The 2012 guide to Qatar - Euromoney...The essential new online tool for assessing sovereign and geo-political risk ECR-DPS-Advert.indd 2 21/06/2011 15:21 To participate in the beta

The 2012 guide toM

ay 2

012

Published in conjunction with:

Qatar

The essential new online tool for assessing sovereign and geo-political risk

ECR-DPS-Advert.indd 2 21/06/2011 15:21

To participate in the beta programme, register ateuromoneycountryrisk.com

• Over 200 expert members updating country risk scores for 185 countries in real time

• Now over 1,000 members

• Network with other risk management specialists. Discuss the issues affecting your countries.

• Create your own country risk scores and track them against your peers

• Follow the latest news and analysis and add your own comments and views

ECR-DPS-Advert.indd 3 21/06/2011 15:21

Qatar redraws global risk map 2Qatar’s sovereign risk profile has significantly improved in Euromoney’s Country Risk Rankings, despite the unprecedented macro-economic and political challenges facing the global economy in the past five years. The kingdom’s political cohesion, sound macro-prudential framework and rapid economic growth have propelled it into the elite list of global safe havens

Economic assessment 3The government is trying to diversify away from oil and gas but the size of its gas reserves relative to the economy mean it is unlikely to succeed

Political assessment 8Massive wealth has helped to ensure Doha has avoided the protests of the Arab Spring. Despite some planned reforms, power remains in the hands of the Al Thani family

Structural assessment 10Qatar’s infrastructure is improving rapidly, backed by heavy investment by the government, but it will be some time before the benefits are felt

Easy market access and credit rating boost Qatar 13Kingdom’s positive scores for debt indicators, access to capital and credit ratings supportive of overall country risk rating

This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

Euromoney Institutional Investor PLCNestor HousePlayhouse YardLondon EC4V 5EXTelephone: +44 20 7779 8888Facsimile: +44 20 7779 8739 / 8345

Chairman and editor-in-chief: Padraic FallonDirectors: Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany

Editor: Philip AyresJournalists: Dominic Dudley and Andrew MortimerPrinted in the United Kingdom by: Wyndeham Group

© Euromoney Institutional Investor PLC London 2012Euromoney is registered as a trademark in the United States and the United Kingdom.

Contents

Euromoney wishes to thank the below members of the ECR Expert Panel for their contributions to the consensus scores for Qatar:Justin Alexander, Qatar National BankLelia Badro, Banque AudiMartin Brandmeier, Standard BankPaul Gamble, Jadwa InvestmentNassib Ghobril, Byblos BankJames Gillard, A.M. Best CompanyPhillip Mayer, Erste BankMarwan Mikhael, BlomInvest BankPitabas Mohanty, XLRIFabio Scacciavillani, Oman Investment FundJohn Sharma, National Australia BankWichai Turongpun, Kasetsart University and Arab Banking Corporation

210x286Contents.indd 1 30/04/2012 16:23

The essential new online tool for assessing sovereign and geo-political risk

ECR-DPS-Advert.indd 2 21/06/2011 15:21

To participate in the beta programme, register ateuromoneycountryrisk.com

• Over 200 expert members updating country risk scores for 185 countries in real time

• Now over 1,000 members

• Network with other risk management specialists. Discuss the issues affecting your countries.

• Create your own country risk scores and track them against your peers

• Follow the latest news and analysis and add your own comments and views

ECR-DPS-Advert.indd 3 21/06/2011 15:21

Qatar redraws global risk map 2Qatar’s sovereign risk profile has significantly improved in Euromoney’s Country Risk Rankings, despite the unprecedented macro-economic and political challenges facing the global economy in the past five years. The kingdom’s political cohesion, sound macro-prudential framework and rapid economic growth have propelled it into the elite list of global safe havens

Economic assessment 3The government is trying to diversify away from oil and gas but the size of its gas reserves relative to the economy mean it is unlikely to succeed

Political assessment 8Massive wealth has helped to ensure Doha has avoided the protests of the Arab Spring. Despite some planned reforms, power remains in the hands of the Al Thani family

Structural assessment 10Qatar’s infrastructure is improving rapidly, backed by heavy investment by the government, but it will be some time before the benefits are felt

Easy market access and credit rating boost Qatar 13Kingdom’s positive scores for debt indicators, access to capital and credit ratings supportive of overall country risk rating

This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

Euromoney Institutional Investor PLCNestor HousePlayhouse YardLondon EC4V 5EXTelephone: +44 20 7779 8888Facsimile: +44 20 7779 8739 / 8345

Chairman and editor-in-chief: Padraic FallonDirectors: Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany

Editor: Philip AyresJournalists: Dominic Dudley and Andrew MortimerPrinted in the United Kingdom by: Wyndeham Group

© Euromoney Institutional Investor PLC London 2012Euromoney is registered as a trademark in the United States and the United Kingdom.

Contents

Euromoney wishes to thank the below members of the ECR Expert Panel for their contributions to the consensus scores for Qatar:Justin Alexander, Qatar National BankLelia Badro, Banque AudiMartin Brandmeier, Standard BankPaul Gamble, Jadwa InvestmentNassib Ghobril, Byblos BankJames Gillard, A.M. Best CompanyPhillip Mayer, Erste BankMarwan Mikhael, BlomInvest BankPitabas Mohanty, XLRIFabio Scacciavillani, Oman Investment FundJohn Sharma, National Australia BankWichai Turongpun, Kasetsart University and Arab Banking Corporation

210x286Contents.indd 1 30/04/2012 16:23

Qatar redraws global risk mapQatar’s sovereign risk profile has significantly improved in Euromoney’s Country Risk Rankings (ECR), despite the unprecedented macro-economic and political challenges facing the global economy in the past five years. The kingdom’s political cohesion, sound macro-prudential framework and rapid economic growth have propelled it into the elite list of global safe havens

The post-crisis map of global risk is being radically redrawn in Euromoney Country Risk Rankings (ECR), reflecting the tumultuous economic and political changes taking place in the world economy.

Global country risk scores are declining in the post-global financial crisis era, as economists respond to slowing economic growth, deteriorating debt metrics and disruption to the global financial systems by slashing consensus country risk scores across the developed world.

