Qatar - The boom continues

Strong economic performance continues
Qatar's economic performance remains stellar, supported by strong hydrocarbon prices and prudent government policies. Importantly, these factors are promoting the long-term resilience of the economy. After strong growth over the last few years, the economic expansion remains buoyant. Recently released official data indicates that nominal GDP growth expanded by 33.8% in 2005. The phenomenal nominal growth rate reflects the continued increases in hydrocarbon revenues, especially with regards to increasing prices. Importantly, the non-hydrocarbon sector's growth also remained strong at 18.8%, although this was a marked slowdown from the previous year due to the high base effect. The strong growth rate in 2005 resulted in Qatar's per capita income increasing by 14% to USD 43,000, one of the highest internationally.

However, slower real GDP growth
With regards to real GDP, the growth rate slowed, albeit still remaining very respectable at 6.1% in 2005. This was a result of a slowdown in the rate of increase in hydrocarbon output and the high GDP deflator partly due to the increasing oil prices. In 2005, Qatar's crude oil production increased by 2.6%, compared to a 46.9% increase in the price of Qatari crude. Indeed, the oil deflator jumped from 131.7 in 2004 to 191.7 in 2005 due to the sustained rise in the price of oil. Furthermore, the positive contribution made by net exports was dampened by the surge in imports given the increased demand in the economy. This resulted in investments making the largest positive contribution to real GDP growth.

Another exceptional year in 2006
The outlook remains bright for 2006. Nominal GDP growth will remain above 30%, while real GDP growth is forecast to accelerate to 8.1% in 2006. Nominal GDP growth expanded by 31.0% y/y in Q2, with the average price of Qatar's crude increased by 29.1% to USD 63.0p/b in H1 2006. Although, the oil price increase will again be removed from the real GDP growth forecast, increased production of gas, and to a lesser degree oil, will result in a strong real growth rate. Liquefied natural gas (LNG) exports are forecast to reach 25.0m tonnes in 2006, compared with 22.9m in the previous year.

Moreover, non-oil sector growth will accelerate in 2006, driven by higher government expenditure and investment, which will drive demand in the economy. Government spending is slated to increase by substantial 44.4% in FY 2006/07 (April 2006-March 2007) to QAR 54.6bn, up from an already high actual spending increase of 31.5% in the previous year. This is the largest budget presented in the history of Qatar. Meanwhile, public project and infrastructure spending will increase by 70.5% to QAR 20bn. Infrastructure spending is particularly forecast to accelerate ahead of the 15th Asian Games, which will be held in Doha in December 2006. Even with higher
spending levels, the budget will still realise a surplus of over 10% of GDP.

Diversification paying dividends
After huge investments, many projects are entering the execution phase. Earlier in 2006, Qatar became the global largest exporter of LNG, surpassing Indonesia. Going forward, there will particularly be large increased in LNG production in 2007, with the completion of the 5th train of RasGas II, followed by the commissioning of the 1st train of Qatargas II at the end of the year. Furthermore, the Oryx GTL (gas to liquids) plant, which was inaugurated in mid-2006, will be fully commissioned in early 2007. This will be an important milestone for the emerging GTL industry. Owing to the higher gas production in 2007, real GDP is forecast to accelerate to 8.5%.

Further forward, LNG, oil, GTL and petrochemical production capacity are all set to increase markedly by 2010. Around USD 100bn worth of oil and gas projects are in the pipeline (even after a government decision to impose a slowdown in the development of new gas-related projects in order secure a more prudent rate of extraction). Around 70% of this sum is to be raised by project finance foreign and regional financial institutions. Meanwhile, the Qatari private sector will increasingly benefit from this investment. The Ministry of Energy and Industry has asked foreign companies that have won major engineering, procurement and construction contracts to offer
subcontracts to local firms.

Wider diversification externally
Importantly, the diversification is not just of the economy itself. As with other regional countries, Qatar has been looking invest its surpluses into overseas companies (in both Europe and Asia). The finance minister, Yousef Bin Hussain Kamal, has indicated that Qatar's state-owned investment fund will become increasingly active in acquisitions worldwide as its gas and oil revenues increase. Investments overseas have been an area that Qatar has traditionally been behind the other Gulf States, given the emphasis on internal development. Widening the investment base will add greater robustness to the economy and investment income, as they provide an extra level of diversification into economies with different drivers to growth and cycles.
Furthermore, it is a tool to tap into strong economic performances in other regions and important as they help to support the government's fiscal position, expenditure and consequently GDP growth at times of lower oil prices.

Meanwhile, the central bank is also looking to diversify its reserves. This is aimed to limit the impact of the weakening of the US dollar against other major currencies on the value of its reserves. The central bank indicated earlier in the year that it plans to buy euros until they made up 40% of its reserves. Currently, the majority of the reserves are made up of US dollars, given the dollar peg and the fact that the majority of Qatar's exports are denominated in dollars. Although in the past the central bank has purchased euros, this seems a more strategic and longer-term policy shift, perhaps in preparation of a floating single currency some time after 2010.

Growing pains
As expected, there have been some growing pains linked with the strong performance of the economy. The large influx of expatriates has resulted in a shortage of housing and increased rental costs. Furthermore, the costs of building materials have also been increasing with the strong demand and shortages in products such as cement. As a result, inflationary pressure has been rising, increasing the cost of projects. Meanwhile, there are indications from the travel sector that Qatar will face shortages in providing accommodation for the Asian Games. This will result in spectators staying in other regional cities and commuting in, which is not ideal in developing Qatar's position as a sporting hub in the region. The wider growing pains are to some degree inevitable given the scale and ambitions of the projects and developments. However, increasing export volumes mentioned above and continued investment will result in Qatar being
the region's fastest growing and richest economy.