 110% of GDP – saying that even if oil prices fell to $10/B, Qatar could still service its loans because provision had been made for this in the budget. According to the preliminary offering circular published by Credit Suisse First Boston and JP Morgan last year for Qatar’s first $1bn sovereign bond, total external debt outstanding for the country stood at $9.795bn at the end of 1998 (including government guaranteed debt, QGPC subsidiaries’ debt and other debt (MEES , 24 May 1999).

Investor sentiment has also improved regarding Qatar. Last year, Moody’s Investors Service changed the country’s outlook from stable to positive, mainly because the government took steps to contain rampant consumption spending, which, combined with increased oil revenues, stabilized the government’s fiscal accounts (MEES , 3 April). While the agency says that Qatar, which is rated Baa2 (the same as Oman, but lower than Kuwait and the UAE), is still vulnerable to a sharp decline in oil prices, recent project financings confirm a trend towards greater appetite for Qatari risk. Oil accounts for 30% of Qatar’s GDP and between 65% and 70% of government revenue.

On 7 April QGPC signed an agreement for the second $400mn tranche of the NGL-4 project with a consortium of bankers. The $400mn syndicated facility carries a pricing of 90bps over Libor for years one to three, 100bps for years four to six, 115bps for years seven to nine and 125bps for years 10 and 11. It has an average life of 8.25 years and 11 years final maturity. Its predecessor, NGL-4’s first eight-year $400mn facility signed last April, was priced at 95bps over Libor for the first three years, 105bps over Libor for the next three years and then 115bps in years seven and eight (MEES, 26 April 1999).

At the time, bankers commented that the transaction was a solid indication of where the bank market now lies for Qatar financing. "There is a scarcity of paper coming out and there is some sovereign debt coming off this year and the market has come back very strongly. All those things create appetite for Qatari risk and indeed regional risk. It’s very encouraging for both Qatar and the region," one source said (MEES , 4 April). Qatar’s other petrochemical plants are doing well. Qatar Petrochemical Company (QAPCO) announced a profit increase of 30% in 1999 to QR380mn ($104.4mn) due to a rise in production and higher prices.

And while many analysts said last year that Qatar paid too dearly for its sovereign bond issue at 395bps above comparable US Treasuries – which they thought might set a dangerous precedent for the region – market sentiment has changed. Rumors that Qatar will return to the 144A market may prove founded if investor sentiment on Qatar remains bullish. "Nothing official has been said," one banker said, "but I wouldn’t be surprised if they issue one, although they’ll probably delay it as long as possible, maybe till the end of the summer. A large chunk of their financial commitments is occurring this year and next year. That in itself could require another bond issues if oil prices are not favorable." The government is believed to be clearing some debt stock with some of the local smaller banks already. According to the bond circular, Qatar’s external debt burden will be reduced by 91% during the period 2000-2004 and debt servicing in 1999 for medium-term debt alone ($2.69bn) was put at $528mn or 12.1% of exports (MEES , 24 May 1999).

The country has been quick to cash in on international investor interest, and is expected to issue a new law on investment funds allowing foreigners to trade on the Doha Securities Market before the end of the year (MEES , 1 November 1999). The law regulating mutual funds and permitting foreigners to trade in the funds’ shares has already been approved by the Ministry of Finance but is still awaiting approval by the Ministry of Justice. A revised company law allowing 100% foreign investment in certain projects in agriculture, education, tourism and general services, is expected later this year.

Qatar’s merits also include solid revenue prospects as LNG exports pick up and petrochemical projects progress, growth estimates of 9% for the year 1999 and a low inflation environment of around 3%. But the privatization process remains sluggish and divestment candidates like the Qatar Steel Company and Qatar Hotels National Company are still on the back burner. Comments made by Mr Kamal last October suggest further delays – local papers reported him as saying that any move to privatize would not take place until profits of the companies are improved and "therefore, we will wait for a year or two because the drop in...profitability discourages investors." Some might argue that Mr Kamal’s caution is well-placed. The divestment of the Qatar Telecommunications Company has never been seen as a great success, and its shares are still trading below par – Q-Tel’s shares opened at QR60 and were trading at QR53.20 as of 3 April, even though the company reported an increase in its 1999 profits of 13.3%.

Even if the country were to accelerate the privatization process, the extent to which such moves could ease Qatar’s debt burden are questionable. A more effective course of action, analysts suggest, would be to reduce military expenditures. Qatar has by far the highest military expenditure in the MENA region, spending an average of $1,967 per capita in 1998, when its population was estimated at 681,000 (MEES , 22 November, 1999). According to the UK-based International Institute For Strategic Studies (IISS), the country’s 1999 defense budget was $1.3bn – 324% higher than the equivalent figure for Bahrain. And according to one Qatari analyst, there is not likely "to be a slowdown in military expenditures, either here or in the Gulf as a whole, judging by the recent tours of the US Secretary of Defense."

© Copyright MEES 2003.