The political rift between Qatar and some of its Gulf neighbours has compounded an already lackluster economic performance, with GDP growing a mediocre 2.5 per cent in annual terms in the first quarter (Q1), a report said.

According to the latest FocusEconomics Consensus Forecast Middle East & North Africa, the economic blockade that has been in place since early June following claims by several Arab countries that Doha was supporting terrorism and had aligned itself with Iran is at risk of becoming protracted.

In mid-June, Saudi Arabia announced a set of non-negotiable conditions for the blockade to be lifted. Qatari authorities, however, have already stated that the Saudi demands are made to be rejected. In light of the risk this poses to the Qatari economy and its increased exposure to foreign deposits, S&P Global Ratings downgraded Qatar’s sovereign credit rating to AA- and placed it on watch for further downgrades. Fitch Ratings also placed Qatar on negative credit watch, although it refrained from downgrading it on account of the country’s ample fiscal buffers.
 

ECONOMIC GROWTH

Although the economy is expected to grow at a faster clip due to a recovery in the oil sector, the ongoing diplomatic crisis has titled risks heavily to the downside, FocusEconomics said in its latest economic forecast of the country. “Our panel sees growth of 2.4 per cent in 2017, down 0.9 percentage points from last month’s forecast, and 3.1 per cent in 2018,” the report forecast.

“Consumer prices fell 0.1 per cent in annual terms in May (April: +0.7 per cent year-on-year). Food scarcity due to the blockade will fuel higher food prices and our panel expects inflation to average 2.6 per cent in 2017 and 3.5 per cent in 2018,” the report added.
 

ECONOMIC OVERVIEW

Once a sleepy backwater with an economy based on pearling, Qatar has developed at breakneck speed over the last two decades thanks to bountiful supplies of oil and gas, and now boasts the highest GDP per capita in the world.

However, take a closer look at Doha’s cluster of futuristic skyscrapers and the panorama loses some of its veneer. Many of the buildings remain half-built or in disuse, a reflection of the sharp reversal of fortunes seen in countries right across the Middle East since oil and gas prices plummeted towards the end of 2014 and government revenues dried up as a result, the report said.

Hydrocarbons form the bedrock of Qatar’s economy. Despite the government’s concerted diversification efforts, oil and gas revenues still account for around half of GDP, some 90 per cent of fiscal receipts and the bulk of exports, making the country highly vulnerable to global price swings. After oil and gas prices tanked a few years ago, the Qatari economy followed suit, with growth dropping from 4.4 per cent in 2013 to an estimated 2.6 per cent last year. Over the same period, the large, sustained fiscal surpluses enjoyed in the decade up to 2015 were wiped out, with the country expected to have registered a sizeable budget deficit last year for the first time in 15 years. Matters haven’t been helped by the recent plateauing of hydrocarbon production. In addition, 2016 saw elevated public capital expenditure linked to preparations for the 2022 World Cup.

However, Qatar has had a softer economic landing than most other oil-exporting nations. Prudent spending in the years leading up to 2015 means the country’s breakeven oil price is substantially lower than the GCC average; as a result, despite slipping into the red last year, the country’s fiscal deficit is projected to have been the second-lowest among Gulf Cooperation Council (GCC) members, and far below the yawning deficit observed in neighbouring Saudi Arabia.

“Faced with a new lower-growth paradigm, the Qatari government is in the process of battening down the fiscal hatches, in synchrony with countries across the region. Current expenditure fell sharply in 2016, with widespread redundancies in central government, public administrations and state-owned enterprises such as Qatar Petroleum and Qatar Rail. At the same time, many projects regarded as non-essential have been mothballed, including the high-profile Al Karaana petrochemicals project,” it said.

The government has also hiked tariffs on utilities such as water and electricity and allowed gasoline prices to fluctuate freely. In a true sign of the changing times, Qatar’s light tax regime will become slightly more burdensome from 2018 onwards, with the introduction of VAT as part of a GCC-wide initiative.

Over the next two years, growth should be lifted by moderately higher oil and gas prices, while the new Barzan gas project will boost gas production by 1.4 billion cubic feet per day. The 2017 budget signaled the government’s intention to continue to pare back government expenses, and channel available resources towards health, education and capital investment for the 2022 World Cup. Getting ready for the games is proving to be a gargantuan task, with $500 million currently being spent weekly on the construction of stadiums, hotels, roads and sewage works. The country’s finance minister has declared that two thirds of projects will be delivered this year and next, which will provide domestic demand, the report added.

Although Qatar’s economy looks set to continue to expand at a reasonable pace, things won’t all be plain sailing. Energy prices represent one major downside risk, with recent signs of record US crude inventories sending oil prices tumbling in early March and casting doubts on the effectiveness of the Opec deal. There is also uncertainty in the LPG market, with fears of a supply glut going forward as new reserves from Australia and the US come on stream, which could threaten Qatar’s slice of the market.

“Looking to the medium term, one thing seems clear: Qatar’s economic bonanza is largely over, and the days in which the Qatari economy grew at double-digit figures are unlikely to be repeated for the foreseeable future. We see growth of 3.3 per cent in 2017 and expect it to rise to 3.6 per cent in 2018. Growth over the last few decades has been achieved largely through increasing inputs,” it said.

The government funneled vast amounts of money into large-scale capital projects while the population ballooned, more than doubling in the last ten years. At the same time, total factor productivity growth has remained sluggish. Improving productivity will be vital if Qatar is to continue to expand at a healthy rate going forward. In order to wean itself off its dependence on oil and develop a knowledge-based economy, progress is needed to improve the business environment, increase human capital and improve the efficiency of public investment, it added.

The government is keenly aware of this fact, and the 2030 National Vision plan provides a blueprint for the type of competitive, diversified economy Qatar yearns to nurture, while the soon-to-be-announced 2017-2022 National Development Plan will continue to elaborate on how this is to be achieved. One prime example of Qatar’s diversification efforts is Education City, an attempt to create a pole of educational excellence in the heart of the Middle East.

 On a less positive note, Qatar’s ranking in the ease of doing business index has worsened continually since 2011, and the country currently languishes in position 83, far behind the UAE, a fellow GCC member; creating a more hospitable business environment will be key in order to attract foreign investment.

Transforming the country’s petro-charged economy will be no small task. Although perhaps, as Qatar has known nothing but transformation for the past few decades, it will be ideally placed to rise to the challenge.