Qatar’s budget deficit will narrow significantly in 2017 - and swing into surplus by 2018 - on the back of rising energy prices and efforts to diversify government revenue. Avoiding tapping reserves, Doha will continue to issue debt this year to cover its modest shortfall, BMI Research has said.
Qatar’s budget deficit will narrow to 1.2% of GDP in 2017 from an estimated 5.6% in 2016, as higher energy prices and the implementation of new taxes raise state revenues.
This figure is significantly lower than the government’s projection of -4.6%: Doha has based its budget on Brent averaging $45 for a barrel this year, even as BMI has forecast $57 and $60 in 2018.
The modest budget shortfall will be covered through debt issuance, as borrowing costs remain lower than the return on investment lost by drawing down reserves, and to avoid domestic liquidity pressures. “From 2018, we expect the budget balance to move into surplus, facilitating a gradual reduction of the public debt ratio in the years ahead.
“We forecast growth in Qatari state revenues - over 80% of which are derived from hydrocarbon earnings (including income on investments abroad) - in the quarters ahead, as energy prices strengthen on the back of the extended Opec, non-Opec supply cut deal,” BMI Research said.
In addition, the government is making efforts to diversify its revenue base. It’s planned introduction of taxes on goods deemed harmful to human health or the environment (including on tobacco and sugary drinks) in 2017, and its a 5% GCC value-added tax rollout next year, will generate additional income.
Overall, BMI forecasts state revenue at QR251.5bn in 2017 - far exceeding the government’s more cautious QR170.1bn projection for the year – and QR298.1bn in 2018.
“We expect more modest efforts to narrow the fiscal deficit on the expenditure side. Doha is working to improve operational efficiency, lower the public sector wage bill and rationalise subsidies, but we do not expect it to carry out cuts that will significantly impact the lives of natural citizens,” BMI said.
This can largely be avoided, given Qatar’s large fiscal buffers and small citizen population. Subsidy reductions will likely be targeted at expatriates (which make up around 90% of the total population).
Meanwhile, capital spending will remain high throughout the next five years, fuelled by projects linked to the FIFA World Cup 2020 and the Qatar National Vision 2030 diversification programme.
In 2017 alone, Qatar has earmarked QR93.2bn for major projects in key sectors (transport, infrastructure, health and education) - representing 47% of total planned expenditure.
Although some ‘non-essential’ projects have been shelved, BMI expects government capital expenditure to increase by around 5% annually in both 2017 and 2018.
As a result, BMI still expects Qatar’s budget balance to remain in deficit in 2017, at 1.2% of GDP. Doha will continue to fund its fiscal shortfall through debt issuance, avoiding drawing down its sovereign wealth fund (as the rate of return on its assets is greater than the costs of borrowing), and limiting domestic liquidity pressures.
The government is expected to make a decision within the next three months regarding an eventual return to international debt markets this year (following its $9bn Eurobond issue in May 2016 , in which five-year, 10-year and 30-year debt sold at yields of 2.375%, 3.25% and 4.62%, respectively).
While such a move cannot be ruled out (particularly amid favourable borrowing conditions internationally), it appears unlikely, in BMI’s view, given the recent issuance and the small size of the forecast deficit.
In any case, given its broad economic stability and well-established position in international debt markets, Qatar will not find any difficulties in accessing external financing.
From 2018, BMI expects Qatar’s budget balance to move back into surplus, as VAT is implemented and hydrocarbon prices continue to strengthen.
Qatar’s budget deficit will narrow to 1.2% of GDP in 2017 from an estimated 5.6% in 2016, as higher energy prices and the implementation of new taxes raise state revenues, says BMI. PICTURE: Noushad Thekkayil
