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The International Monetary Fund (IMF) has projected Qatar’s real GDP (gross domestic product) growth to average more than 12 per cent a year until 2012.
The world body also said the Gulf country is likely to see a 12.5 per cent rise in its per capita income to $70,754 (Dh259,879) in 2007 against the 2006 estimate of $62,914. The IMF has assigned a “very favourable” medium-term outlook for Qatar, according to a report released this week. Standard and Poor’s recently upgraded Qatar’s long-term foreign sovereign rating to AA-, from BBB in 1996, citing strong economic prospects and acceleration of reforms.
The IMF said Qatar’s main drivers of growth are expected to be oil and gas, petrochemicals and financial and education services, but cautioned that the country’s continued good performance depends on maintaining financial and macroeconomic stability.
“Strong revenue growth from sharply increasing hydrocarbon receipts will help maintain fiscal surpluses of 15 per cent of GDP, on average,” the report said. It projected an almost 25 per cent jump in gross domestic product (GDP) to $65.81 billion in 2007 for Qatar.
The generally glowing report, however, cautioned against the spectre of inflation, which is estimated to have risen to an annualised rate of 13 per cent for the Gulf country by the middle of last year, reflecting supply bottlenecks.
“Qatar’s economic performance has been very strong for the last several years, spurred by high oil and gas output and prices, and increased investment in infrastructure.
“However, high demand growth, escalating rents and strong growth of monetary aggregates have contributed to double-digit inflation. The medium-term outlook remains very favourable, but high inflation is a concern,” said the report.
The IMF recommended that if inflation persisted, Qatar should restrict increases in current outlays including wages, and phase the implementation of large projects to ease demand pressures.
“Containing inflation over the medium term calls for restraint in current expenditures and the phasing of development expenditures as part of a well-designed fiscal policy, and for continuing efforts to address problems related to supply-side bottlenecks, especially housing shortages,” the world body said in its report.
Apart form the caution on inflation, the IMF said Qatar’s economic performance was strong in 2007, supported by high oil and gas prices and on-going investments. “The external current account surplus is projected at 33 per cent of GDP, despite strong import growth (30 per cent), mainly for investment projects.
“Both the government and commercial banks are expected to continue accumulating external assets.
“The gross reserves of the Qatar Central Bank are projected to increase further by $1.1bn to $6.5bn by the year’s end,” the report said.
Qatar’s 2007/08 budget, which was based on a conservative oil price assumption of $40 a barrel, is likely to show an increase in fiscal surplus from 2.6 per cent of GDP to 11. 5 per cent on an average price per barrel estimate of $67 when it ends on March 31.
The IMF said broad money is projected to have grown by about 43 per cent in 2007, reflecting large increases in net foreign assets of the banking system and increased credit to finance private and public investments.
“The banking system is well-capitalised, but could be vulnerable to real estate price corrections in light of the continuing growth in credit to the private sector (estimated at 50 per cent in 2007),” it said.
The report pointed out that the downside risks to the outlook include lower oil prices and shortfalls in gas productions, continued high inflation and a deterioration of the security situation in the Gulf.
“Looking forward, Qatar faces the challenge of sustaining growth while maintaining macroeconomic and financial stability. This requires appropriate policies for managing oil and gas revenues, deepening financial markets, and developing a competitive private sector.”
The world body made a reference to the Gulf nation’s recent drive to better its global image politically and through an acquisitions strategy.
“Qatar’s international profile is rising. In this regard, Qatar’s admission to the UN Security Council in 2006 as a non-permanent member has helped. Also, the government, through the Qatar Investment Authority, is pursuing strategic investments in international markets, and investor interest in the country is growing,” the IMF said.
COMMITMENT TO DOLLAR PEG
On the issue of the US dollar peg, it pointed out that Qatari authorities have reiterated their commitment to maintaining a peg to the US dollar in the period leading up to the GCC monetary union. They also argued that a pegged regime is likely to be in the interest of the GCC in the post-monetary union period, mainly because the familiarity and credibility of the regime are important to investors.
“As regards the exchange rate, the IMF shares the authorities’ view that the peg to the US dollar has served Qatar well by reducing trade and financial transaction costs, encouraging investment activities and providing a credible nominal anchor, and that it should be maintained in the transition to the GCC monetary union.
“Nonetheless, the exchange rate regime (and the exchange rate level at which Qatar enters the single currency arrangement) should be reviewed carefully at the time of establishing the monetary union,” the IMF suggested in its report.
“Diversification away from oil and shifts in the distribution of international financial assets may lessen the need for a continuing focus on the US dollar. Also, tightening labour markets from increased competition among GCC states, varying fiscal policy needs, and greater integration with international capital markets will make managing a common peg more challenging,” the report said.
High per capita income
Qatar is a small, very affluent country that is developing rapidly. Endowed with around 14 per cent of the world’s natural gas proven reserves and a population of 0.8 million, Qatar has one of the highest per capita incomes in the world after Luxembourg and Norway.
The strong performance of the world economy and high oil and gas prices have spurred output growth and generated sizeable fiscal and large external current account surpluses over the past five years. To reduce vulnerabilities from high dependency on oil and gas, the government has stepped up investment expenditure to broaden economic diversification, particularly in oil and gas-related petrochemicals, education, financial services and tourism.
It is also creating an enabling environment for privatisation and growth of small- and medium-size enterprises (SMEs).
What the IMF recommends to go forward
Qatar is moving ahead with refinements to licensing criteria, rules on ownership and control of banks, and assessments of country and operational risk. With regard to its plans to establish a single financial market and a unified regulator, it is important for the Qatar Central Bank and the Ministry of Finance to agree on a memorandum of understanding on their respective responsibilities for financial monitoring and oversight, crisis resolution, and payment systems regulation and operation.
While stress tests indicate the financial system is robust, the rapid rise in real estate-related lending, and bank exposure to new IPO lending should continue to be monitored. The authorities should take advantage of the strong market conditions to establish procedures to address promptly any issue that may arise as a result of increased competition. Consideration may also be given to introducing a deposit insurance scheme, with an explicit cap and risk-based premiums.
Staff recommend the monitoring of total debt, possibly through a debt monitoring unit, by collecting data and maintaining adequate regulatory oversight. Although external borrowing by financial institutions and large corporations has picked up significantly, external vulnerability associated with such borrowing is not at stake, given Qatar’s large net creditor position, its borrowing for export-related activity, and the increasing use of secured debt instruments.
Appropriate conditions should be set up for developing the capital market, including a vibrant corporate bond market. The authorities’ plans to issue treasury securities for developing a secondary market and creating a yield curve are welcome. In this regard, there is a need for a co-ordinated debt management strategy to facilitate the forecasting and management of liquidity at the QCB. Consideration should also be given to broaden the QCB’s market instruments by issuing central bank bills in Qatari rials for liquidity management purposes. The availability of corporate bonds would add depth to the financial market, allow banks to better manage their liquidity, and provide corporations with additional instruments to match their maturities.
The QCB is working toward developing its capacity for financial stability analysis and reporting, taking into account its evolving role in a future environment where bank supervision will be the responsibility of the single unified regulator. In this connection, IMF welcomes the QCB’s plans to establish a statistical database to inform policy-making, develop leading macroeconomic indicators, and design early warning systems. The Fund could provide technical assistance in this area.
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