Tracking Qatar’s Next Move

To the rest of the world Qatar’s ‘problems’ may seem amusing.

The Gulf country’s economy will ‘slow down’ to 7.1 per cent in 2012 and 3.9 per cent in 2013, according to the International Monetary Fund. Most OECD countries would consider that kind of growth a bumper year, but Qatar is used to better statistics having posted double-digit growth in five of the past six years – only the global financial crisis interrupted the growth to a ‘paltry’ 8.6 per cent in 2009.

The gas-led hydrocarbon sector has been growing at an average rate of 11 per cent from 1990 to 2009, transforming the tiny country into a natural gas giant. But this breathless growth is cooling off. IMF expects the oil and gas sector to ease to 5.7 per cent in 2012 and post zero growth from 2013 to 2015.

This is due to a moratorium on further gas development, which will remain in place till 2015 while the government carries out a study to reassess the reserves of the abundant North Field.

In its place, Qatar hopes the non- hydrocarbon’s sector to take over and post a jaw-dropping nine per cent growth.

“Continued government investment will keep non-hydrocarbon growth high beyond 2011, although overall growth would decline due to constant LNG production,” notes an IMF report.

UNLEASHING BILLIONS

The target of nine per cent non- hydrocarbon growth will be a tall order, especially for a country that remains heavily dependent on the energy sector and has a nascent private sector.

Luckily, the government has pledged to pump funds into the non-hydrocarbon sector to the tune of $225 billion between 2011 and 2016.

Qatar is, of course, preparing to welcome the world’s football fans for the 2022 FIFA World Cup. This will entail massive investments such as the $29 billion metro and rail project.

Other key sectors of focus include roads, industrial zones, and information and communication technology.

Hosting the FIFA World Cup itself is part of the much grander Qatar National Vision 2030 – which will be broken down into five-year national development strategies (NDS).

“To achieve the vision set out in the QNV 2030, the National Development Strategy 2011-16 estimates that around $225 billion of investment will be needed during 2011-16,” says Qatar National Bank in a report. “Roughly half of this investment will be in the non-oil and gas sector. The NDS 2011-16 estimates that the government will provide $95 billion, or 42 per cent of total investment, laying the foundations for the private sector to make up the remaining $130 billion.”

THE NEXT STEPS

Qatar is keen to liberate itself from hydrocarbon dependence and generate jobs and growth by leveraging on its existing strength. The country is taking advantage of inexpensive hydrocarbon growth to build petrochemicals, fertiliser manufacturing and metal production.

“Additionally, Qatari services sector companies including iconic brands, such as Qatar Airways and Al Jazeera, are competing on the international stage. In the financial sphere, the Qatar Financial Centre (QFC) has been successful in attracting globally renowned companies,” says QNB.

A key pillar of the QNV 2030 is to create a knowledge-based economy in Qatar. The aim is to boost the contribution of the services sector to GDP and raise research and development spending to 2.8 per cent of GDP.

The Qatar Science and Technology Park (QSTP) epitomises the emphasis on education and research and is now host to more 30 institutes, including leading global high-tech research companies.

Sizable investment has gone into education, developing Qatar University and attracting top-class foreign universities to set up affiliates in Doha in the Education City campus. QNB Capital estimates that spending on education will be 3.2 per cent of 2011 GDP, one of the highest in the GCC.

While these are laudable plans, the big question is whether expected private investment in the non-hydrocarbons sector will materialise.

“The NDS expects that private investment will drive growth and under its baseline scenario envisages $107 billion will be invested in the non-hydrocarbon sector through to 2016. This is a considerable sum, representing over 85 per cent of current GDP,” writes Keith Savard, chief economist at Riyadh-based Samba, in a report.

“Much of this investment is expected to come from government-linked companies such as Barwa, Qatar Diar and Qatalum that are expected to have ready access to finance. However, it would not be surprising if overall private investment levels fell short.”

In 2009 the Qatari Government issued several tranches of bonds in its effort to create a sovereign benchmark yield curve aimed at facilitating issuances by government-owned corporations and commercial banks. As a result, the external borrowings of the sovereign and public sector entities doubled to $70-billion between 2008 and 2010.

While this would normally raise eyebrows, Qatar’s debt burden is manageable given the country’s large current account surplus and nearly $100 billion of foreign assets held by Qatar Investment Authority and other government entities.

“That said, the authorities will need to monitor debt levels carefully and ensure that activities of government- owned companies do not lead to concerns. The debt problems in Dubai provide a salutary example of what can go wrong,” noted Savard.

VULNERABLE TIMES

There are also other challenges. Qatar, which shares the North Field with Iran, faces serious threats if the Strait of Hormuz is closed.

Qatar depends heavily on LNG exports to its clients in Japan, South Korea and other Asian economies and a prolonged closure could dry up its revenue stream.

Ratings agency Standard & Poor’s considers Qatar as the country most vulnerable to the strait’s closure. “Qatari issuers such as Qatar Petroleum, Ras Laffan Liquefied Natural Gas Co. Ltd. (II) and Ras Laffan Liquefied Natural Gas Co. Ltd. (III), and Nakilat Inc. rely entirely on the passage of their LNG fleets through the Strait to reach export markets worldwide,” said S&P. “From an operating standpoint, Qatar Petroleum is the most reliant of the oil majors on the channel for exporting its oil and LNG production.”

A disruption in hydrocarbon sales could upset the emir state’s carefully laid out plans.

“Slowed economic growth in 2012 could restrict the resources available to the sheikhdom to boost social welfare spending should the public demand even more generous hand-outs,” notes risk consultancy Maplecroft.

However, the gas moratorium is reversible and the emirate could rely on its budget surplus in coming years to offset the loss of government revenue from slowed economic growth.

“In the long term however, the sheikhdom’s ability to protect the political status quo through public spending may be weakened by the gradual depletion of gas reserves and a diversification policy which fails to sufficiently top up government coffers,” notes Maplecroft grimly.

There is another great reason for Qatar’s urgency to reduce some of its dependence on gas exports. The recent example of shale gas in North America has transformed the industry but also depressed prices from $12 five years ago to just under $3.

With massive gas developments under way in places as diverse as China, Canada, Algeria, Australia, Saudi Arabia, Venezuela and Russia, Qatar may face significant competition in securing new long-term clients. That would be a catastrophic development for a country whose prosperity remains dependent on LNG exports.

It would be reasonable to assume that not all of Qatar’s laid out plans for the energy and non-hydrocarbon sector will work out, but it will certainly be an interesting governmental exercise to goad the private sector into action.

Qatar’s last decade has been characterised with a can-do attitude and a remarkable ability to punch above it
s weight in political, social and economic circles. But the challenge of building a non-oil and gas sector, managing expectations and hosting the world’s most watched sporting event will push the ambitious country’s financial and management acumen to its limits.