Amid this declining global trend, a number of standout investment desti-nations have emerged for international capital. Qatar, which has been the top rated MENA sovereign in ECR’s risk rankings since September 2009, is at the forefront of this new wave.

Ranked 20th safest investment destination globally in March 2012, Qatar now boasts a country risk assessment superior to OECD member states Belgium, South Korea and Japan.

Dynamic economyFrom Europe, the kingdom’s dynamic economy attracts increasingly envious glances. European country risk scores have declined sharply since March 2010, as the sovereign debt crisis engulfing the eurozone has intensified.

Simultaneously, Qatar has seen its ranking rise nine places, propelling it into the elite list of countries with a score of 70 or above.

More than 400 economists and country-risk specialists from a range of financial institutions take part in Euromoney Country Risk. They evaluate the risks faced by international investors in more than 180 markets, scor-ing countries across a range of political, economic and structural criteria.

Qatar’s country risk score has many supportive elements. High survey scores in economic outlook, government finances and bank stability place it among the elite countries in the ECR rankings, reflecting the sound macro-management of country’s energy resources over the past decade.

Qatar’s economic dynamism is now well known. Its policy makers contin-ue to implement a huge public spending programme to maintain strong growth in the non-hydrocarbon sector and improve living standards.

GDP growth is forecast at 6% in 2012, after the state’s stellar year in 2012, when growth reached 19%. Inflation remains contained at 2%, and the country retains a positive fiscal balance.

Non-energy investmentHigh structural scores are the result of tremendous investment in the country’s non-energy sector which has occurred in the past five years, improvements which have driven up the country’s scores for hard and soft infrastructure.

A comparison with Asia shows that Qatar is considered less risky than all Asian economies except Hong Kong and Singapore.

However, ECR economists are increasingly struck by the kingdom’s politi-cal backdrop.

In the survey’s political assessment, Qatar’s high scores in both a regional and international context reflect the political and social stability the country has long enjoyed. They also indicate economists’ confidence in its legal system and the transparency of the business environment.

In a period of upheaval in the Middle East, Qatar also stands out in terms of its political stability.

Across the region, country risk scores were not immune to the political upheaval which have swept across the Middle East, sparked by popular protests in Tunisia in January last year.

However, Qatar is one of two MENA states numbered among the top 40 politically stable countries in the world, along with Oman.

In contrast with other MENA states, its political assessment remained stable throughout 2011.

This stability, allied to the sovereign’s deep pockets and robust growth outlook, explains why Qatar is on course to overtake industrial nations including the UK, France and the US in the ECR global risk rankings later this decade.

Source: Euromoney Country Risk

10

15

20

25

30

FranceUKUSQatar

March ‘12

December ‘1

1

September ‘11

June ‘11

March ‘11

September ‘10

March ‘10

September ‘09

March ‘09

Coun

try

risk

rank

ing

Qatari convergence: country risk ranking versus UK, US and France

2012

Gui

de to

Qat

ar

3

Economic assessmentThe government is trying to diversify away from oil and gas but the size of its gas reserves relative to the economy mean it is unlikely to succeed

All the oil and gas producing countries in the Middle East have been in an enviable economic position in recent years. On several occasions in 2012, the price of the benchmark Brent crude has risen above $125 a barrel, its highest level since the record of $145.75 a barrel that was reached in July 2008. Such prices translate directly into huge revenues for all the Gulf oil producers, but even in the exalted company of countries such as Saudi Arabia, Kuwait and the UAE, Qatar is in an unusually favourable position.

There are three principle advantages that Doha has over its neighbours which have combined to give it one of the strongest and most stable economies in the world, although all three have more to do with luck than any great judgement by the authorities.

The first is that it is blessed with the world’s third largest reserves of natural gas, behind Russia and Iran, as well as relatively large oil reserves. According to BP, a UK oil major, Qatar had 25.3 trillion cubic metres of gas reserves at the end of 2010, equivalent to 13.5% of the global total. It also had 25.9 billion barrels of oil, or 1.9% of the world total. At the current rates of production, the country’s gas reserves should last it more than 100 years while the oil wells should keep pumping for at least 45 years.

Expanding productionThe country’s second great advantage is that the recent high energy prices have coincided with a massive expansion of its gas production and export capacity. In particular, a series of large gas to liquids (GTL) and liquefied natural gas (LNG) projects have come on stream. This has meant that the revenues from condensates and GTL output rose from QR27.2 billion ($7.5 billion) in 2008 to almost QR104 billion in 2011, according to Qatar National Bank (QNB), while income from LNG and pipeline gas sales increased from QR84.4 billion to QR144.8 billion over the same period.

Oil production during that time remained fairly steady, although prices varied widely from an average of $62.10 a barrel in 2009 to $108.60 a barrel in 2011. Taken together, the country’s revenues from oil and gas production have climbed from QR275 billion in 2008 to QR427 billion in 2011. QNB estimates that it could rise further to QR516 billion this year

and QR535.8 billion in 2013.

Other areas of the economy have also been growing, but when it comes to revenue they simply cannot compete. Non-oil and gas GDP rose from QR144.4 billion in 2008 to QR204.5 billion in 2011.

The third and final factor behind Qatar’s economic strength is the country’s small population. The Qatar Statistics Authority estimates that there are 1.67 million people living in the country, a figure that has been growing by around 14% a year since 2006. Of those, the vast majority are expatriates. Only around 250,000 are Qatari citizens, which means that the huge hydrocarbons wealth only needs to be shared among a very small group of people.

“Qatar is a special case,” says Said Hirsh, Middle East economist for the London based Capital Economics. “It has a massive gas field to support a population of just 250,000 locals.”

High oil prices and expanding output has meant that the country’s GDP has grown at an astonishing speed in recent years. QNB estimates that real GDP grew at a compound annual rate of 15.7% between 2006 and 2010 and the figure for 2011 is estimated at 21%.

With its small population, that translates into one of the highest levels of GDP per capita in the world. The IMF estimates that GDP per person will be $106,394 this year, making it the second highest after the interna-tional financial hub of Luxembourg with $106,958. The next highest GCC country is the UAE, where the GDP per capita is a shade under $70,000.

