Qatar continues to cash in on windfall revenues but the country is preparing for more modest long-term economic growth as strategies to boost non-hydrocarbons sectors are implemented
What do you do when your gross domestic product (GDP) per capita is set to exceed $100,000 within the next two years, your current account surplus is north of $186 billion, and real GDP is on course for 20 per cent growth this year?
For the Qatari authorities, the happy inheritors of these shining economic indicators, the answer is simple: plough back the surplus liquidity to the people, with a hike in public sector salaries ranging from 50 to 120 per cent.
Qataris working for the state are in line for a substantial windfall. From 1 September 2011, basic salaries and social allowances for public employees increased 60 per cent, while salaries and social allowances for military personnel will rise 50 to 120 per cent, depending on rank. Pensions for civilians will increase by 60 per cent and 50 to 120 per cent for military retirees.
The Emir Shaikh Hamad bin Khalifa al Thani's exercise in wealth redistribution is clearly influenced by the wider political climate in the region, even if officials are disinclined to make that explicit connection. There is a precedent in neighbouring Saudi Arabia. In February and March of this year, King Abdullah bin Abdulaziz splashed around $130 billion in spending commitments to keep Saudis insulated from the Arab Spring. But there is more to it than spending to avert protests, which are an unlikely spectacle in prosperous Doha.
According to EFG Hermes, in an early September economics note, the new spend also aims to improve wealth distribution. Capital expenditure has increased as a share of total spending, notes the investment bank's economist Monica Malik, with the recent focus being on investment spending. The percentage of wages and salaries to total government spending fell 16.2 per cent in 2010-2011 from 26.3 per cent in 2002-2003.
That in itself should be a cause for alarm - but if anything, the opposite has been true: the arrival of billions of dollars in liquefied natural gas (LNG) export revenues has given Qatar abundant financial resources to spread around, and positively the government appears to have maintained a focus on ensuring that money is spent effectively - for example, building up gas-fuelled downstream industries that will provide a value-added from the country's rich hydrocarbons endowment.
The recent spending hike will nonetheless have some impact on the country's fiscal position. There are signs that spending is rising faster than state earnings. In Q1 2011, according to Qatar Central Bank figures, Qatar showed a budget deficit of -0.1 per cent of GDP, compared to a surplus of 23.4 per cent of GDP in the previous quarter.
EFG Hermes expects total government spending to increase 23 per cent this year - up from its previous estimate of 18.5 per cent - with the addition of QR30 billion ($8.2 billion) in spending entailed by the new commitments, which includes QR10 billion for wage increases and social allowances and QR20 billion in one-off payments to the state pension.
The strength of revenues, including from the country's second gas to liquids plant, which started up in the summer (see also page 52), should ensure Qatar's finances remain firmly in the black over the next two years. Samba Financial Group expects fiscal surpluses of between seven to eight per cent of GDP in 2011-12.
"Budgeted spending commitments are always exceeded (as are revenues being based on very conservative oil price assumptions) and we expect that this will remain the case in 2011-12 as the authorities push ahead with both infrastructure and social spending commitments," says Samba's senior economist Andrew Gilmour.
The direct multiplier impact of this salary and pension increase on GDP growth will be modest, forecasts EGF Hermes, which maintains a real non-oil growth forecast of 12.7 per cent for this year. Though the new spend will support overall sentiment and private expenditure, given the limited domestic consumer productive base and the high GDP per capita, a large proportion of spending will be directed towards imports.
Even if real GDP growth does come in below 13 per cent - below consensus forecasts - it is pretty clear that Qatar's economic growth is shaping up impressively this year. Data released by Qatar Statistics Authority on 20 August show real GDP grew 16 per cent year-on-year in the first quarter of 2011.
The spending hikes will be positive for the economy as they will help boost aggregate demand. The inflationary impacts may not be that painful, even though annual consumer price inflation edged up to 1.9 per cent in July, its highest level in a year and a half. The growth rate of money supply increased to 16.8 per cent in the second quarter, from 2.3 per cent in the first half of 2011.
