RIYADH, 11 March 2008 — No GCC country has a faster-expanding economy than Qatar, with real GDP growth expected to achieve 14.3 percent in 2008 and 13.5 percent in 2009. Indeed, the rate has been close to 10 percent for seven years now, during which time the population of Qatar has risen to 900,000 — around 25 percent of whom are Qatari citizens, with the rest a mix of expatriates from various countries.
Qatar’s economy is expected to remain buoyant, as Qatar’s liquefied natural gas (LNG) industry takes hold and additional oil capacity leads to increased export volumes. Output of associated condensates (natural gas condensates) will also increase, along with other gas-based industrial ventures, particularly in petrochemicals. Further economic growth is being fueled by an ongoing rise in domestic demand, mainly due to expansion in the construction and financial services industries.
Government expenditure will continue to grow strongly in 2008, as capital programs in education, health and transport give the economy a boost. This additional spending also triggers more private consumption, since 96 percent of Qatari workers are employed by the state. As far ahead as 2012, the economic outlook is very strong, with our forecast for real GDP growth projected to average over 11 percent per annum. Fiscally, Qatar will register another surplus in 2008, even on an oil-price assumption of just $45 per barrel.
But success comes at a price. Due to sustained expansion, as well as demand outpacing supply, serious constraints on capacity have created inflationary pressures. The rise in inflation in 2007 was again due largely to escalating rents as a result of housing shortages, as well as high aggregate demand, and rising wages for both nationals and expatriates.
Although supply-side pressures could subside in 2008, inflation is still expected to reach 11.5 percent. In 2009, we expect the supply of housing to achieve a degree of equilibrium and more new infrastructure to come onstream. As a result, inflation is expected to fall into the high single digits.
The introduction of a 10 percent cap on annual rent increases for a two-year period was not especially successful in mitigating rental inflation — and it was phased out in February 2008. Similarly, both Abu Dhabi and Dubai have been unable to control rent rises through capping schemes. But the underlying problem of real estate inflation in Qatar will be addressed when additional housing units come on to the market. The September 2007 price freeze on wheat flour and wheat products may even add to inflation, as price freezing could increase demand from consumers, yet discourage suppliers.
Stability and Security
Given that inflation persists, the authorities in Qatar and across the GCC could attempt to lower demand pressures by restricting wage increases and phasing the implementation of large projects over the medium term. Qatar can afford to slow down project development as employment generation is not the key goal, so much as creating labor incentives for Qatari nationals in the private sector. But we still expect that, through 2010, Qatar will see construction projects totaling an estimated $82.5 billion — despite the measures it has taken to reduce building costs by waiving customs duty on the import of steel, cement and gravel from outside the GCC.
As is common across the GCC, recession in the US economy should not adversely affect Qatar’s expected growth in 2008. High oil prices will help the GCC remain decoupled, although we do believe that Qatar will retain its currency peg to the US dollar in the period leading up to GCC monetary union. Regarding the exchange rate level, we do not expect a change in 2008 despite forward rate signals to the contrary. Qatari exports are substantially dependent on hydrocarbons, which makes the case for revaluation less convincing at this juncture.
Growing Markets for Cleaner Fuels
With 14 percent of the world’s known reserves, Qatar the third most gas-rich nation, after Russia and Iran. Qatar is the largest exporter of LNG in the World and most of it is exported in the form of LNG. Most of the natural gas it produces is exported in the form of LNG — the majority currently destined for China, India, Korea and Japan. Through 2012, Qatar will invest more than $90 billion in the gas sector, which will result in a tripling of LNG exports. Meanwhile, oil-production capacity is expected to reach 1.1 million bpd by 2010, after investments worth $5.5 billion in the Al-Shaheen field. Qatar’s crude oil exports are mainly directed to Asia (97 percent in 2006). Qatar’s reliance on crude oil is expected to decline as oil production is expected to peak around 2010.
The creation of a GCC-wide gas grid originating in Qatar remains a distinct possibility — and Saudi Arabia would be one of the main beneficiaries. The Dolphin undersea natural gas pipeline project is now operational and connects the gas networks of Oman, the UAE and Qatar. The second phase of the project involves increased volumes of piped gas to the UAE, whilst gas from Qatar to other GCC destinations is envisaged for the future — which could help solve the region’s gas supply problems in an environment of ever-increasing demand from the power-generation and other industries.
Infrastructure and Real Estate
Infrastructure projects will continue to be a blessing that creates domestic demand, as well as a curse that adds strain to the economy. The New Doha International Airport, for example, which will have the capacity to handle 50 million passengers by 2015, is currently in its first phase of development and will receive $2 billion of investment by 2009.
Qatar also continues to expand its capacity to generate power and 2008 will see the completion of IPP-2, adding 2,000 MW of power at a cost of $2 billion.
By 2010, Qatar hotel-room availability in the luxury sector is set to exceed 8,500 rooms.
Saudi investments in the real estate sector currently amount to an estimated $1.1 billion. Construction on the first of these, the $2.7 billion Pearl-Qatar project, began in 2004 — and on completion in 2009, it will offer luxury accommodation for 40,000 international residents, as well as schools, shops, restaurants and several marinas.
Work on a larger project has also started: the $6 billion Lusail development will eventually house around 200,000 people. Finally, work on Al Khor multi-residential scheme is also underway, with an estimated total project cost of $5 billion.
Sovereign Wealth
The Qatar Investment Authority (QIA) has invested assets of $65 billion. Besides the recent acquisition in Credit Suisse (less than 3 percent), QIA has acquired a near-10 percent holding in the Nordic Exchange OMX, almost 24 percent of the London Stock Exchange and 5 percent in Singapore’s Raffles Medical Group. It also made a joint-investment with Dubai International Capital to secure a 3.12 percent stake in EADS.
In the UK, investments include the acquisition of four leading chains of nursing homes for approximately $5 billion. QIA also has a 50 percent shareholding in the Qatar National Bank and owns 50 percent of Qatar Telecom.
(Dr. John Sfakianakis is chief economist at SABB, Riyadh.)