Safe and stableUnsurprisingly, this impressive economic track record has meant that Qatar has performed extremely well in recent Euromoney surveys. Since September 2009, it has been consistently ranked as the safest country in the Middle East and North Africa (MENA) region in which to invest. In the most recent survey, carried out in March this year, Qatar was ranked 20th out of 186 economies on this measure. In addition, it was ranked first in

Rank Country Score1 Norway 86.82 Switzerland 83.63 Luxembourg 79.44 Qatar 79.45 Sweden 79.26 Macau 78.57 Hong Kong 78.38 Singapore 78.09 Chile 76.910 Finland 76.7Source: Euromoney Country Risk

Overall economic risk scores: Qatar 4th overall

Rank Country Score1 Qatar 8.02 Norway 7.73 Sweden 7.54 Macau 7.55 Finland 7.56 Peru 7.47 China 7.48 Switzerland 7.39 Hong Kong 7.310 Chile 7.3Source: Euromoney Country Risk

Economic outlook scores: Qatar 1st overall

the world in terms of economic outlook, ahead of Norway, Sweden and Macau, and fourth in the world for overall economic risk, behind Norway, Switzerland and Luxembourg.

Qatari government finances, although often opaque, are in a very healthy position and on this measure, Qatar is ranked fifth in the world, after Norway, Hong Kong, Switzerland and Kuwait. Despite current expendi-ture rising by between 16 and 20% in recent years, the government has maintained a healthy fiscal surplus according to the IMF. The overall fiscal balance was 2.7% of GDP in 2010/11 and is likely to rise to 7.2% in 2011/12.

In addition, a lot of the country’s LNG exports are based on long-term contracts, which means the government is insulated to some extent from the sort of price fluctuations that can bedevil the oil market.

Growth slowing, but still healthyThe major projects to expand the country’s gas production and export capacity have now come to an end and 2012 will be the first full year at the new higher production capacity. As a result, the rate at which GDP grows will start to slow down, although it is likely be at a still-healthy level of 5.4% next year, according to QNB.

This slow-down should not cause any problems in itself, not least because everyone has long been aware that it was going to happen. However, it does mean that the emphasis, in terms of further economic growth, will now have to switch to other parts of the economy.

“There will be a shift in growth drivers as the LNG industry matures and domestic demand continues to expand at a similar pace as in the last few years or even possibly faster,” says Simon Williams, the Dubai based chief economist at HSBC Middle East.

The government has long recognized the need to diversify the economy away from the hydrocarbons sector and a number of areas are being promoted, including tourism, transport, construction and manufacturing. At the heart of this diversification strategy is the country’s banking sector and the broader financial services industry.

“Financial services is an important part of the diversification effort and it facilitates the diversification; it plays both roles,” says Shashank Srivastava, acting chief executive officer of the Qatar Financial Centre Authority. “Financial services help to finance other sectors of the economy, so they act as a facilitator of the diversification effort. And then eventually it also becomes a sector in itself, which is part of the diversification.”

Banking strengthsThe country’s banks are seen as particularly strong as a result of the con-sistent and generous support of the government in recent years. Indeed, the banking system is ranked as the most stable in the region, and the 17th most stable in the world, according to the Euromoney survey in March 2012.

Banks have been helped by the government making three rounds of capital injections from 2009 to 2011. This has meant they now have a Tier 1 capital ratio of 20% as of December 2011. In addition, the non-perform-ing loans rate is low at around 2% of gross loans, according to Moody’s Investors Service, a credit ratings agency, while the return on average assets is high for the region at 2.7%.

There are some concentrations of risk in the banking sector however. According to Moody’s, the government accounts for around 23% of deposits. In addition, banks have been increasing their dependence on wholesale funding, particularly short-term foreign interbank funding. In total, this now accounts for approximately 33% of total funding.

“This degree of exposure leaves the banks vulnerable to shifts in market conditions and investor sentiment,” points out Elena Panayiotou, lead analyst for Qatari banks at Moody’s.

Credit growth is also running at a high level, in line with the rapidly expanding economy. Moody’s estimates that credit growth is expected to be 20-25% in 2012.

The country’s banks are also heavily exposed both to the local economy and to the local construction and real estate sector in particular. Despite all this, there appear to be few immediate concerns for the health of the banking system, not least because of how well the banks, backed by the government, coped with the downturn in 2009.

“I think [the banking sector] is very solid,” says Williams. “I have no concerns about the stability of the banking system. Credit growth is rapid right now and is lead by the public sector, but I’ve no concern over concentrating risk. The fact that the government plays such a dominant role in the domestic economy and in the banking sector itself provides a great deal of comfort.

“If you look at how the banking system performed during the 2009/10 downturn, the pain it endured and the pace with which it recovered, the banks in Qatar outperformed their neighbours by a considerable margin, demonstrating the advantage of having a wealthy sovereign so closely

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0UAEChinaUSAUK

Saudi ArabiaGermanyBrazilFrance

QatarJapanSingaporeSwitzerland

March ‘12

December ‘1

1

September ‘11

June ‘11

March ‘11

December ‘1

0

September ‘10

Rank

ing

Comparative bank stability scores

Rank Country Score1 Norway 9.32 Hong Kong 9.03 Switzerland 8.94 Kuwait 8.85 Qatar 8.76 Chile 8.67 Sweden 8.58 Macau 8.59 Luxembourg 8.510 Singapore 8.5Source: Euromoney Country Risk

Government finance scores: Qatar 5th overall

Source: Euromoney Country Risk

2012

Gui

de to

Qat

ar

5

involved in the sector.”

The government can happily afford to continue supporting its banks as a result of its strong fiscal position. Economists estimate that the break-even price for oil for this year’s budget is around $55 a barrel, well below the average price of $118 in the first quarter of this year.

As Rachel Ziemba, director at Roubini Global Economics, says, “Qatar’s banking sector is as strong as its sovereign allows it to be. The likelihood is that government support will continue.”

Sovereign wealthOf course oil prices have fallen rapidly in the past and could do so again, but the financial reserves that Qatar has built up through its sovereign wealth fund, the Qatar Investment Authority (QIA), means that it could easily afford to cover any budget deficit for several years.

