By Denise Marray/Gulf Times Correspondent/London
“Qatar’s sovereign assets and hydrocarbons endowment, its high-income indigenous population and the government’s fiscal adjustment efforts so far have allowed Qatar – more than most of its GCC peers – to shrug off global energy market instability and focus on preparing for the future.”
This was the upbeat view presented by Oliver Cornock, Managing Editor, Middle East at Oxford Business Group, at a well-attended briefing on ‘Opportunities in Qatar’ organised by the Arab British Chamber of Commerce in London.
Cornock, who has a background in project finance at British Arab Commercial Bank, part of the HSBC Group, and many years’ experience in the Mena region, does not discount the “very real, challenges that Qatar, whose long-term gas contracts are mostly indexed to oil prices, currently faces”, but believes that these are outweighed by “the country’s numerous strengths and opportunities.”
He observed: “Qatar’s domestic economy is much better equipped than most neighbouring markets to not only withstand a prolonged period of cheap oil, but to thrive, regional sluggishness notwithstanding.”
Looking at the country’s fiscal reserves, he noted: “The Qatar Investment Authority, the nation’s sovereign wealth fund, had around $262bn under management as of 2015, according to data from the US-based Sovereign Wealth Fund Institute.
“This figure – which is equivalent to around $1mn per indigenous Qatari citizen – is, frankly, astounding. More impressive still is that the government does not intent to dip into the Investment Authority’s portfolio to cover the current deficit, as the fund has been designated for future generations, and not as a stabilisation tool. Instead, the state plans to rely on domestic and international debt markets to finance ongoing expenditure.”He noted that Qatar’s financial services industry, “a major economic contributor in its own right”, stands to benefit considerably from this activity.
“The robust fundamentals of the domestic banking and capital markets sectors are a key reason I am optimistic about Qatar at the moment. Foreign investors can hold up to 49% of a company’s stock now. The country is home to the third-largest banking industry in the Gulf, with assets of $288bn spread among 18 institutions, a growing percentage of which are Shariah-compliant. From 2010 through 2014, the industry’s asset base grew at a compound annual rate of more than 15%, making it the fastest-growing banking sector in the GCC,” he said.
With regard to the outflow of government deposits reported by banks in 2015, which led to anxiety about tightening liquidity, he said that in his view such concerns had been ‘overblown’.
He explained: “As of the end of 2015, the sector was in a strong position, with a capital adequacy ratio in excess of 16%. In recent years international-standard corporate governance and transparency rules have been put in place across the industry, under the guidance of one of the most widely respected central banks in the region. As such, in my view Qatari banks are currently better positioned to underwrite deficit spending than lenders in almost any other country in the Middle East.”
He takes a similarly optimistic view of the bond market.
“The country’s bond market is still small, but it has great potential. The central bank began laying the groundwork for a domestic debt market in 2011, when it issued short-term sovereign bonds for the first time in the country’s history. Since then the state has expanded its offerings to include instruments with maturities of up to seven years, thereby broadening the nascent yield curve in preparation for corporate issuance.
“Sovereign bond sales are expected to ramp up considerably in 2016 and through 2017, as the state issues a steadily increasing amount of debt to finance the shortfall. Qatar will likely run a deficit of around 4% of GDP from 2016 through 2019, according to recent forecasts by Standard & Poor’s.
This should not concern us much, however, given the government’s reserves and clear continued ability to borrow not only at home but also on international markets.
Indeed, just last week Fitch affirmed Qatar’s AA rating, following on from S&P’s AA reaffirmation a month prior. By comparison, in mid-February 2016 Saudi Arabia, Bahrain and Oman were downgraded by S&P,” he said.
Above all, he said, Qatar’s greatest asset at the moment is its nascent, but diverse and steadily expanding non-hydrocarbons economy, fuelled by the current infrastructure drive – much of it in preparation for the FIFA Football World Cup Tournament.
According to the IMF, from 2012 through 2015, GDP growth has been driven primarily by a handful of non-energy industries, including banking and the financial sector, construction, sports, tourism and media, among others.
Underpinning much of this activity is the state’s massive ongoing infrastructure programme, which, with around $220bn in spending expected through 2022 – when Qatar will host the World Cup – is one of the largest national development initiatives globally.
He concluded: “While states across the region have slashed spending on similar programmes in recent years, the authorities in Qatar have stated repeatedly that they will not cut capital expenditure to cover deficit spending. In my opinion, the government’s stance on this issue is spot on.
The projects underway now – including some $35bn-worth of new municipal and national rail lines – will allow the country to play a central role in the GCC in the future, once the region has recovered from the current slow-growth situation.
“Qatar is perhaps the only country in the Middle East that can afford to continue to invest in its future at such a grand scale. I expect this effort will pay off and to present opportunities investors cannot ignore.”
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