Qatar plunges in deflation for second year

A sharp decline in rents is plunging Qatar into deflation for the second successive year after the world’s top LNG exporter reeled under the worst inflation in the region in 2008, according to a Saudi bank.

The Gulf country, sitting atop the world’s third largest gas deposits, is already deep into deflation despite expectations of another year of strong economic growth due to rising LNG exports, strong oil prices and heavy public spending, the Saudi American Bank Group (SAMBA) said in a study.

Most oil and non-oil sectors are projected to roar ahead this year except construction and real estate, which will likely remain in the “doldrums”.”

According to SAMBA, the private sector consumption and investment activity also appears to be reviving only slowly.

“Excess supply in the real estate sector continues to put pressure on rents which is being reflected in sharp declines in the heavily weighted (31 percent) rental component of the consumer price index – which was down 15.3 percent in July - and sustained overall deflation of close to three percent,” it said.

“Although the combination of Ramadan and rising global wheat prices will see food price inflation pick up from around 2.5 percent in July, another year of annual average deflation now seems inevitable given the sustained decline in rents. We have thus revised our projection to show deflation of 1.5 per cent this year, shifting to two per cent inflation next year.”

Qatar, the wealthiest Arab nation, recorded the highest inflation rate in the six-nation Gulf Cooperation Council (GCC) in 2008, when it climbed to a record high of around 15.2 per cent. The surge was a result of a weakening in the US dollar, to which the Qatari riyal and other GCC currencies are pegged, making the import bill of the country more costly.

Other factors include a sharp rise in rents, higher food prices and strong domestic demand because of the oil boom in the region.

Inflation turned into negative rate of 4.9 per cent in 2009 and SAMBA believes it will remain negative this year before it is reverses direction in 2011.

“Consumer prices in Qatar have risen rapidly and increased more than

three-fold in recent years, averaging 8.9 per cent during 2005-2009 compared to an average 2.5 per cent in the preceding five years…this increase in inflation over the past few years can be primarily attributed to the rapid and sustained rise in housing costs,” the Qatari National Bank said in a study.

“However, in 2009 Qatar witnessed a reversal to the trend, with a deflation of 4.9 per cent, mainly due to a decline in the housing sector.”

The QNB report showed the Housing Group in the Consumer Price Index declined by nearly 12 per cent in 2009.

In the first five months of 2010, the trend became clearer, with the CPI recording a deflation of around 2.5 per cent, mainly due to a continued slowdown in the housing sector category, according to QNB.

“All the other main groups of commodities and services on the index witnessed an increase. Food and beverages increased by 1.2 per cent for the first five months of 2010 while transport and communication grew by around 1.7 per cent, and the education, entertainment and culture by nearly 1.6 per cent.

“For 2010, QNB estimates deflationary conditions to persist between -0.5 to –two per cent, with the continued easing out in the housing sector.”

In its study, SAMBA expected Qatar’s GDP, the fastest growing economy in the region, to record another high growth rate this year and in 2011 before it slows down in 2012, when LNG exports stabilize.

“As the bulk of these projects will be completed by 2012 questions are being raised as to where longer-term growth will come from….this question is not unique to Qatar, but touches on the diversification challenges faced by all of the hydrocarbons-based GCC economies,” SAMBA said.

“While the extraordinary annual real economic growth rates of recent years (averaging 18 per cent during 2004-2009 and projected at 17.7 per cent this year and 13.3 per cent in 2011) are unlikely to be repeated, prospects for growth averaging around four per cent post 2012 appear promising.”

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