In a speech to the Global Investment Form held in Doha on 21 April, Minister of State for Cabinet Affairs Ahmed bin Abdullah Al Mahmoud said that the QIA currently has assets of more than $65 billion under management. Just how much more is unknown, however. The US based Sovereign Wealth Fund Institute estimates that the QIA controls $85 billion in assets, making it the twelfth largest fund in the world. Other

Qatari officials have put the value of the QIA’s holdings at more than $100 billion.

The health of the banking sector and indeed the wider economy will remain inextricably linked to the actions of the government in the years ahead. In particular, Mohamad Moabi, assistant general manager of eco-nomics, financial analysis and research at QNB, says that the local projects market, backed by continuing government spending, should provide more opportunities for the banking sector.

“There are definitely opportunities for the banking sector with all the projects that are happening,” he says. “There’s been quite a lot of new projects announced over the past few years and to get everything done in time for the World Cup in 2022 they will need to start initiating these new projects from 2013 and 2014. They’re bidding for the Olympics now as well, so to get everything done by 2020 will bring more urgency.

“In terms of financing for the metro, for example, whatever structure they use there will be a large chunk of syndicated loans which will provide opportunities for the banking sector to support the contractors who will be executing these projects.”

Inflation picking upWhile economic growth has been impressive over the past few years, inflation has recently been kept low. According to the Qatar Statistics Au-thority, the consumer price index (CPI) rose by just 1.3% between January 2011 and January 2012.

One key reason is the over-investment that has taken place in the real es-tate sector. The excess supply that has created has meant that rents have been flat or even falling for around three years in Qatar. Given that the

‘rental, fuel and energy’ category accounts for 32% of the basket of goods used to calculate the CPI, it means that inflation too has also remained lower than it otherwise would have been. In the 12 months to January 2012, rents, fuel and energy fell by 5.9%. Without that, inflation would have been 4% for the period.

For this year, QNB is predicting that inflation will be 2.56%, rising to be-tween 3 and 4% next year. The figure is expected to pick up as new work-ers that arrive in Qatar help to soak up the supply of apartments, offices and retail outlets, allowing rents to start to rise again. However, with the real estate market finally recovering, many commentators have warned of the need for Qatar to keep a close eye on its monetary policy to ensure that inflation does not rise to fast. One difficulty is that the peg between the Qatari riyal and the US dollar limits the monetary tools available.

“Inflation will remain a concern,” says Trevor Cullinan, director of sover-eign ratings at Standard & Poor’s, a credit ratings agency. “One of the weaknesses is the lack of flexibility over monetary policy. If inflation were to continue to increase this would be a concern. It’s an issue we are watching. It ties in to this idea that potentially there are signs of overheat-ing and overcapacity in some areas.”

It is impossible to know just how quickly inflation might rise but, ac-

cording to HSBC, the pressure for some increases could start to build up towards the end of this year or early next year.

“Inflation may begin to pick up in the latter part of this year or in 2013,” says Williams. “There is a fair amount of spare capacity in the Qatar econo-my, particularly in the real estate sector. Rents have been flat or falling for three years now because there is, despite the growth in the population, still an excess of real estate. When Qatar works through that you will see price pressures resume.”

Despite the risks, Qatar is still ranked at 11th in the world in terms of monetary policy and currency stability, in the Euromoney survey. Within the region, only Oman fared better, in seventh place.

As Williams points out, there has been significant population growth in

Rank Country Score1 Norway 9.02 Switzerland 8.83 Slovak Republic 8.34 Canada 8.25 Sweden 8.26 Singapore 8.27 Oman 8.18 Luxembourg 8.09 Netherlands 8.010 Australia 7.811 Qatar 7.8Source: Euromoney Country Risk

Monetary policy/currency stability scores: Qatar 11th overall

“Qatar is a special case. It has a massive gas field to support a population of just 250,000 locals”

recent years. From 2006 to 2010 the number of people in the country rose by an average of 14% a year. Most of this was accounted for by expatriates coming to find work in the booming economy. The growth rate among local Qataris is estimated at a far more modest 3.5% a year from 2006 to 2010, according to QNB, although that still makes it among the fastest in the GCC.

With such a small local population, it is inevitable that the economy has to rely so heavily on expatriate labour. In addition, there is an overwhelm-ing preference among locals to work for public sector employers. Accord-ing to QNB, some 84% of Qataris who work do so for the public sector, and a further 5% work for companies that are partly state-owned. Just 8% go to work for the private sector, with the rest either unemployed or not actively seeking work. One noteworthy element of this is that some 73% of unemployed locals are female, according to QNB.

Building human resourcesThe government has also been pushing forward with the development of the education system, in an effort to make locals more attractive to private sector employers. Currently one in five Qataris has a university degree, while a further 28% have completed secondary level education.

Central to the government’s efforts to improve education levels further is Education City. This campus on the western outskirts of Doha is vast is size and impressive in ambition, but the reality is not yet matching the vision (for more on the education sector, see the Structural Risks chapter).

The government’s National Development Strategy 2011-2016, a stepping stone on the way to achieving the goals of the National Vision 2030 document, has set a target of having 15% of the Qatari workforce in the private sector by the end of that period, but with public sector salaries rising so fast it is difficult to see how that can be achieved – in September 2011 the government announced a 60% rise in salaries and pensions for public sector workers, rising to 120% for those in the armed forces.

The relatively small number of locals means that this situation does not represent a big financial problem for the government for the near term. The public finances are in such a healthy position as a result of the oil and gas revenues that the government can easily afford to employ locals who do come into the job market.

“The domestic population is tiny,” says one regional economist. “It’s a very small number and the ability of the public sector to absorb numbers of that size, certainly for the next five or 10 years, is pretty clear. I’m not worried about unemployment in Qatar. The public sector will continue to be the dominant employer of local staff and expatriates will make up

the vast majority of people in the private sector. The ability of nationals to create value in the private sector is pretty limited.”

Finding ways to get more locals to enter the private sector workforce is one of the two big challenges facing the Qatari authorities, alongside the efforts to diversify the economy away from oil and gas. The two policies are interlinked but both are being undermined to some extent by the high wages offered by state employers.

