Top marks for Qatar economy

Regional uncertainties may be running high, but the outlook for Qatar remains extremely positive.

The economy is now the top performer in the Middle East, with average annual real GDP growth of around 6.5% over the past five
years. Per capita income levels, approaching $30,000, are also among the highest in the world. Both the fiscal and current accounts have been transformed and concerns about the country's external debt position have eased considerably in recent years.

Oil still dominates the economy. However, ongoing development of LNG and petrochemicals will enable the economy to withstand future possible negative oil shocks. The scale of investment needed to develop Qatar's sizeable gas reserves is dictating a need for greater private sector involvement and efforts are underway to promote the role of the private sector. Policy inconsistencies between various government ministries still need to be addressed as does the issue of labour shortages.

The authorities acknowledge these problems and are attempting to improve the investment climate. Aside from the progress on the economic front, political and social reforms are being gradually introduced. A draft new constitution guaranteeing freedom of expression, religion and association was unveiled in July 2002 and eventually a new legislature, in which the majority of members will be elected, is planned.

Real economic growth is estimated to have slowed in 2002 due to OPEC enforced oil output cuts at the start of the year. However, activity in both the gas and the non-hydrocarbons sectors remained buoyant.

Gas was supported by additional production coming on stream - output increased by an estimated 9% y-o-y. Non-hydrocarbon GDP grew by around 4%, supported by a sharp rise in government capital and development spending, as well as the US military build-up at the Al-Udeid base later in the year.

Overall real GDP growth was around 5%. The current account too has benefited from stronger hydrocarbons earnings, with an annual surplus of around $4.2bn (equivalent to around one-quarter of GDP) similar to that in 2001.

The strong oil prices of recent years together with exponential growth in LNG output, as well as prudent macro-economic policies - the authorities have purposely based recent budgets on conservative oil price assumptions - have helped transform Qatar's fiscal accounts.

A budget surplus of around QR2,000-2,500mn is expected in the fiscal year ended March 2003, against an initial deficit target of QR1,820mn, the third consecutive year the budget has turned in a surplus despite an original deficit forecast. Once again the discrepancy is due to government's cautious oil price assumptions - actual average price of $24.5/barrel for Qatari blends last year was some $8 above the initial budget forecast.

Despite current high oil prices, the authorities are unlikely to deviate from a conservative oil price stance in the forthcoming fiscal year. Although no details are presently available, the FY03/04 budget will likely follow a similar pattern to recent years with an oil price assumption of less than $20/barrel.

Further efforts will be made to rein in current spending, but capital spending on infrastructure will remain a priority.
Government reassurances that capital spending will be maintained at FY02/03 levels point to a rebound in economic growth in 2003. Lingering regional political uncertainties are unlikely to dent growth prospects. The oil sector is currently reaping the benefits of higher oil prices and output levels.

Although there is a risk that prices will come off sharply once uncertainties disappear, as in 2003, gas and non-hydrocarbons growth is expected to compensate for any downturn in the oil sector. After three years of above target government revenues, infrastructure spending is unlikely to be adversely affected by a sudden collapse in oil earnings this year.

The boom in the construction sector looks set to continue, supported by realisation of a host of public infrastructure projects, the 2006 Asian Games project and further LNG and petrochemicals related projects. The surplus on the current
account is likely to shrink as oil prices ease later in the year, but will remain very large. All in all a very positive outlook.