Qatar’s Crown Prince, Jasim bin Hamad bin Khalifah Al Thani, approved by Royal Decree on 28 March the country’s FY2001-02 budget to take effect immediately. (Qatar’s fiscal year commences on 1 April and ends on 31 March.) The budget provides for total spending of QR17.5bn ($4.81bn) and projects that total revenues will exceed this amount at QR18.06bn ($4.96bn), generating a budgetary surplus for the first time in 15 years of QR497mn ($137mn – see Table 1). According to the Qatari Minister of Finance, Economy and Trade, Yusuf Husain Kamal, the budget aims to diversify the economy’s income sources, boost the quality of education, health and other social services, reduce the debt burden and strengthen the state reserves.

The 43% projected rise in budgetary revenues compares to the more conservative 14% projected increase in expenditures and reflects the cautious policy stance of other GCC states despite the surge in oil prices last year. (For details of Qatar’s FY2000-01 budget see MEES, 17 April 2000). In its year 2001 budget Saudi Arabia projected a 37% increase in revenues with only a 16% rise in expenditures, while Oman is projecting increased revenues of 19% but only a 15% rise in expenditures (MEES, 1 January and 15 January). Equally, Qatar’s underlying oil price assumption of $16.5/B resembles similarly conservative estimates made by other OPEC countries (MEES, 26 March) and represents only a small increase over the previous year’s figure of $15/B (MEES, 17 April 2000). Oil analysts suggest that Qatar and its GCC neighbors are right to adopt conservative oil price assumptions. GCC crude is usually sold at a discount to Dated Brent and WTI of $2-5/B, respectively and the OPEC basket, which is weighted more towards the lighter crudes, is now trading at around $22-24/B. Qatar’s fiscal caution was partly responsible for a recent ratings upgrade from the agency Standard and Poor’s which announced on 9 March that it had raised its long-term foreign currency issuer credit and senior unsecured debt ratings for Qatar to BBB+ from BBB, and its local currency issuer credit rating to A- from BBB+ (MEES, 19 March).

Table 1

Qatari Budgets: FY1997-98 To FY2001-02

(QRMn)

*This figure includes the category above i.e. Public Works/Infrastructure plus Economic Services.

Ongoing austerity may also please financiers interested in Qatar’s ability to repay its significant debt. As of 31 March last year, Qatar was faced with a total of $7.47bn in external direct government debt owed by the state, or 65.5% of GDP at current prices (MEES, 14 August 2000). Total external debt – direct and indirect – is currently thought to amount to around $13bn, but the state has demonstrated a pro-active approach to managing the issue. Figures released at the time of last year’s $1.4bn sovereign bond showed that the government had succeeded in shifting its debt maturity profile and reduced internal debt to $3.431bn as at 31 March from $3.482bn the previous year (MEES, 14 August). Local economists confirm that this process has continued since and that, with Qatar’s gas reserves now generating consistent revenue streams, the country’s cash flow issue is largely a thing of the past. According to Qatar National Bank’s (QNB) Economic Review of January, total export revenues in 2001 could reach $11.5bn based on a scenario of crude oil averaging around $26/B, which would generate oil revenues of around $6.6bn with the remainder coming from other products such as LNG, condensate and petrochemicals (see Table 2 below for other oil price assumptions). QNB’s figures also show that the country’s trade surplus rose by 26.6% in 2000 to QR22.9bn ($6.29bn) and that crude oil prices averaged $27/B. Qatar achieved GDP growth in 2000 of almost 19% in nominal terms to QR53bn ($14.6bn), according to recent comments from the Governor of the Central Bank in the local press – in 1999 GDP grew by 18.9%. Growth in nominal GDP in 2001 is expected to be substantially lower due to the anticipated decline in oil prices and production volumes. Inflation in the country is thought to be around 0% or even negative.

Qatar is set to borrow again and is reported to be seeking a further $2bn in finance for the expansion of three large-scale industrial projects. RasGas is seeking to raise $1.4bn, Qatar Fertilizer Company needs around $400mn and Qatar Electricity and Water Company (QEWC) is expected to raise $150mn shortly. But analysts remain unperturbed, since part of these funds will be used to refinance existing debt in an effort to capitalize on an improved credit history and better economic fundamentals. "Generally the whole credit story with Qatar has improved," Anais Faraj, Economist for Emerging Markets at Nomura International, told MEES. "So they think they can get away with much tighter pricing and they got a taste of it with their last syndication." Qatar secured a $400mn syndicated loan through a consortium of banks led by Sumitomo late last year with a margin of 62.5bps over Libor (MEES, 11 December 2000).

And appetite for Qatari debt is still strong. "People in the bond market are saying that Qatar is looking over-sold and pretty good value," said Mr Faraj. "It’s investment grade with yields almost as good as, say, Kazakhstan which is in a similar position – their oil exports won’t kick in for another year or two. In Qatar’s case it’s gas but they figure that politically and economically Qatar is better. It’s a higher rated country and if you compare it to other triple BBBs like Korea and Malaysia, you’re getting a premium of some 100bps. And Qatar faces the same global risks that affect any east Asian country, except that it’s on the supply side while Asians are on the demand side. If world growth slows and Asians aren’t exporting, their economies will slow. That’s exactly the same environment in which Qatar’s economy would slow – the correlation with the world economy is very strong." A relatively sound financial policy has helped. "They have a strong finance minister," said Mr Faraj. "He’s of the old school and believes that wealth shouldn’t be squandered and the Amir gives him a lot of leeway to balance the books. These two factors are critical, in addition to the government’s ability to resist popular demands for much looser fiscal spending."