Diversification targetsThe government has set itself the ambitious aim of financing the entire budget from non-hydrocarbons revenues by 2020. According to a recent report by the IMF it seems likely to miss this target. In its most recent Article IV report on the country, published in January, the IMF team that visited the country reported that: “The recent increases in current expenditures, and the large public sector salary and pension increase for Qataris announced in September, in particular, led to an expansion-ary fiscal stance in 2011/12 ... According to [IMF] staff’s calculation, the non-hydrocarbon revenue would cover about 63 per cent of the total expenditure by 2016/17, implying the need for more effort by the au-thorities to achieve their target.”

A further reason for the difficulty in meetings its diversification aims is that Qatar is targeting many of the same sectors that other GCC states are chasing after, including financial services, tourism, transport and logistics, education and healthcare.

“The various reports they’ve put out, such as Vision 2030 and the Na-tional Development Plan, are some of the best that we’ve seen from the region,” says Andrew Gilmour, a senior economist at Saudi bank Samba. “They’ve thought out the issues and problems and are making a good stab at trying to drive the economy in a different direction. The trouble is that they are in amongst a group of countries like Dubai, Abu Dhabi and Bahrain who are all chasing the same markets. In terms of the financial sector, Dubai has a head start, but Qatar has done well in terms of grab-bing a bit of a niche in the sporting arena.”

The major success to date in terms of sports is clearly the football World Cup which Qatar will hold in 2022. It is also hoping to win the rights to host the 2020 Olympic Games, with a decision on that expected in Sep-tember next year. In the meantime, Qatar has also established a name for itself with smaller events such as the Tour of Qatar cycling race, the Qatar Open tennis tournament and the Qatar Rally.

In the financial services arena, the country’s efforts are focused around the Qatar Financial Centre (QFC) which has been trying to develop Doha as a hub for the asset management, reinsurance and captive insurance industries, although it is open to looking at other areas too, according to its acting CEO.

“The future for us is to continue to focus on the three niche areas and to develop industries in those three areas,” says Srivastava. “It’s not some-thing that can happen overnight, but we are in it for the long haul and we are going to stick with it.

“We are always looking at the latest developments that are happen-ing in the financial services sector and if there is something that we find, an opportunity that we can capitalize on, then surely we will do that. That doesn’t mean we will divert away from the long-term focus to develop those three industries, but the world is a dynamic place.”

Rank Country Score1 Norway 8.92 Switzerland 8.43 Luxembourg 8.04 Singapore 7.95 Qatar 7.96 Austria 7.97 Netherlands 7.88 Denmark 7.89 Macau 7.810 Hong Kong 7.8Source: Euromoney Country Risk

Employment scores: Qatar 5th overall

2012

Gui

de to

Qat

ar

7

Despite the cluster of high rise office buildings that have sprung up in the West Bay area of Doha in recent years around the QFC, the financial sector remains underdeveloped in some aspects. The stock market, the Qatar Exchange, for example remains small and trading levels are low.

That could change if MSCI decides to include Qatar in its emerging mar-kets index. To date it has refused to do so because of the restrictions that the authorities in Doha have on the proportion of shares that foreigners can own in a company. In the meantime there have been some other notable developments, such as the launch in January of a junior market targeting small and medium sized enterprises (SMEs).

“The equity capital markets here are moving in the right direction, particularly with the recent creation by the Qatar Exchange of a venture market aimed at SMEs,” says Andrew Macklin, a partner at law firm Latham & Watkins, which is licensed by the QFC. “This is a very promising development and the next step will be for the local exchange to gain ad-mission to the MSCI Emerging Markets Index which will help more global fund managers to invest in Qatari companies.”

Tourism remains an underdeveloped industry, hampered by a visa system which can be confusing at times for many passport holders and

a lack of obvious attractions in the country. Two impressive museums have been built in Doha, the Museum of Islamic Art and the Mathaf Arab Museum of Modern Art, but they are not in themselves mass tourist attractions and they are likely to be overshadowed by the facilities being developed on Saadiyat Island in Abu Dhabi, where there are plans to build offshoots of the Louvre and the Guggenheim.

Unlike nearby Dubai, Doha has also decided against developing a raft of tourist and family-friendly hotels and resorts. However, the globally important sports events that Qatar is now bidding for and sometimes winning will boost its profile and could lead to higher tourism numbers in the years ahead.

Infrastructure plansIn the immediate future, it will be the infrastructure building plans which will drive the agenda of economic diversification. There are huge rail, road, airport and utilities investments planned by the government, partly to ensure the country is able to host the World Cup, but also to ensure that it is well equipped for the future.

As part of the National Vision 2030 strategy, some $225 billion in invest-ment is expected between 2011 and 2016, according to QNB. Roughly half of that will be in the non-oil and gas sectors and the government is expected to provide $95 billion of the total, with the rest to come from the private sector.

“Qatar’s plan isn’t to go to being a non-oil and gas economy tomorrow but to diversify the economic activities of the country,” says Moabi. “It’s a gradual plan embedded in the 2030 Qatar National Vision. The aim this decade is to build the infrastructure and sow the seeds of a non-oil economy.

“People have been linking everything to the World Cup, but only about $5 billion worth of the projects are directly linked to the World Cup. The rest would happen anyway. The difference is that with the tournament in 2022 they’ll make sure it happens on time. Otherwise they might have extended some of the deadlines.”

For all the ambitious plans, however, reality dictates that diversification will only take the country so far. Given its small size and massive oil and gas wealth, it will be all but impossible to switch the focus of the entire economy away from hydrocarbons. In any case, much of the non-oil and gas activity relies, indirectly at least, on the liquidity that is coming into the economy from hydrocarbons.

“The economic base is broadening,” says Williams. “The build-out in the service sector, as well as the development of downstream energy inten-sive industries are about broadening Qatar’s economic base, but make no mistake: an economy that has the kind of natural resource endowment that Qatar does will always be driven by those commodities.

“The heartbeat of the economy will be receipts from the oil and gas sec-tor. That’s what will drive the economy along. Even if the economic base broadens, the essence of the Qatari economy is going to be hydrocar-bons wealth.”

