QATAR
Vying with Dubai

One of the fastest growing economies in the world, Qatar’s fortunes in 2008 will however in large part be tied to the energy industry.

Qatar could turn out to be the world’s second fastest growing economy in 2008. Real GDP is forecast to grow between 9 per cent and 10 per cent for 2008, according to banking-industry forecasts. The only country expected to grow faster is China, at about 10 per cent. The UAE, Bahrain, Saudi Arabia, Kuwait and Oman are also among the world’s 10 fastest growing economies, but barring the UAE, all are projected to grow at just half the rate of Qatar. The Emirates was seen expanding at a rate closer to 8 per cent.

But investors know all this already and share prices on the Doha Stock Exchange reflect that knowledge: the average price-to-earnings ratio was 19 , second in the region only to Kuwait’s ratio of 20.2. That makes stocks in any other country in the GCC a better buy than Qatari or Kuwaiti ones, and is an indication that the stock market in Qatar may not see returns as explosive as what is likely in bourses in other countries in 2008. Still, shares on the Doha market are not too expensive. Stocks in 10 other developing countries are costlier, including in China, Chile, India, Indonesia and Malaysia.

Another challenge in 2008 will be rising project costs. Qatar has more than US$100 billion in projects underway in sectors, including real estate, industry, utilities and natural resources. Like in other Gulf countries, the cost of labour and supplies is on the rise, but the shortage of supply in areas like housing and office space mean developers are likely to keep building. Real estate prices will continue to rise, stoking inflation pressure on the economy as a whole.

Main driver
Qatar’s fortunes in 2008 will in large part be tied to the energy industry. Analysts in late 2007 predicted that if oil prices drop in 2008, it would most likely be because of economic sluggishness in the US, where the credit industry is struggling to cope with delinquent loans. Still, many oil-industry watchers remain convinced that oil will remain above US$80 a barrel, a price at which Qatar will not have to worry about its budget and plans.

Gas prices are less fluid than oil prices, given the lack of a global market for the commodity. Yet, demand is picking up around the world, specially in the US, and that will help Qatar. The International Energy Agency predicts demand growth of 1.5 million barrels of oil equivalent per day, a 1.7 per cent increase, and price rises of 17 per cent. This is based on assumptions such as the expectation that North America will not experience two consecutive mild winters. Last season’s higher-than-normal temperatures sapped demand for energy to heat buildings. Qatar is the world’s biggest seller of liquefied natural gas. While the gas it sells now is mostly at predetermined prices, an increase in demand will certainly boost Qatar’s ability to negotiate higher prices in future deals.

Several gas projects are expected to see progress in 2008, including the initial run of the largest LNG shipment scheme in the world – gas will be liquefied in Qatar and shipped to a hub in the UK, where it will be sold. This gas train was initially expected to start operations, and therefore to begin generating profits, in 2007. Now it looks likely to do so in the first quarter of 2008.

By the numbers
Qatar’s financial position is marked by strong macroeconomic indicators but a large debt. The government has financed gas exploration and production operations by borrowing. External debt was near US$26 billion in early 2007, about 48.7 per cent of the GDP. That ratio was at just 29.4 per cent in 1994, when debt obligations reached US$2.2 billion.

The Ministry of Finance recently pledged to stay out of the world debt market, in part because high energy prices make it unnecessary. The government appears sensitive to and conscientious towards its debt obligations. It has been reluctant to take on more debt for fear of weakening its credit rating, and has repaid some loans earlier than required.

This is happening as the cost of funds is increasing in Qatar also. The government’s decision to avoid floating new debt was perhaps also in part to keep the market clear for Qatar Petroleum and other main cash-cow companies.

Anecdotal evidence shows that some of those industrial giants are backing off expansion plans until they can secure cheaper loans. Qatar Steel had planned a US$1.3-billion loan to refinance debt and add 1.4 million tonnes of annual capacity to a plant, but as of late 2007 it was undecided on whether to postpone that plan because of conditions in the credit market. The deal may be revisited in January or February. Qatar Fertiliser Co. is also said to be undecided on whether to cancel a US$1.2-billion bond issue. But as of late 2007, it had reportedly chosen to continue as planned so it can add capacity.

Takeover Battle
Early 2008 could see the resolution of a takeover battle between Dubai and Qatar. The Qatar Investment Authority (QIA) had been vying with the Borse Dubai to take over OMX, the pan-Scandinavian stock market. QIA had amassed a 10 per cent stake in OMX by 2007, and had asked the Swedish regulators, who oversee the exchange, for permission to make an offer to all outstanding shareholders. Then Borse Dubai combined with the US-based National Association of Securities Dealers, operator of the tech-heavy NASDAQ electronic market, to make a counteroffer for OMX. That $4.9-billion deal was backed by major OMX shareholders and management.

With the Qatar Financial Centre possibly competing with Dubai to attract multinational companies, the battle for the OMX was pitted by some as a test of whether Doha could muster the clout to challenge Dubai’s status as the premier financial services hub in the Gulf. As of late 2007, it appeared that QIA would withdraw its bid for the OMX, perhaps in exchange for a swap in which QIA’s minority ownership of the London Stock Exchange (LSE) would grow. If that plays out, as sources suggest it will, QIA would swap its OMX shares for some of Borse Dubai’s in the LSE. QIA would end up boosting its share of the UK bourse from 15 per cent to 20 per cent, while Borse Dubai’s stake in it would shrink to 15 per cent.

Qatar’s attempt at becoming an international hub for financial services rests largely with the Qatar Financial Centre, an economic zone targeted at banks and other financial services providers. Tenants are promised low rent, a light regulatory regime and other enticements. The centre was established in 2005, but HSBC is the only big international name-brand tenant thus far. Qatar may lose out to Dubai in its bid to become the financial centre for the Gulf region, analysts say, because Dubai has been promoting its financial services sector for a longer period of time, and because regulations and investment controls are often considered more burdensome in Qatar than in Dubai.

Outlook
While Qatar faces the same challenges as other Gulf countries – rising costs, the spectre of sagging energy prices, and an increasing reliance on debt – the outlook remains a bit more positive. Gas sales should boost coffers significantly in 2008, and the gradual easing of the regulatory framework may help coax more financial-services providers to set up shop in Doha.

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