IMF report gives Qatar points for diversification efforts

Qatar, the leaf-shaped, super-rich mini-state that extends north from the coastline of Saudi Arabia into the Arabian Gulf, is “well positioned to mitigate” the macroeconomic challenges it is currently facing, a new IMF report on the country has said.

Like many of its Gulf neighbours with oil export-based economies, Qatar is in the midst of a diversification drive, although in its case, it started even before the recent global downturn in petrochemical prices.

But continued low oil prices on global markets, coupled with fresh market competition from fracking and renewable energy sources, have given a new sense of urgency to efforts to make the economy more balanced.

At the same time, the country is in the process of preparing to host the 2022 FIFA World Cup – even as its choice to host the event remains controversial in some quarters.

In its report, dated yesterday, the International Monetary Fund said that a recently-concluded consultation with Qatar found the country’s macro-economic performance had been “adversely impacted” by lower hydrocarbon prices, resulting in a deterioration in its fiscal and external balances, from previous “large surpluses”.

This, it noted, was forcing the authorities to cut current expenditures, and to place greater emphasis on raising non-hydrocarbon revenues.

Nevertheless, while banking system liquidity has tightened and credit to the private sector has moderated, “banks remain sound and well-capitalised,” an introduction to the 57-page report notes.

“Macroeconomic performance is expected to remain resilient under the baseline.

“Real GDP growth is projected at 3.4% for 2017, reflecting still-significant expansion in the non-hydrocarbon sector, owing to public investment commitments, and supported by the added output from the new Barzan gas project.”

The US$10bn Barzan gas project is a joint venture between Qatar Petroleum and Exxon Mobil that is designed to meet rising domestic energy demand in the country.

“Growth is expected to slow in the medium term, as public investment growth tapers off, and hydrocarbon output continues to slow down,” the IMF report summary continues.

“Further subsidy cuts, a moderate recovery in global commodity prices, and the introduction of a VAT are expected to improve the fiscal and external balances gradually over the near to medium term.”

Economic diversification

Qatar’s efforts to diversify come as many of its neighbours have also been seeking to promote the growth of non-oil businesses and industries. None more so, it could be argued, as visibly as Qatar’s large and wealthy neighbour, Saudi Arabia, which is in the midst of a widely publicised diversification campaign known as “Vision 2030”, led by its deputy crown prince, Mohammed bin Salman.

Prince Mohammed took responsibility for a range of Saudi affairs on the death of his father’s half-brother, and previous king of Saudi Arabia, in April, 2015.

The fact remains that what has propelled Qatar to the top of the per-capita income lists in recent years, though, hasn’t been its growing schools and universities sector, nor its new hospitals, but rather, its petro-chemical reserves.

These have also enabled it to be a major purchaser of trophy assets around the world generally, and in the UK  in particular. It owns Harrods, the upmarket London department store, and number of upmarket hotels, and it’s pledged £5bn worth of investment in the UK after Brexit.

Still, as Victoria Chernykh, of Panmure Gordon, noted recently,  some US$180bn to US$200bn-worth of infrastructure spend by Qatar, scheduled to stretch into 2030, is already beginning to transform its economy.

“The decision by governments in recent years to de-carbonise the economy has been shown to be strategically sound,” she added, in a recent report.

“We have also seen a notable decoupling of the Qatar stock market and the oil price.”

The market cap of the QE, Qatar’s stock exchange, currently stands at around US$150bn, considered high for a country of just 2 million people, many of whom are expatriates who have been hired to build the infrastructure projects, the World Cup stadiums and other World Cup facilities. (According to published reports, it’s in the process of building nine stadiums, “cooled” fan zones, hotels, sewage works and roads, ahead of the 2022 event.)

In 2015, Qatar was the only Gulf Cooperation Council member state to avoid a budget deficit in 2015, although it posted a small deficit in 2016.

Nick Wilson, chairman of the London-listed Qatar Investment Fund plc, which markets itself as the means by which international investors are able to access the Qatari stock exchange, argues that the IMF report supports what he has been saying recently, to the effect that this is the time to look for bargains in Qatar.

Although Qatar has been less hard-hit by the oil price weakness in recent years  than some of its Gulf oil-state neighbours, Wilson says, the Qatar Investment Fund is nevertheless down 10% over the last two years, and currently trading on an 18% discount to net assets.

Thus the fact that that the country’s non-oil and gas sector is “[now] growing faster than the hydrocarbon part” of the country’s economy, while the Qatar economy “overall is growing faster than the global economy, [which] is struggling to grow 3%”, he adds, suggests potential investment bargains to be had.

“Qatar has been pursuing a diversification strategy for several years, as the country shifts away from dependence on oil and gas,” he says.

“The IMF report reiterates the fact that Qatar is well positioned to mitigate sustained low oil prices, given its substantial financial buffers…and applauds the ongoing fiscal structural reforms, which will ensure Qatar maintains its growth in the medium and long term.”

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