Not everyone sees this as a problem, however. As Srivastava points out, “You can’t just diversify into something that is completely unrelated, because you won’t have any expertise in it. What would underpin it? That is not just true for Qatar, it’s true for anywhere else in the world.”

However, it is difficult to properly evaluate how well the government is faring with its diversification aims, or indeed any other policy it has, due to the opacity of state activity. A lack of transparency is a problem in many areas of public life in the region, although Qatar is seen as better than in other GCC states and getting better.

“There is a lack of timely economic and financial data,” says Ziemba. “It’s improving but it makes it difficult for economists and business profes-sionals to understand what’s really going on. It’s also makes it difficult for government.”

Of course greater transparency could increase the demand for greater distribution of the country’s wealth to its local population, which may be one reason why Qatari authorities are reluctant to open up too much. For all that, however, the biggest strength and weakness of the economy remains the same thing, and it is unlikely to change any time soon: the country’s oil and gas reserves and its reliance on them.

“The concerns I’d have across the region is that we have a situation where oil and gas make up almost all government revenues so they are very exposed to a decline in prices,” says Ziemba.

Qatar is not unusual in failing to properly diversify with the proceeds of the current oil price boom, but it remains the greatest risk for the economy. The hope must be that the boom lasts long enough for its diversification ambitions to bear fruit.

“The fact that the government plays such a dominant role in the domestic economy and in the banking sector itself provides a great deal of comfort””

Political assessment

Qatar is one of the few countries in the Middle East bypassed by the Arab Spring. It’s small, relatively homogenous local population and copious wealth means that the government has been able to avoid the demonstrations and violence seen in so many other countries.

As a result, the country scores impressively in terms of political risk, lead-ing the region with a score of 64.7 points in Euromoney’s March 2012 survey. The next country after that is Israel with a score of 61.3 points. The scores of Qatar’s fellow GCC states include Oman at 60.2 points, the UAE at 57.8, Kuwait at 57.7, Saudi Arabia at 51.1 and Bahrain at just 50 points.

High scoresFor several of the underlying factors, including government stability, corruption and the country’s regulatory and policy framework, Qatar has the best score in the region. For other factors, including institutional risk, government non-payment/non-repatriation and information access and transparency, it comes third behind the likes of Israel, Oman and Jordan.

But while it is the clear leader in the region, on a global basis Qatar’s score is not always so impressive, ranging from 26th in the world for government stability to 59th for information access and transparency, demonstrating how far the region as a whole still has to go in terms of governance and accountability.

Despite the political stability in Doha, the government has shown some signs of nervousness over the past year. In September 2011 it an-nounced a massive pay rise for public sector employees. Most were to get a 60% increase in their salaries, although some in the military were awarded a 120% increase.

Although such payments led to a significant rise in overall government spending towards the end of 2011, they are not enough to cause any problems for the exchequer given the vast revenues the government enjoys from its oil and gas exports.

Cautious openingThere have also been some hints that the regime is opening up the political space, if only slightly. The country is an absolute monarchy and, under Article 8 of the constitution, power can only be passed on to a nominated male heir in the Al Thani family, currently Sheikh Tamim bin Hamad al Thani. The family is not about to relinquish that power, but at the margins some concessions are being made.

In a speech on 1 November 2011 marking the opening of the latest session of the country’s Shura council, an advisory body which is as close as Qatar gets to a parliament, the emir said an election would be held in the second half of 2013 for the council. This was a direct response to the events of the Arab Spring that year.

“The only guarantee for the stability of Arab states, in the short and long terms, lies in the adoption of continuous reforms to meet the aspirations of their peoples, for reality affirms that no country can isolate itself from the current political movement,” he said. “The people have discovered their strength and their ability to claim their rights and to consolidate the values of freedom, dignity and social justice.”

The greatest risk with the electoral reforms is that Qatar ends up with a political system similar to the one in Kuwait – a country which has found itself trapped in an unenviable deadlock between an appointed cabinet on the one hand and an elected but largely toothless parliament on the other. In Kuwait the emir, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, retains all the important levels of power but the ability of the parliament to embarrass the government and frustrate its plans has led to a cycle of ministerial resignations and parliamentary dissolutions.

According to one regional political analyst the Qatari authorities are well aware of the potential for a Kuwaiti scenario to emerge. They are likely to do everything they can to ensure a pliant parliament is returned, with careful management of the electoral process, including who is allowed to vote and how constituency boundaries are drawn up.

Comfortable lifeSuch reforms will do little to alter the placid nature of life in Doha and there appears to be little popular appetite for wider change, given the comfortable life that locals enjoy.

“Qatar nationals will be extremely well cushioned by the wealth that has been generated,” says one economist at a Saudi bank. “They’ll have jobs. They’ll have salary increases. There will be opportunities in the private sector should they wish to take them.”

This comfortable position extends to other areas of public life such as

Massive wealth has helped to ensure Doha has avoided the protests of the Arab Spring. Despite some planned reforms, power remains in the hands of the Al Thani family

Rank Country Score1 Qatar 72 UAE 73 Oman 6.64 Kuwait 5.95 Saudi Arabia 5.86 Tunisia 4.87 Morocco 4.58 Iran 4.49 Israel 4.310 Jordan 4.3Source: Euromoney Country Risk

MENA Government stability: Qatar 1st regionally

2012

Gui

de to

Qat

ar

9

“Alongside the domestic harmony, however, there are some serious international political issues which could yet cause problems for the country, in particular the tensions between the West and Iran”

the relative lack of corruption. Berlin-based Transparency International ranked Qatar at 22 out of 182 countries in its most recent Corruption Perceptions Index, in December 2011. That was the best position of any country in the region and put Qatar ahead of the US and France, among others. It is also in line with the findings of the Euromoney poll, which ranked Qatar 27th in the world for corruption.

Alongside the domestic harmony, however, there are some serious inter-national political issues which could yet cause problems for the country, in particular the tensions between the West and Iran.

