Wednesday 04, January 2017 by Georgina Enzer

IMF reports on Qatar's new reality

Qatar is adjusting to the new reality of sustained lower energy prices. The drop in international oil and gas prices has put considerable pressure on the fiscal and external positions. However, the authorities’ policy response has been adequate, underpinned by cuts to current expenditures and renewed efforts towards increasing non-oil revenues, according to a new report by the IMF. Tariffs of some utilities (water and electricity) have been increased from October 2015 and the increase in gasoline prices in January 2016 was followed in May by the implementation of a regular price adjustment mechanism. 

Qatar is adjusting to the new reality of sustained lower energy prices. The drop in international oil and gas prices has put considerable pressure on the fiscal and external positions. However, the authorities’ policy response has been adequate, underpinned by cuts to current expenditures and renewed efforts towards increasing non-oil revenues, according to a new report by the IMF. Tariffs of some utilities (water and electricity) have been increased from October 2015 and the increase in gasoline prices in January 2016 was followed in May by the implementation of a regular price adjustment mechanism. 

Despite the availability of substantial buffers, the reduced hydrocarbon prices have adversely affected macroeconomic performance. Growth slowed to 1.7 per cent (year-on-year) during the first half of 2016 and inflation picked up, reaching 2.2 per cent in October 2016 (year-on-year), in part due to higher domestic energy costs. The central government surplus fell from 12.3 per cent of GDP in 2014 to 1.2 per cent in 2015 and government debt as a ratio of GDP moved from 32.3 to 34.9 per cent of GDP during the same period. The authorities, unlike many other hydrocarbon exporting countries, financed the fiscal deficit mainly through domestic and foreign borrowing without drawing down their sovereign wealth fund. Qatar has already raised a total of $ 14.5 billion of external debt and issued $ 2.6 billion of domestic bonds and Sukuk (Islamic bonds). The decline in energy prices has reduced Qatar’s current account surplus, from 24 per cent in 2014 to 8.4 per cent of GDP in 2015. While bank credit to the public sector has increased private sector credit growth, though moderating in recent months, remains robust. Despite tightening liquidity in the banking system, banks remain sound and well capitalised, with a nonperforming loan ratio of about 1.2 per cent, the lowest in the GCC region.

Macroeconomic performance is expected to remain resilient under the baseline. Real GDP growth is expected to moderate to about 2.7 per cent in 2016 and is projected to reach 3.4 per cent in 2017, reflecting expansion in the non-hydrocarbon sector due to World Cup-related spending and supported by added output from the new Barzan gas project. In 2016, average inflation is expected to inch up to three per cent. The fiscal adjustment planned in 2017 by the authorities is moving in the right direction.

During 2017–18, further subsidy cuts, increase in public fees, a moderate recovery in global commodity prices and the implementation of a VAT will drive inflation, which is expected to moderate back to low levels over the medium term. Fiscal and external balances are projected to persist in the near term, though improvements are projected for the medium term, as hydrocarbon prices recover slightly and fiscal adjustment advances.

The main risks are related to the possibility of lower hydrocarbon prices compared to the baseline assumption and to the public investment programme. The main external risk remains the possibility of persistently lower energy prices. In addition, the prospects of further rises in the US interest rates may complicate efforts to bolster economic growth. Spillovers to the non-oil sector would be transmitted through slower government spending and declining liquidity in the banking system. Domestic risks are related to the ongoing public investment programme. While crucial for further economic development and diversification, it could bring about over-heating in the near term, potential resource misallocation and reduced expenditure efficiency in the medium term. Overall, financial risks in the banking sector are moderate as banks’ balance sheets remain strong. However, the loan-to-deposit ratio has risen, possibly implying increased credit risk.  Moreover, the expansion strategy of some banks into riskier foreign jurisdictions could potentially increase downside risks for their asset quality. 

Economic Policies

Fiscal consolidation should be well-sequenced and take into consideration the potential impact on growth: 

The pace and the composition of the adjustment should strike a balance between revenue increases and expenditure restraint in the medium term. Containing the wage bill, public service benefits, subsidies, and goods and services expenditure are some avenues to rein in public spending, while preserving growth-promoting public investment. 

The GCC agreement on the introduction of VAT by 2018 is a welcome development, and Qatar is already taking actions to ensure its smooth and timely implementation.  

Based on discussions with the authorities as the 2017 budget is not yet approved.

The authorities’ plan to implement excises on tobacco and sugary drinks starting in 2017 in line with a GCC-wide agreement will yield additional revenue. Complementary revenue measures should be explored, including broadening the corporate income tax base to include GCC companies.  Deficit financing should remain supportive of private sector credit growth without jeopardising external debt sustainability. Financing the deficit mainly through external borrowing as well as asset drawdown seems appropriate, taking into consideration the risk-return tradeoff between the cost of external borrowing versus the return on accumulated assets.

The authorities have made good progress in public investment management. A new tender law and public finance law were recently approved. Building on these developments, further efforts to enhance monitoring of public expenditures will help improve efficiency and better management of investment spending.

The authorities need to carefully manage liquidity pressures. Increasing transparency of T-bill auctions and improving communication with respect to the QCB’s liquidity operations would allow banks to better anticipate liquidity conditions in the interbank market and strengthen their liquidity management. 

The fixed exchange rate regime remains appropriate. The peg to the US dollar continues to serve Qatar well. Nevertheless, given that the Qatari economy is evolving towards more diversification, the pegged exchange regime should be periodically assessed over the medium term to ensure it remains the best option. 

Deepening domestic financial markets will promote saving and offer borrowing and investment opportunities. Investment projects increase the need for diverse sources of funding with long-term maturities and reduced cost of borrowing. Qatar has continued to develop its domestic debt market, deepest in the GCC region, by issuing bonds and Sukuk in September 2016, even though secondary trading is very limited. Building on Qatar’s strategic plans, the deepening of domestic financial markets should be actively pursued. 

Banking supervision and regulation, including the macroprudential framework, are being strengthened. Progress has been made in implementing Basel III and related regulations, including liquidity ratios, counter-cyclical buffers, and buffers for systemically important domestic banks. An Early Warning System is being developed. Efforts to enhance the AML/CFT framework are underway. However, potential financial stability risks could include continued liquidity pressures, concentration risks, construction sector exposure, cross-border lending, and foreign currency exposure. Further extending and strengthening the early warning indicators should be a priority to improve financial sector monitoring. 

Competitiveness

Qatar’s competitiveness indicators are the strongest in the GCC region, but there is scope for improvement compared to non-GCC peers. The authorities have implemented a number of measures to boost diversification, including strengthening the private sector, promoting SMEs, and incentivizing nationals to work in non-government jobs. They are accelerating efforts toward ensuring contract enforcement and simplifying business registration. Additional measures are needed to further strengthen the business environment, including by enhanced contract enforcement, and improved education quality. 

The vast infrastructure spending has put a spotlight on labour market conditions for expatriates. The authorities are addressing reports about working conditions of certain expatriate workers. Committed to improving the situation, the authorities have put in place a new labour law abolishing the “Kafala”, which came into effect in December 2016. The law makes it easier for workers to switch jobs and exit the country. 

The authorities should continue efforts to further improve macroeconomic statistics. The authorities have started publishing quarterly GDP by expenditure and finalised the compilation of the Foreign Investment Survey. They are contemplating a new investment survey with a view to addressing the remaining gaps and improving the IIP and BOP statistics. Progress is being made on compiling fiscal data according to the GFSM 2001 and in subscribing to the SDDS

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