By Santhosh V Perumal
DOHA: Qatar appears to be caught in a cycle of soaring asset prices, putting the private sector under pressure, exposing banks and insurers to greater risks and forcing the state to keep up expenditure.
The rising petrodollar-induced liquidity and the limited avenues for financial investments led to excessive funds being diverted to other forms of investment like the stock market and real estate, bankers said.
With stock market declines, many average investors turned to real estate projects but it appeared as though they were not (now), they said.
Those already committed to property were desperately trying to abandon the sector due to the slowing pace of the expected return on investments, they added.
“Earlier, an investor could get back whatever he invested in the real estate projects in 6-7 years but now the costs have gone up so much that it could take a minimum 12 years,” a bank official said.
The booming construction sector led to shortage in steel, cement and washed sand and lack of supply led to burgeoning operating costs.
Besides, staff costs have also gone up for the constructing companies due to overall higher living costs.
A recent joint study by job portal Bayt.com and a research house YouGovSiraj recently found from their survey that in 2006, when Qatar saw an average 17% growth in salaries, the living costs had gone up 27%.
Lamenting that the media headlines were focused more on the consumers’ side, a banker said the producer price inflation (PPI) was seldom discussed in a serious way.
“Overall, the costs have gone up significantly, putting both the banks and insurance companies in a tight spot,” the banker said.
He said the responsible statistical agencies should also come out with PPI data at least on a monthly basis in order to give a better picture on the cost of doing business in the energy-rich peninsula.
In many of the developed and especially emerging economies, the business confidence surveys had factored in the business environment in terms of legal and monetary costs, opportunity costs, regulations and other aspects.
Referring to the spiralling asset prices situation as a “vicious cycle”, an economist said it showed the dichotomy in the macroeconomics.
“The liquidity overhang or excess supply in the monetary sector exists alongside excess demand in the real sector,” he added.
But for the banks, the sources said, the question was of their exposure to the real estate projects on the basis of bloated collateral.
It could be noted that the East Asian crises were triggered by a crisis in the property sector, which engulfed the banking sector as it had huge exposure to real estate on inflated collaterals.
Similarly, insurance companies feared that their risks were “overtly and covertly” increasing because of the rising construction costs.
They fear that they might take a hit not only in credit insurance but also in the risk cover for physical assets.
With private sector tending either to slow down or pull back, the onus would obviously be on the government, an economist said.
“The development expenditure (by the government) has become a necessary evil in the given circumstances” because otherwise it would only add fuel to the fire of raging inflation, he added.
Qatar’s inflation touched an all-time high of 11.83% in 2006 mainly on soaring rents.
The finance minister, HE Yousef Hussein Kamal had said recently that there were no plans to curtail expenditure since it would only aggravate inflation.
But the increased government (principal) expenditure brought with it higher demand for real estate, jacking up prices which in turn led to most agents resorting to steep rent rises, an economist said.
This phenomenon could potentially crowd out private investments, he added.
From the demand and fiscal sides, public investments could be seen as logical, an economist said, adding however that it may not seem so from the supply side or the monetary side.
The monetary policies, which were faster than fiscal policies for quick results, appeared to be rather rigid to Qatar’s fast changing situations in view of the riyal’s fixed parity with the dollar.