"Inflationary pressures will rise but Qatar should benefit from an easing of food prices next year and little pressure from import costs. There is still some slack in the economy, especially in real estate, and this will help temper price pressures although we project that inflation will rise to 4.5 per cent in 2012," says Gilmour.
Qatar National Bank (QNB) forecasts that full-year real GDP will grow by 21 per cent in 2011, compared with annual average real growth of 15.7 per cent during 2006-10. It believes that oil and gas will grow by 29.5 per cent this year, mainly driven by a significant increase in LNG production.
Oil and gas sector expansion should also have a beneficial influence on non-hydrocarbons performance, which QNB sees growing by 14.1 per cent in 2011, thanks to manufacturing and services improvements and a revival in the construction sector.
Qatar is, however, preparing for days of less explosive economic growth. Under its long-term National Development Strategy laid out earlier this year - which places a much greater focus on developing non-hydrocarbons - once the state's 20-year hydrocarbons investment programmme ends around 2012, real GDP growth rates will slow sharply from high double digits of the last decade. However, at a projected four to five per cent a year, post-2012 real GDP growth will remain solid, suggests Samba, and in nominal terms the economy will remain highly prosperous with national income conservatively projected to reach $213 billion by 2016 with an estimated per capita income of over $114,000.
The real long-term growth challenge will be ensuring that the non-hydrocarbons sector lives up to its billing and becomes a strong economic driver.
"After real GDP growth of around 20 per cent this year growth will slow as the national accounts will no longer feel the benefits of large increases in hydrocarbons output and exports. The Pearl GTL plant will provide a fillip in 2012, but thereafter growth will rely on expansion in the non-hydrocarbons sector," says Gilmour. "Lower oil prices will not have any material impact on growth - public spending levels will remain high, bolstered by the increase in gas and related product exports and growing revenues from external assets," he asserts.
If the non-hydrocarbons sector is to become the driver of future real GDP growth, questions may arise of whether it is strong enough to shoulder the burden. Qatar's non-oil sector has continued to lag LNG growth, notes Standard Chartered in its newly-issued Middle East Focus, which it expects will be the key driver of the 18.7 per cent real GDP growth it anticipates this year.
In H1 2011, the value of projects under construction dropped to $6.89 billion, a 27 per cent fall versus H1 2010. While long-term prospects are strong, particularly in light of the more than $100 billion-worth of projects planned in the run-up to the 2022 Fifa World Cup, a lack of non-oil spending is constraining private-sector growth this year, says the bank. The government says though World Cup-related investment projects may be commissioned in the 2011-2015 period, the likely impact is modest.
Project activity will remain a driver of Qatar's economy, though again not with a major near-to-medium-term impact. Two key megaprojects underway are both transport schemes: the $28 billion Qatar Metro and $12 billion Expressway projects. Consortiums had been invited to submit expressions of interest for the Metro project by mid-September, but construction on both are not expected to begin until mid-2012, and both are long-term ventures.
Much will depend on whether private investment in non-hydrocarbons will materialise as envisaged. The NDS sees $107 billion invested in non-hydrocarbons to 2016, against $23 billion in private hydrocarbons. This represents over 85 per cent of current GDP. It is far from clear, however, whether such large amounts will be forthcoming.
On a positive note, Qatari private sector credit growth appears to be reviving strongly this year, strengthening to 16 per cent in July amid a pickup in private sector credit. EFG Hermes has raised its private sector credit growth forecast to 20 per cent for 2011, up from 17 per cent.
"Increasing private credit growth will certainly help the non-hydrocarbons sector," says Gilmour. "Credit growth had slowed sharply in the aftermath of the 2008-09 global credit crunch/recession, and it is encouraging to see it picking up again, which would be indicative of greater confidence and increasing economic activity."
Qatar has reason enough not to worry too much about its economic future. But the fact that it is giving thought to how its post-gas boom economy might operate is a cause for comfort in a country where long-term thinking is hard-wired into the national DNA.
© The Gulf 2011