Mr Kamal made a vague attempt in his budget statement to respond to these demands, pointing out that despite the renewed commitment to austerity spending will increase. "Estimates of allocations for major public projects in FY2001-02 reached QR3,160mn compared with an average of QR1,466.3mn per year over the past five years…an increase of 115.5%," he said. This may be of little comfort to those in Doha questioning why it is that they have yet to benefit from the oil windfall, especially as they see other Gulf countries loosening the purse strings and given that Qatar suffered a deeper recession than other GCC states. One local banker told MEES that there have been some complaints from the general public and from the merchants and contractors. "My guess is that people are a bit disappointed about the level of spending. They want to see more money coming into the economy and more interesting projects."

Policy analysts might be less critical. "The government is keeping its options open, which I think is right given the risks of global growth around Asia," said Mr Faraj. "Asian demand is turning off very rapidly and the Asian economies are cooling down, so even if you secure offtake agreements you don’t secure the strength of those markets. If you have cash in the bank you can go to the market from a position of strength for a bond or a syndication." But the idea is not revolutionary. "You don’t have to be a genius to do what they’re doing. It’s nothing exceptional, you’re just applying merchant principles to public finance, balancing the books." Other commentators suggest that with such low demographic pressures and a national population of less than 100,000, "little more than a football match" as one analyst put it, economic management becomes less challenging, and as Mr Faraj points out, the question is much more one of vision. "The big challenge is what you do with all these assets – something unadventurous like investing in treasuries or are they going to set up something like the Kuwait Investment Office once they start accumulating gas revenues?"

Table 2

Qatar: Forecast Export Revenues

($Mn)

* Excluding spot sales.

** Including NGL, Refined Petroleum Products, Petrochemicals and Others.

Source : Qatar National Bank Estimates.

Progress on general liberalization and notably foreign investment laws is still sluggish. Foreigners are not allowed to trade on the stock market, although GCC residents are allowed to purchase shares of the national telecoms provider Q-Tel. The country did pass Law No (13) For The Regulation Of Foreign Capital Investment In Economic Activity which, according to Article 2, allows "foreign investors [to invest] in all sector of national economy," but with the proviso that they "have one or more Qatari partners whose share shall not be les than 51% of the capital." Foreign participation may exceed this percentage through a decision of the Minister of Finance, Economy and Commerce for up to 100% of a project’s capital in the sectors of agriculture, industry, health, education, tourism and the development and exploitation of natural resources or energy or mining, "provided it is in conformity with the development plan in the state." Foreigners are prohibited outright from investing in banking, insurance, commercial agencies or real estate. Mr Kamal alluded to further opening up in his budget statement, saying that the country would focus on large-scale vital projects and encourage foreign participation in them. "The foreign partners in these projects will possess the desired technology, marketing outlets, and financial resources," he said, "…they will also have the desire to operate in Qatar." More cryptically he said that it was inevitable that the laws would be issued and that appropriate resolutions and measures adopted would provide the transparency necessary to ensure the achievement of that objective.

Despite this, Qatar is something of a regional success story, at least for the time being. "The improved sentiment, compared to say 18 months ago, can really be felt," one analyst recently returning from the country told MEES. "Contractors are no longer complaining that they are not getting paid, there is new construction going up, they have already built new hotels and finally work has begun on upgrading the airport – essential if they are to host the WTO summit later this year." Last year, around $150mn was allocated to the airport although only around $12mn was actually spent. In this year’s budget QR200mn ($55mn) has been set aside. Qatar’s banking sector put in a solid performance in 1999 and the 2000 results are likely to follow a similar trend (MEES, 7 August 2000). QNB has already reported a profit growth of 8.6% (MEES, 5 March). Doha Bank announced recently that it had taken a QR103mn ($28.3mn) provisioning cost and Commercial Bank of Qatar saw its net profits fall by almost 50% last year from QR98mn ($26.9mn) in 1999 to QR56.3mn ($15.5mn) as provisioning costs rose. However, these are specific cases believed to result from over-exposure to one particular troubled Qatari corporate rather than a sector-wide fall in asset quality.

Qatar has accelerated the process of acquiring long-term offtake agreements for its gas and recently awarded an EPC contract for RasGas’s third LNG train to supply India’s Petronet (see story in A section, page 13). And it is set to become a key global gas player as the main regional supplier of gas through the Dolphin project as well as through ongoing efforts to develop a gas-to-liquids project in conjunction with South Africa’s Sasol (MEES, 19 March) and with plans to connect Kuwait and Bahrain to its gas supply via a pipeline (MEES, 19 March). Observant of Dubai’s efforts, Qatar is now hoping to aggressively develop its tourism industry and held its first conference on the subject in January this year. It has recently hosted a string of international sporting events including World Cup qualifying matches and golf tournaments. While the country remains a conservative Gulf state, as one source told MEES, "it’s all relevant...they have seen what’s happening in Dubai and have realized the costs involved in not encouraging foreigners to visit the country and/or expatriates living there to use it as a leisure base. They are opening up."

© Copyright MEES 2003.