Qatar: Risk Assessment
Country Risk Rating
Business Climate Rating
- Third-largest gas reserves in the world
- World’s leading exporter of LNG
- Economic diversification strategy supporting development of non-hydrocarbon sectors
- Hosting of World Cup 2022 sustains infrastructure and construction activities
- Huge financial buffers allowing the economy to remain resilient during the boycott
- High per capita income supports political stability
- Monetary policy dependent on the currency peg regime
- Possible negative impacts if diplomatic rift escalates
- Rising geopolitical uncertainty
- Dependence on foreign labor
- Persistent dependence on hydrocarbon revenues
Economy remains resilient; impacts of the rift likely to fade
In 2018, Qatar’s economy was backed by higher growth in the hydrocarbon sector and the acceleration of the non-hydrocarbon sector, particularly with the increases in construction and manufacturing. The hosting of the 2022 World Cup will likely support investments and activity in the construction, tourism, and transportation sectors in 2019. The easing of the OPEC production cut, the government’s support to diversify the economy, and the creation of new trade routes will also help growth to accelerate. However, the economic embargo will continue to restrain any strong leaps.
The conservative fiscal stance is expected to continue, despite higher hydrocarbon prices, thus limiting the contribution of government consumption to growth. The Qatar central bank has so far hiked its policy rate in line with the US Federal Reserve monetary tightening. The bank is expected to follow the FED’s footsteps due to the currency peg regime, which could result in a slower growth for household consumption. Any worsening of political tensions, lower energy prices, tighter-than-expected fiscal stances, or tighter global financial conditions would pose a significant risk to growth performance. In this regard, Qatar’s large financial buffers could provide additional support to the economy.
Inflation rose along 2018 on the back of higher energy prices and the boycott imposed on Qatar. In particular, food and beverage prices, which constitute nearly 13% of the consumer price index, rose as much as 6% early in 2018, before gradually decreasing since then. Price hikes on fuel and the impact of the introduction of a VAT are together expected to push up prices during 2019.
Rising current account surplus, with services and transfers still in deficit
Higher oil prices will enable Qatar to increase its trade surplus, and consequently its current account surplus in 2019. Hydrocarbon exports are still the leading export item for the country, with their share of total exports reaching 84% (2017). Imports are also expected to increase on the back of higher growth, which will fuel imports of consumer goods. Additionally, the country will also continue to import capital goods necessary for construction ahead of the 2022 World Cup. However, the pace of import growth will be slower than that of exports, thus feeding the country’s current account surplus.
The deficit in the services account is expected to persist, although drifting lower. On a 12-month cumulative basis, it fell to USD 13.5 billion (estimated equivalent of nearly 7.5% of GDP) at the end of the first quarter of 2018, a 16.7% drop compared with the same period one year earlier. This was mainly due to a surge in exports of transportation and travel services as a consequence of government’s efforts to diversify exports. The current transfers account will remain in deficit due to high level of remittance outflows from foreign workers in Qatar (6% of GDP in 2017) and Qatari official transfers to foreign countries. The resulting current account surplus will continue to be used for investing abroad. On a 12-month cumulative basis, overseas net direct investments stood at USD 2.5 billion (nearly 1.4% of GDP) in the first quarter of 2018 while other investments (loans, deposits, etc.) outflows jumped to USD 33 billion.
The surplus of the budget balance is also expected to increase, backed by higher energy prices and restrained government spending. Hydrocarbon exports still account for nearly 50% of the central government’s total revenues. Since the oil price dip in 2015, total budget expenditures fell to 33% of GDP in 2017 from close to 40%. Non-hydrocarbon revenues are estimated to increase thanks to higher taxes, the introduction of the VAT, and higher fees collected from the expat workers.
Domestic political scene remains stable
In June 2017, Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt severed their diplomatic ties with Qatar, and cut air, ground and sea links. Although the boycott had some negative spillover effects on the Qatari economy, it has not represented a major risk in terms of domestic political stability. However, any new conflict, or the formation of new alliances in the region, might jeopardize this stability. Moreover, any escalation of the GCC crisis would also negatively impact investors’ sentiment towards Qatar.
At the end, we can add: «Qatar’s decision to leave OPEC remains largely symbolic and may benefit Qatar’s economy as it will focus more on the major commodity it exports, liquefied natural gas (LNG). However it may cause relations with Saudi Arabia and the United Arab Emirates to be more distant.