The Qatari Economy: At a Crossroads

Looking out across the water towards Doha’s West Bay, the Qatari capital’s glittering skyline is a striking testament to this minuscule country’s meteoric economic rise and newfound wealth. Once a sleepy backwater with an economy based on pearling, Qatar has developed at breakneck speed over the last two decades thanks to bountiful supplies of oil and gas, and now boasts the highest GDP per capita in the world. However, take a closer look at Doha’s cluster of futuristic skyscrapers and the panorama loses some of its veneer. Many of the buildings remain half-built or in disuse, a reflection of the sharp reversal of fortunes seen in countries right across the Middle East since oil and gas prices plummeted towards the end of 2014 and government revenues dried up as a result.

Hydrocarbons form the bedrock of Qatar’s economy. Despite the government’s concerted diversification efforts, oil and gas revenues still account for around half of GDP, some 90% of fiscal receipts and the bulk of exports, making the country highly vulnerable to global price swings. After oil and gas prices tanked a few years ago, the Qatari economy followed suit, with growth dropping from 4.4% in 2013 to an estimated 2.6% last year. Over the same period, the large, sustained fiscal surpluses enjoyed in the decade up to 2015 were wiped out in one fell swoop, with the country expected to have registered a sizeable budget deficit last year for the first time in 15 years. Matters haven’t been helped by the recent plateauing of hydrocarbon production, due in large part to a self-imposed moratorium on new projects in the North Field. In addition, 2016 saw elevated public capital expenditure linked to preparations for the 2022 World Cup, causing the country’s fiscal position to deteriorate further at a time when other governments across the region were tightening their belts. However, Qatar has had a softer economic landing than most other oil-exporting nations. Prudent spending in the years leading up to 2015 means the country’s breakeven oil price is substantially lower than the GCC average; as a result, despite slipping into the red last year, the country’s fiscal deficit is projected to have been the second-lowest among Gulf Cooperation Council (GCC) members, and far below the yawning deficit observed in neighboring 0i Arabia.

Faced with a new lower-growth paradigm, the Qatari government is in the process of battening down the fiscal hatches, in synchrony with countries across the region. Current expenditure fell sharply in 2016, with widespread redundancies in central government, public administrations and state-owned enterprises such as Qatar Petroleum and Qatar Rail. At the same time, many projects regarded as non-essential have been mothballed, including the high-profile Al Karaana petrochemicals project. The government has also hiked tariffs on utilities such as water and electricity and allowed gasoline prices to fluctuate freely. In a true sign of the changing times, Qatar’s famously light tax regime will become slightly more burdensome from 2018 onwards, with the introduction of VAT as part of a GCC-wide initiative. The country’s colossal sovereign wealth fund, the fruit of over a decade of sound economic management, has cemented confidence in the economy and allowed the government to issue USD 9 billion in bonds last May in order to finance the budget deficit.

Over the next two years, growth should be lifted by moderately higher oil and gas prices, while the new Barzan gas project will boost gas production by 1.4 billion cubic feet per day. The 2017 budget approved last December signaled the government’s intention to continue to pare back government expenses and the public wage bill, and channel available resources towards health, education and capital investment for the 2022 World Cup. Getting ready for the games is proving to be a gargantuan task, with an eye-watering USD 500 million currently being spent weekly on the construction of stadiums, hotels, roads and sewage works. The country’s finance minister has declared that two thirds of projects will be delivered this year and next, which will provide domestic demand with a welcome shot in the arm going forward. Further subsidy cuts and tax rises, coupled with higher commodity prices, should slowly shore up the country’s fiscal position, although the fiscal balance is set to remain in the red for the foreseeable future.

Although Qatar’s economy looks set to continue to expand at a reasonable pace, things won’t all be plain sailing. Energy prices represent one major downside risk, with recent signs of record U.S. crude inventories sending oil prices tumbling in early March and casting doubts on the effectiveness of the OPEC deal. There is also uncertainty in the LPG market, with fears of a supply glut going forward as new reserves from Australia and the U.S. come on stream, which could threaten Qatar’s slice of the market. Although the baseline scenario is for oil and gas prices to rise in the near term, if recent years have taught us anything it’s that trying to predict their evolution is fraught with uncertainty. In addition, monetary normalization in the U.S. will force Qatar to increase interest rates in lockstep with the Federal Reserve in order to preserve the currency peg, which would tighten domestic financial conditions and put a damper on investment and private activity. If downside risks materialize, contractual obligations to deliver the 2022 World Cup will limit Qatar’s ability to rein in capital spending, making the country’s fiscal position more vulnerable.

Looking to the medium term, one thing seems abundantly clear: Qatar’s economic bonanza is largely over, and the heady days in which the Qatari economy grew at double-digit figures are unlikely to be repeated for the foreseeable future. We see growth of 3.3% in 2017 and expect it to rise to 3.6% in 2018. Growth over the last few decades has been achieved largely through increasing inputs. The government funneled vast amounts of money into large-scale capital projects while the population ballooned, more than doubling in the last ten years. At the same time, total factor productivity growth has remained sluggish. With population growth set to taper off rapidly and the government’s coffers far barer than before, improving productivity will be vital if Qatar is to continue to expand at a healthy rate going forward. In order to wean itself off its dependence on oil and develop a knowledge-based economy, progress is needed to improve the business environment, increase human capital and improve the efficiency of public investment. The government is keenly aware of this fact, and the 2030 National Vision plan provides a blueprint for the type of competitive, diversified economy Qatar yearns to nurture, while the soon-to-be-announced 2017-2022 National Development Plan will continue to elaborate on how this is to be achieved. One prime example of Qatar’s diversification efforts is Education City, an attempt to create a pole of educational excellence in the heart of the Middle East. The project has so far managed to lure several Western universities, including University College London and HEC Paris, to a purpose-built site on the outskirts of Doha, where they will rub shoulders with local institutions. On a less positive note, Qatar’s ranking in the ease of doing business index has worsened continually since 2011, and the country currently languishes in position 83, far behind the UAE, a fellow GCC member; creating a more hospitable business environment will be key in order to attract foreign investment.

Transforming the country’s petro-charged economy will be no small task. Although perhaps, as Qatar has known nothing but transformation for the past few decades, it will be ideally placed to rise to the challenge.