The GCC states are in the shadow of the US, EU, Russia and China in terms of trying to resolve to the crisis, but Doha has been careful to keep its diplomatic channels to Tehran open. There are two key angles to the crisis for Doha. One is the fact that its giant gas field, the North Field, is shared with Iran. The second is that some Iranian officials have threat-ened to close the Strait of Hormuz in the event of any military strikes against Iran. Were this to happen, it would shut Qatar’s only route for its LNG exports, with little it could do in response.

The events in nearby Bahrain, where pro-democracy protests against the Al Khalifa regime have continued for more than a year, are a further potential headache. Despite a history of diplomatic spats and territo-rial disputes between the two countries, the Qatari government has adopted the same line as other GCC states in supporting the Bahraini regime of King Hamad bin Isa bin Salman Al Khalifa.

Advocating changeElsewhere, Qatar has been among the most vocal advocates for regime change. It was one of two Arab states, alongside the UAE, to send forces to patrol the no-fly zone over Libya in 2011. It also trained some units of the Libyan rebels, helping to pave the way for the eventual victory of the anti-Gaddafi forces.

More recently, on an official visit to Rome on 16 April, the Qatari emir told a press conference that the latest UN peace plan for Syria had only a “3%” chance of success and that President Assad’s opponents should be supported with arms rather than just diplomacy.

Such positions create an obvious potential contradiction, with an abso-lute monarchy backing democracy movements abroad while insisting on all but untrammelled power at home.

There are also contradictions in how Qatar’s main tool of soft power diplomacy, the Al Jazeera television network, has reported the events of the past year. The Arabic-language version of Al Jazeera’s news channel has been criticised for failing to report on the protest movement in Bahrain, although its English-language sister station has covered it in greater depth, notably through a documentary called Shouting in the Dark, first broadcast in August 2011.

Al Jazeera, like all broadcast media in Qatar, is state controlled. In September 2011, Sheikh Ahmed bin Jassim bin Mohamed al-Thani was appointed director general of the network, thus cementing the close ties between the broadcaster and the regime.

Other areas of media are of mediocre quality at best. Despite the exist-ence of numerous Arabic and English-language papers, including Al Watan, Al Sharq, The Peninsula and Gulf Times, self-censorship is wide-spread and, overall, the media fail to hold authorities to account.

“I think everyone understands what’s wanted and what can be tolerated. They don’t need someone in the Diwan [emiri court] to pick up the phone and tell them,” says David Roberts, deputy director of RUSI Qatar, a think-tank.

Balancing actThe Paris-based organisation Reporters Without Borders ranks Qatar at just 114 out of 179 in its Press Freedom Index, behind regional peers such as Kuwait and the UAE. According to the organisation “The balancing act that constitutes journalism [in Qatar] means that any critical analysis of decisions made by the Doha authorities or on Qatar in general is highly risky. Political and financial pressures weigh heavily on the editorial line taken by newspapers.”

On the one hand this situation highlights how little pressure there is in Qatar to rock the boat, but it also makes it all but impossible to judge what appetite there is for change.

Qatar is a conservative country undergoing profound social and eco-nomic changes. Preventing or at least managing the tensions that are likely to emerge from this, not least within the ruling family, will be a challenge, albeit one considerably eased by the country’s vast wealth.

Rank Country Score1 Israel 6.82 Jordan 5.83 Qatar 5.54 Oman 5.35 Kuwait 5.26 Tunisia 5.17 UAE 4.78 Bahrain 4.59 Morocco 4.510 Saudi Arabia 4.4Source: Euromoney Country Risk

MENA Information access/transparency: Qatar 3rd regionally

Rank Country Score1 Israel 7.02 Qatar 7.03 UAE 6.84 Kuwait 6.15 Bahrain 6.1Source: Euromoney Country Risk

MENA hard infrastructure scores: Qatar 2nd regionally

Rank Country Score1 Israel 6.62 Qatar 6.13 Bahrain 5.94 UAE 5.85 Kuwait 5.8Source: Euromoney Country Risk

MENA soft infrastructure scores: Qatar 2nd regionally

Structural assessmentFlying through Doha International Airport is not a particularly pleasant experience these days. The facilities in the main terminal building are lim-ited and all passengers have to be bussed to and from the aircraft – there are no stands connected directly to the terminal itself.

It is not quite in keeping with the impression that the country and its flag carrier Qatar Airways like to portray around the globe; that of a modern, efficient economy with companies able to compete with the best the world has to offer. It also underscores how the country and its economy are still a work in progress.

Clearly, the airline, the city and the country all need better air transport facilities. That will happen when the New Doha International Airport opens its doors. The airport is being built by US engineering firm Bechtel, four kilometres to the east of the existing airport, partly on land reclaimed from the sea.

In 2011, the existing airport dealt with some 18 million passengers. When it opens, the new airport will be able to handle 24 million. The main 400,000-square metre passenger terminal will have 40 gates. Once a second phase is complete, there will be twice as many gates and the capacity will rise to 50 million passengers a year.

A new port is also being developed to replace the existing facility close to the centre of the capital. New Doha Port is being built on a site 30 kilometres south of the city. Once complete, the new container terminal will have a capacity of 2 million 20-foot equivalent units (TEU) a year, although this could be expanded to 6 million TEU a year at a later date. In addition, there will be terminals for grain, vehicles, livestock and cruise ships. The port is due to open in 2016, with a special economic zone alongside it.

Building a hubIn expanding its transport and logistics facilities in this way, Doha is following a trend seen the length of the Gulf. Most of the GCC govern-ments have been building up their transport infrastructure, both to meet existing demand but also in anticipation of attracting greater traffic in the future as regional or even global hubs.

In terms of air and sea transport, Dubai is the leader. It already has the region’s busiest airport at Dubai International and the most important port at Jebel Ali and continues to develop both. Just an hour’s drive away in Abu Dhabi a new airport terminal and a new port are being built. Bah-

rain, Kuwait and Saudi Arabia have also been expanding their transport infrastructure. Qatar’s position is no better than most and the relatively small size of its domestic market means that, for all the wealth it has, suc-cess cannot be guaranteed.

For Qatar’s airline and airport, the most important competitors are Etihad, based at Abu Dhabi International, and Emirates, with its hub at Dubai In-ternational. Not everyone is convinced that all three can succeed or, more broadly, what sort of return Qatar can hope to make on its investments.

