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Jan 14 2004

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Qatar: Country outlook

FROM THE ECONOMIST INTELLIGENCE UNIT

OVERVIEW: The sudden change in the succession arrangements in mid-2003 generated some uncertainty, but the Economist Intelligence Unit does not believe that it will lead to instability--although risks remain. Qatar's international relations will continue to depend largely on the direction of US foreign policy. However, this will generate tensions with other states in the region that have been unwilling (or unable) to work so closely with the US and its allies. Economic policy will continue to centre on the development of Qatar's vast non-associated natural gas reserves, and its plans to expand liquefied natural gas, condensates and petrochemicals production. The authorities are also keen to attract foreign finance into other sectors, but privatisation will be limited. Fiscal policy will remain prudent, with a tightening of spending as income falls in 2004. The industrialisation programme will boost growth, with real GDP set to rise by 5.5% in 2004 and around 7% in 2005, but inflation will remain low. The current-account surplus will fall sharply in 2004, although it will remain substantial at 8.6% of GDP.

DOMESTIC POLITICS: The replacement in early August of Sheikh Jassem bin Hamad al-Thani with his younger brother, Sheikh Tamim bin Hamad bin Khalifa al-Thani, as crown prince caused tremors within the generally stable domestic political environment. Although the Economist Intelligence Unit expects political order and the direction of policymaking to be largely unaffected by the change in succession, risks remain. It will take time for the new crown prince to establish himself in his role and to win the acceptance of the elite, some elder members of which are still sceptical of Sheikh Hamad's reform programme and retain some loyalty to his deposed father. More broadly, the suddenness with which the change was announced is indicative of the opacity and unpredictability of the highly personalised political system.

INTERNATIONAL RELATIONS: Qatar's international relations will continue to depend largely on the direction of US foreign policy. Qatar has aligned itself closely with the US, and now plays a key part in US military strategy in the region. Qatar demonstrated its value during the recent US-led invasion of Iraq, when--in sharp contrast to many of its neighbours--it readily extended use of military facilities for the US campaign. Qatar was also among the first states to welcome the establishment of the US-appointed Iraqi Governing Council in Baghdad. This relationship with the US will become increasingly close over the coming years, with Qatar steadily displacing Saudi Arabia as the key location for US military facilities in the Gulf.

POLICY TRENDS: Economic policy will continue to centre on the development of Qatar's vast non-associated natural gas reserves--the primary focus of the government's long-term strategy to diversify the economy away from its reliance on crude oil exports. The administration's target of expanding production of liquefied natural gas (LNG) to 65m tonnes/year (t/y) by 2010 (a level of production that would probably establish Qatar as the world's largest LNG producer) is ambitious, although prospects have improved recently, most notably with the signing of a substantial sales agreement between ExxonMobil and Qatar Petroleum (QP). Associated industries such as condensates and petrochemicals will also be expanded.

INTERNATIONAL ASSUMPTIONS: We have revised our outlook for global economic growth upward, largely to reflect new data showing that many of the world's leading economies--led by the US--have begun to recover more quickly, and more robustly, than we had previously anticipated. We now forecast that world GDP (at purchasing power parity exchange rates) will expand by 4.2% in 2004, experiencing further growth of 4.1% in 2005, with a slowdown in US growth offset by a more robust performance in other OECD economies.

ECONOMIC GROWTH: The outlook for real economic growth remains very positive, with industrial investment showing sustained growth. We have therefore revised our forecast for real GDP growth in 2004 upward slightly to around 5.5%--a slowdown on the estimated 8.5% expansion generated in 2003, but still a rapid pace of increase by international norms. Growth is expected to accelerate once again in 2005 to around 7%. The growth trends in part reflect developments in the oil sector, with output expected to contract by over 5% in 2004 as OPEC production quotas fall. The weakening of oil prices over the forecast period will also have something of a dampening effect on growth if—as we have assumed—the cautious Ministry of Finance responds by reducing expenditure growth. These factors will be offset, however, by non-oil developments, led by the continued rapid expansion of Qatar's LNG industry which will see steep increases in volumes, particularly in 2005.

INFLATION: Inflation will remain low, although some pick-up is likely over the forecast period, partly as a result of external factors, notably the continued weakness of the US dollar and rising non-oil commodity prices. Robust domestic demand will also generate some inflationary pressure. However, a range of factors will constrain consumer price inflation, most notably the extensive system of subsidies and price controls that continues to hold down the costs of essential goods and services. We therefore expect consumer price growth to remain below 3% throughout the forecast period.

EXCHANGE RATES: The Central Bank will direct monetary policy towards maintaining the riyal's peg to the US dollar at QR3.64:US$1 over and beyond the forecast period. Qatari interest rates will therefore continue to track US rates. The positive differential over US rates is narrow, but in a market dominated by the Central Bank and a handful of local commercial banks, it will still be enough to preclude any speculative pressure on the riyal.

EXTERNAL SECTOR: Revisions to our oil price forecast have had a positive impact on what was already a robust outlook for Qatar's external account. We now expect Qatar to generate a current-account surplus of US$1.6bn in 2004--sharply down from an estimated US$4.8bn in 2003 but still a substantial 8.6% of GDP. The current account will register a further surplus of US$1.3bn (6.6% of GDP) in 2005. The trend will be driven predominantly by developments in the trade account. Export earnings are forecast to stand at around US$11.6bn in 2004—a fall of some 18% on the estimated 2003 record high, but still very high by historical standards. The downturn will be driven by lower average oil prices, which will undermine earnings for Qatari LNG as well as oil sales. Export revenues will rise by around 4% in 2005 to US$12bn as oil and LNG volumes increase and other export commodities show growth. Interim Central Bank data point to an even more rapid rate of import spending growth than we had previously anticipated, reflecting the strength of domestic demand for industrial goods, and the impact of the weakness of the US dollar on average prices. Overall, we expect this to boost import spending to US$5.5bn and US$5.8bn in 2004 and 2005 respectively, leaving Qatar with trade surpluses in both years of around US$6.1bn compared with an estimated US$8.9bn in 2003.