Growth - Trade - Current Account - Public Finance - Debt
Foreign Reserves - Inflation

By: MEED "21 July 2000 Vol 44 No.29"

Qatar's second foray into the international bond market has not only raised $1,400 million for the government. It has also provided the clearest indication to date that the economy and public finances are finally turning the corner. Angus Hindley reports

The international financial community gave Qatar a resounding thumbs up on 22 June. Amid volatility in the emerging debt market, investors piled in for the Qatari sovereign bond, the Middle East's first 30-year issue. Commitments of about $2,500 million were taken, allowing the government to sell $1,400 million worth of paper and refinance a sizeable portion of its debt mountain.

Just 18 months ago, such a reaction from the markets would have been unthinkable. Then, all the talk was of an economy deep in trouble. Single-digit oil prices coupled with an external debt equivalent to almost 100% of gross domestic product (GDP), were raising serious concerns about Doha's ability to pull off a high-risk economic strategy investing billions of dollars in new industrial ventures that would only begin to deliver a healthy return in 2003/.4.

Alarm bells were ringing especially loudly at US credit ratings agency Moody's Investors Service. In a move widely seen as the precursor to a downgrade, the agency in January 1999 revised its outlook to negative from stable for Qatar's foreign currency rating of Baa2.

However, the threatened downgrade never materialized. Today, Moody's outlook on Qatar is back to stable. The reason is not hard to find: the 44% jump in the average export price of Qatari crude during 1999 came to the rescue.

Just how far Qatar's finances were transformed by last year's oil revenue windfall is apparent in the offering circular accompanying the sovereign bond issue. Prepared by joint bookrunners Goldman Sachs International and Morgan Stanley Dean Witter, the official report confirms that 1999 was a landmark year for Doha's key economic indicators.

A 43% surge in exports resulted in a record trade surplus and the first current account surplus for more than five years. The government deficit was halved and was the lowest since 1986. The economy expanded by close to 9% in nominal terms, while inflation remained subdued.

The one cloud on an otherwise bright horizon was the scale of government debt. The report estimates that in the 12 months to the end of March, direct government debt grew by 14% to $7,470 million, equivalent to 65.5% of 1999 GDP. This heavy burden not only explains why Qatar's credit rating was not upgraded, it also accounts for the tight fiscal policy the government continues to follow.

In every other respect, the indicators are positive:

Growth:

The economy is estimated to have expanded in 1999 by a nominal 8.9% to $11,401 million, mainly as a result of an 18.9% rise in activity in the oil and gas sector. In contrast, the non-oil economy grew by just3.2%, reflecting sluggish domestic demand and the government's decision to keep a tight grip on expenditure. Consequently, the non-oil sector saw its share of overall GDP drop to 59.8% from the previous 63.2%.

The Latest growth estimates mean that since 1995 the Qatari economy has grown by an estimated 40%, while per capita income has increased by 31% to $21,841, which is the highest in the GCC.

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Trade:

Despite average oil production slipping by 4% to 650,000 barrels a day (b/d), total crude exports climbed in value by 34% to $4,014 million. The value of liquefied natural gas (LNG) exports rose by 61% to $1,353 million, following a near-doubling in volumes to 6.5 million tonnes. The upshot was that overall exports were up by 43% to $7,214 million.

Rising LNG exports will be a strong feature of Qatar's foreign trade in the coming years. With both Qatar Liquefied Gas Company (Qatargas) and Ras Laffan Liquefied Natural Gas Company (RasGas) ramping up production, exports are projected to increase to 9.6 million tonnes in 2000, 10.3 million tonnes next year and 11 million tonnes in 2002.

The surge in exports in 1999 coincided with a sharp fall in imports, which dropped by one-third to $2,252 million. The reduction was premarily due to a decline in imports for the LNG construction projects, which fell to $372 million from $1,021 million previously, following completion of Qatar's second liquefaction plant, the RasGas project.

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Current Account:

The strong growth in exports helped to more than double the trade surplus to $4,962 million, the highest level for a decade. The large surplus more than offset a 15% rise in net outflows for services, official income and current transfer to $2,791 million. As a result the current account showed a surplus of $2,171 million. This compares to deficits of $456 million in 1998 and $1,061 million in 1997. Excluding LNG-related imports, the current account surplus increased to $2,543 million from $565 million.

High LNG and petrochemicals exports are expected to keep the current account in surplus over the medium term. However, it is clear that oil receipts will continue to play fundamental role in determining the balance of payments outcome and that large capital outflows will continue.

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Public Finances:

The government's battle to reduce a yawning budget deficit is finally yielding results and the Finance, Economy & Commerce Ministry has made substantial progress towards balancing the books. Preliminary estimates show that the budget deficit fell to $70 million in 1999/2000 from $148 million in the previous year. The reduction was in fact much greater than first appears: the 1998/99 deficit was boosted by a $650 million one-off cash injection arising from the partial privatization of Qatar Telecom.

In fiscal 1999/2000 which ended on 31 March, the government estimates that total revenues declined by 8.5% to $3,873 million, despite a 47% increase in oil and gas revenues to $3,059 million. The jump was more than offset by a slump in other revenues, which fell by 61% to $814 million as no significant privatization took place during the fiscal year.

Despite growing pressure to boost spending, the government managed to keep a lid on outgoings, which are estimated to have fallen by 8.5% to $3,943 million in fiscal 1999/2000. While development and capital expenditure bore the brunt of government austerity, falling by an estimated 17.5% to $756 million, current expenditure was not exempt. the government's wage bill is estimated to have fallen by 8% to $1,404 million and other current expenditure was reduced by 4.2%.

A budget surplus is a real possibility in the current fiscal year. The budget should be balanced at an oil price of $18 a barrel, assuming average production of 594,000 b/d; during the first five months of 2000, the export price of Qatari blends averaged $25.4 a barrel while production was running at 660,000b/d.

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Debt:

Doha has build up a substantial debt burden as a result of its $10,000 million gas investment programme and years of running up large budget deficits. Direct government debt was estimated to be $7,470 million at 31 March, of which $4,039 million was external and the remaining $3,431 million was domestic. Factoring in debt incurred by Qatar General Petroleum Corporation (QGPC) and its subsidiaries, some of which is guaranteed by the government, Qatar's total external debt reached $10,956 million at the end of 1999.

The government is entering a period of high debt servicing. External debt repayments in fiscal 1999/2000 reached an estimated $915 million, up from the previous $551 million. Excluding the proceeds from the recent bond issue, the government estimates that projected external debt repayments will rise to $1,289 million in the current fiscal year before peaking at $1,301 million in 2001/02. In the following three years, repayments will gradually decline, reaching $242 million in fiscal 2004/05.

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Foreign Reserves:

Qatar's foreign reserves are modest compared to other Gulf states, a fact that helps to explain why it has had to borrow so heavily in recent years. The report estimates that the government's official international reserves were up by 43% to $1,918 million in 1999. However, it adds that the figure does not include assets in the foreign investment portfolio managed by the Government of Qatar Investment Office.

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Inflation:

The inflation rate in 1999 was estimated at 2.2%, down from 2.9% in 1998.

The 18-month oil price recovery may have placed its finances on a far firmer footing, but Qatar is not yet out of the woods. Even with solid economic growth and a budget surplus in prospect for this year, the government will have to walk a fiscal tightrope if it is to meet its short-term debt obligations. Spending will have to be contained, as will popular expectations, which have been on the rise ever since the oil price bounced off the floor in early 1999.

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