Country Report Qatar
While the era of double digit economic growth is over, Qatar’s economy is likely to expand by a still robust 6% in 2014. Qatar has built a reputation as an international peace broker, but its foreign policy has been in choppy waters for the past two year. Fixing this will be a challenge.
Strengths (+) and weaknesses (-)
(+) Strong external position
High oil and gas export revenues have resulted in external surpluses and a large stock of foreign assets, the majority of which has been placed in the country’s sovereign wealth fund.
(+) Strong fiscal position
High oil and gas export revenues have led to high budget surpluses for many years.
(-) Some political tensions with some neighbouring countries
Qatar’s reputation as the Switzerland of the Middle East has come under pressure as Qatar supports the Muslim Brotherhood (MB) and its affiliates (in for example Syria and Egypt), while other GCC members oppose them, most notably Saudi Arabia.
(-) Economy is too dependent on the hydrocarbon sector
The economic base of Qatar is very narrow. The country is highly dependent on the hydrocarbon sector.
1. Slower but more diversified growth
Qatar’s growth has slowed down considerably from the double digits seen in 2006-11 (12-26% per year). In 2013, real GDP growth was 6.5%, which was higher than the 6.1% growth in 2012, but clearly marks a new era of lower growth. Importantly, this lower but still robust growth has been driven mostly by the non-hydrocarbon sector, which in past years has been the backbone of Qatar’s economy. Specifically, the non-hydrocarbon sector grew by 11.4% in 2013 and more recently 11.3% yoy and in 14Q2. The hydrocarbon sector on the other hand grew by only 0.1% in 2013 and even declined 2.2% yoy in 14Q2, which was partially driven by some maintenance shutdowns of major LNG (liquefied natural gas) and NGL (natural gas liquids) facilities. The strong growth of the non-hydrocarbon sector was driven mainly construction, financial services, trading and hospitality. Construction for example grew by 13.6% in 2013 and 14.5% yoy in 14Q2 on the back of increased investments in infrastructure related to Qatar hosting the FIFA World Cup in 2022. Financial services grew by 14% in 2013 and 16.6% yoy in 14Q2 on the back of an increasing population. Qatar seems to be successfully implementing its strategy to diversify away from the hydrocarbon sector and becoming a regional business and tourist hub. Namely, according to the IMF, the share of the hydrocarbon sector in total GDP fell from 59% in 2011 to 51% in 2013. Going forward, this trend is likely to continue for three reasons. First, Qatar’s population is projected grow by more than 6% in the coming 5 years, driving (non-hydrocarbon related) consumption demand. Second, government investments will stay an important driver of growth (as they have been in the recent past as Figure 1 illustrates) and these investments are increasingly taking place outside the hydrocarbons sector. Third, declining gas prices due to a projected increase of world gas supply will put further pressure on the hydrocarbon sector. The latter will also put some pressure on GDP growth, which is nevertheless expected to stay robust in the near future (about 6.7% in 2015). However, at the moment Qatar is still highly dependent on the hydrocarbon sector. This dependence poses an important risk for Qatar.
2. Trying to mend relations with GCC neighbours
Political stability is relatively high in Qatar and the government enjoys broad support from its citizens. However, political risks remain as tensions between Qatar and neighbouring countries have increased somewhat because Qatar has supported the Muslim Brotherhood (MB) and its affiliates, while for example Saudi Arabia considers the MB a terrorist group. At the height of these tensions in March 2014, Saudi Arabia, the UAE and Bahrain simultaneously withdrew their ambassadors from Qatar. Consequently, Qatar has initiated a number of measures to mitigate these tensions. Namely, Qatari Emir Sheikh Al‑Thani visited Saudi Arabia twice in three months with the latest visit being to King Abdullah Bin Abdel‑Aziz al‑Saud in October 2014. Also, Saudi Arabia, the UAE, Bahrain and Qatar have found some common ground as they all pledged to materially support the US military campaign against Islamic State (IS, formerly ISIS) in Iraq and Syria. Still, tensions are likely to remain in the near future as Qatar is unlikely to change its support of the MB in for example Syria and Egypt. If these tensions increased, Qatar could turn its back on Saudi Arabia and seek an alliance with Iran, with which it already has ties. However, we still consider this an unlikely scenario, since Qatar needs Saudi Arabia for imports (in particular raw materials and food), as it is the only country with which it shares a land border.
3. Current account declines while LNG prices stay stable
Qatar still has a big surplus on the current account, even as this surplus is expected to decline sharply in 2014. Currently, the current account surplus is estimated to be roughly 16.7% of GDP in 2014, down from 30.9% in 2013. This decline was partially due to lower export volumes. Particularly of Liquefied Natural Gas (LNG) and Natural Gas Liquids (NGL), which together account for an estimated 70% of total exports in 2014. Lower exports of gas were driven by lower production as some of Qatar’s 14 gas liquefaction plants were closed for maintenance. Meanwhile, LNG prices have stayed relatively stable from an average price of USD 16.8 per million British Thermal Unit (MMBTU) in 2013 to an average of USD 17.0 MMBTU in 2014 (Jan-July). Oil prices on the other hand have declined in recent months. But this is not likely to affect Qatar very strongly in the near term for two reasons. First, oil is currently expected to be only 4% of exports in 2014. Second, Japan (Qatar’s main export market) is likely to keep importing huge amounts of LNG as has it has closed down most of its nuclear power plants and has increasingly moved towards LNG. On the import side, Qatar has seen an increased inflow of materials, equipment and to a lesser extent food. Going forward, we expect imports to keep increasing as demand for materials, services and food keeps increasing due to further development of large infrastructure projects and an expanding population. Combined with relatively stable expected exports, we expect a further decline in Qatar’s current account surplus, although it will likely remain at healthy levels.
Qatar is a small country located in Western Asia. It is a peninsula and only shares a land border with Saudi Arabia. Qatar has been ruled by the Al-Thani family since the mid-1800s and the current Emir is Sheikh Tamim Al-Thani, who was handed power by his father Sheikh Hamad in June 2013. Qatar enjoys political stability. This stability is likely to stay in the foreseeable future as the country enjoys broad support from its citizens, which enjoy the highest GDP per head of the world (USD 145,000 at PPP), a very low unemployment (0.4% in 2014) and a high standard of living (Qatar ranks 31st on the Human Development Index). The country’s wealth is due to the hydrocarbon resources the country is endowed with (mostly gas). As such, the hydrocarbon sector has been the engine of the Qatari economy. It is the principal provider of government revenue, and large parts of the manufacturing and services sectors are closely linked to this sector. Hydrocarbon exports (including oil and gas) constituted 88% of total export earnings in 2013. In the past 15 years, Qatar, in partnership with foreign companies, has invested in excess of USD 70bn to expand its oil and gas production capacity. Qatar’s proven oil reserves increased from 3.8bn barrels in the mid-1990s to 15bn barrels, and its production capacity increased from less than 300,000 barrels a day (b/d) to around 1m b/d (actual production is around 740,000 b/d, however, to prolong the life of the reserves). The oil reserves are estimated to amount to 56 years at present production levels and Qatar’s natural gas reserves are the third largest in the world. Business opportunities beside the hydrocarbon sector are constrained by the small size of the population and the economy. However, Qatar’s population is growing fast (10% per year between 2003 and 2013) and is currently 2 million, consisting mostly of expatriates (1.75 million). Qatar’s long term strategic plan is to reduce its dependency on the hydrocarbon sector, as the hydrocarbon sector still accounts for 51% of real GDP.