Qatar, whose real economic growth has been revised downwards to 2.9% this year but expected to accelerate to 3.3% in 2017, may witness rising funding costs for its corporate sector, given the currency peg and the likelihood of the US interest rate hike, according to the Institute of International Finance (IIF).
Finding that the “GCC (Gulf Cooperation Council) tiger” is slowing down; Washington-based IIF said “we are now projecting growth at 2.9% in 2016, down from 3.7% previously.”
The delay in bringing the Barzan gas on stream has led it to mark down hydrocarbon sector projections, which is expected to be broadly flat this year, it said, highlighting that the Barzan project is slated to come on stream by next year, which should boost headline growth to 3.3% in 2017.
Nevertheless, it found non-hydrocarbon sector growth to be still “robust” at 5.5% this year and about the same pace next year too, led by sectors such as construction, financial services and trade. “Despite the momentum of the 2022 World Cup related projects, growth in the non-hydrocarbon sector has cooled due to fiscal consolidation measures,” it said.
Projecting a “modest” fiscal deficit of 5.8% of gross domestic product (GDP) in 2016, the IIF said the authorities have consolidated spending by measures as merging ministries, reducing the expatriate workforce, instituting a wage freeze and cutting administrative expenses.
Subsidies are being phased out including by raising fuel prices. Other measures such as fee hikes for public services and sin taxes are being considered and the authorities have recently introduced an airport tax, it said, adding value added tax is also expected to be implemented in 2018.
“These measures should be sufficient to reduce the deficit in the coming years, even if oil prices were to remain at current levels,” it said, highlighting that Qatar’s fiscal break-even price (including investment income) is forecast to be $60 a barrel this year and a higher $63 in 2017 against $58 in 2015.
Observing that the country has tapped domestic markets, which is most for rolling over existing debt; the IIF said “given the peg to the US dollar and a likely rate hike from the Federal Reserve in December, we see funding costs rise further.”
Although domestic issuance stopped in the first quarter due to tight liquidity, regular issuances have since resumed, it said, adding after a respite following the proceeds from the eurobond issuance, the three-month interbank rate has again risen to 2.5%.
The IIF said the Qatari government has also moved rapidly in securing funds from external sources this year with a syndicated loan amounting to $5.5bn in January and a further $9bn in May through eurobonds.
“Having chosen not to tap public foreign assets (which are more than 200% of GDP) to finance the deficit, gross public debt is expected to rise to 55% of GDP in 2016, from 43% in 2015,” it said, adding the public debt may further rise to 62.8% in 2017.
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