Doha’s efforts to diversify economy are bearing fruits

Qatar’s economic diversification is bearing fruits as the country is set to outperform its GCC peers on growth this year and in 2018.Recovering oil prices – after bottoming out in 2016 – supports rising investor and consumer confidence, even as Qatar’s ambitious economic diversification boosts the nation’s non-oil economy.Doha’s efforts to diversify sources of imports and external financing have come in for praise from the International Monetary Fund (IMF), which recently allayed fears of shortages, as well as concerns about the state’s ability to implement big infrastructure projects.Qatar, the world’s top exporter of liquefied natural gas, is spending billions of dollars on projects ahead of the 2022 FIFA World Cup, which it is hosting.The IMF said Qatar’s banking sector remains sound, after the central bank injected liquidity to mitigate the impact of withdrawals of deposits after the diplomatic rift with its GCC and Arab neighbours erupted in early June.Qatar was cutting current expenditure and raising non-oil revenues to help reduce the projected fiscal deficit from 8.8% of gross domestic product in 2016 to 5.9% of GDP this year.Lower imports and an oil price recovery will allow the current account to swing from a deficit of 7.7% of GDP to a surplus of 3.9% this year, the IMF forecast showed.Economists also say Qatar will continue to absorb added import costs linked to the reorganisation of supply chains – necessitated by fellow GCC members’ unjustifiable boycott of the country – limiting the impact of the ongoing diplomatic crisis on prices over the coming quarters.Recent data showed only a small, temporary uptick in inflation following the outbreak of the crisis on June 5 – to 0.8% y-o-y in that month – and a deceleration to 0.2% in July, indicating that this trend is playing out.Some of the upward pressure on inflation will be offset by increased housing supply, which has caused housing prices – a key driver of inflation in recent years – to fall in recent months.BMI analysts’ believe that Doha will hold off on fiscal consolidation measures amid the crisis, limiting the likelihood of these putting upside pressure on inflation in the coming months.As Gulf Times reported today, the BMI researchers expect price pressures in Qatar to remain manageable over the quarters ahead.Another expectation is that the Qatar Central Bank (QCB) will continue to track the US Fed’s tightening cycle through to 2019, given the riyal’s dollar peg.Following the US Fed’s June 2017 hike to its benchmark interest rate by 25bps, the QCB raised its overnight deposit rate by the same the same margin to 1.5%. It chose to keep its overnight lending and repo rates at 5% and 2.25% respectively – likely in order to limit pressure on local banks’ funding costs in the short term, amid the ongoing diplomatic crisis.Qatar’s large foreign reserves – sufficient to cover around 12 months of imports – mean the QCB would certainly be able to defend the riyal’s peg to the dollar, should the interest differential with the US narrow.