Qatar needs to stay vigilant on overheating risks: IMF

Sommer: Qatar’s economic outlook is positive.

By Pratap John/Chief Business Reporter

A senior International Monetary Fund official has urged Qatar to remain “vigilant” about overheating risks, and said “careful sequencing and prioritisation of investment projects will be crucial” for the country.

According to Martin Sommer, IMF mission chief for Qatar, the risk of overinvestment could be reduced by adopting a comprehensive public investment management framework.

“In this regard, rigorous procedures for selection and appraisal of projects would be especially helpful,” Sommer said in an interview with Gulf Times.

Qatar’s macroeconomic performance, he said, has remained strong. The economy expanded by 6.5% last year, the fastest in the region. Qatar has been insulated from sluggish global growth thanks to high hydrocarbon prices and a large public investment programme to support economic diversification and prepare for the FIFA World Cup 2022. At the same time, inflation has remained subdued. The budget and external sectors continue to post large surpluses.

“Qatar’s economic outlook is positive,” Sommer pointed out.

However, he said the large public investment programme poses two distinct challenges: the risk of over-heating in the near term and over-capacity in the medium term. The possibility of a sharp decline in oil and gas prices also remains a medium-term risk.

Asked about IMF views on Qatar’s real GDP growth this year and next, Sommer said,

“The economy could again grow by about 6% this year, driven entirely by the non-hydrocarbon sector. In 2015, GDP growth is expected to accelerate to around 7% as public investment disbursements gather pace and the Barzan project comes on stream.

“Going forward, growth will continue to be led by non-hydrocarbon sectors such construction, finance, transport, and trade. Our projections assume that the moratorium on new projects in the North Field will remain in place over the next several years.”

On Qatar’s banking sector, the IMF mission chief said, “Banks remain well capitalised and liquid. Stress tests by the Qatar Central Bank show that banks are resilient to various risks due to their high capital and liquidity buffers. However, deposits and credit are substantially concentrated, there is still some reliance on short-term international funding, and regional expansion of the largest Qatari banks in the Mena (Middle East and North Africa) region could stretch risk management capacity.

“Policymakers should continue monitoring these risks and vulnerabilities through an enhanced early warning system. The existing toolkit could be upgraded to identify risks and links across all sectors of the economy. Policymakers should continue to monitor closely lending standards, concentration risks, and cross-border activities of banks.”

Substantial progress has already been made in enhancing financial sector regulation, Sommer said. As an example, he cited the QCB adopting the Basel III standards. And the new financial sector regulatory strategy published last December will help strengthen banking oversight in many areas, including by combining expertise among the Qatari financial regulators, Sommer added.