“The question is what is the comparative advantage that Qatar has,” says Trevor Cullinan, a director for sovereign ratings at credit ratings agency Standard & Poor’s. “It remains in the balance as to whether or not they’ll be 100% successful or not and whether they’ll be able to compete with the likes of Dubai which has a lot of the infrastructure already in place.”

However, the investments that have been made in recent years, and the continuing work to improve its facilities, means that Qatar was ranked second in the region for both hard and soft infrastructure in the latest Euromoney survey, behind Israel for both categories. Globally, Qatar was ranked in 29th place for hard infrastructure and 38th for soft infrastructure.

National railwayMassive investments are also being put into the country’s domestic transport infrastructure. A national rail system, including a metro network in Doha, is being developed in conjunction with Germany’s Deutsche Bahn International. This project is being managed by the Qatar Railways Development Company, which was set up in November 2009 under the control of the state-owned Qatari Diar, which is itself owned by the Qatar Investment Authority.

Qatari Diar, a company best known for its real estate investments, owns 51% of the railway company, while Deutsche Bahn International holds the remaining 49%. The project involves the construction of 325 kilome-tres of freight and high speed passenger lines connecting all of the major population centres around the country, as well as an extensive metro network in Doha, part of which will be underground.

Other state-owned bodies such as the Qatar General Electricity & Water Corporation (Kharamaa) and the Public Works Authority (Ashghal) are working on expanding the country’s utilities and road networks respectively.

Qatar’s infrastructure is improving rapidly, backed by heavy investment by the government, but it will be some time before the benefits are felt

2012

Gui

de to

Qat

ar

11

Taken together, such investment helped Qatar to defy the sceptics and win the right to host the FIFA 2022 football World Cup and are likely to play a significant part in its bid for the 2020 Olympic Games too.

Pillars of developmentThe development work also fits into the National Vision 2030, a economic strategy that was launched in October 2008 by the heir apparent, Sheikh Tamim bin Hamad al Thani. That document was based on the four pillars of human, social, economic and environmental development and aims to transform Qatar into an advanced, knowledge-based economy by 2030.

The World Cup has meant the government has had to accelerate some plans. But there is a question mark over whether the infrastructure that is being built fits with the country’s long-term needs or is designed with major events like the World Cup more in mind.

“The difficult thing for small states is the question of the population,” says Andrew Gilmour, a senior economist at Saudi bank Samba. “The Qatari population has grown by 1 million people in eight years and that has re-quired a huge investment in infrastructure. But about 900,000 of those 1 million people are labourers living in camps who are going to leave once the infrastructure is built. So what is the settled population?

“The challenge is how to avoid unproductive investment and an over-expansion of capacity beyond which the settled population can accommodate. It isn’t easy. If they overshoot it’s not a major issue, but it’s a difficult balancing act.”

In other areas of infrastructure, Qatar is already relatively advanced for the region. It was recently ranked 28nd in the world by the World Economic Forum (WEF) and French business school INSEAD in its Global Information Technology Report 2012, which rated countries in terms of their information and communication technology (ICT) systems.

That placed it third in the region, behind Israel at 20th and Bahrain at 27th. Overall, Qatar was deemed to have the second best environment for business and innovation in the world, behind only Singapore.

Communications in transitionHowever, the report also pointed to a number of problems. “On a less positive note, the low levels of competition existing in the ICT and telecommunications sectors are affecting the overall affordability of accessing ICT, especially in terms of broadband, hindering a wider diffu-sion and usage of ICT across the different agents in the country, such as broadband internet subscriptions.”

All this means that the country was classified by the report as a “tran-sitional” economy when it comes to digitization, alongside the likes of Mexico, Turkey and Colombia. Within the Middle East region, both Israel and the UAE are rated as “advanced” economies in this respect.

The market has been opened up slightly in recent years as a result of reforms brought in by the Supreme Council of Information & Commu-nication Technology (ictQatar). Until 2009, Qatar Telecom (Qtel) had a monopoly on providing fixed line and mobile communications. On 1 March that year, the UK’s Vodafone launched its service, although Qtel retains a dominant market position.

Other elements of the soft infrastructure of the country are also in transi-tion. A large amount of investment is being poured into education, for example, with around 14% of the state budget for 2011-12 allocated to

education and youth welfare. However, it will be many years before the strategy can be judged a success or failure.

The flagship project is Education City, a vast development on the western edge of Doha backed by the Qatar Foundation for Education, Science & Community Development, which is chaired by the emir’s second wife Sheikha Moza. Education City is home to satellite campuses of Carnegie Mellon, Texas A&M, Weill Cornell Medical School and Georgetown among others. The aim is to provide world-class education to locals without forcing them to leave the country, although the range of courses on offer is limited.

Critics of the project say that the students getting on to the courses would, in some cases at least, struggle to make the grade if applying to the main campus in the US. Others are more supportive, but most are withholding judgement for now. “With time it may deliver some kind of change, but it’s a long-term process,” says one observer.

Sheikha Moza is closely associated with the more self-confident and in-ternational approach that Qatar has been taking in recent years. At Qatar University in the north of the city, however, more conservative elements appear to be gaining influence. In January the Supreme Education Coun-cil issued a surprise decree that Arabic should be the official teaching language at the university from spring 2012 for the faculty of law. Other areas of study, including international affairs, mass communication and the faculty of management are due to follow later in the year.

On the one hand the decision was an understandable attempt to retain an important aspect of the country’s culture and identity, but it will do little to help the university’s graduates compete for jobs in an economy that is increasingly internationally-focused.

Expatriate workforceIn any case, whether they enrol in universities in Qatar or abroad, and whether they study in Arabic or English, few locals are likely to find employment in the private sector and certainly not in sufficient numbers to meet the needs of private companies.

According to Qatar National Bank (QNB), the size of the Qatari workforce grew from 52,895 in 2004 to 74,087 by 2010. That is rapid, but remains a small fraction of the total workforce of more than 1.2 million. As a result, some 94% of the country’s workforce comes from overseas, and in the private sector the proportion is 99.4%.

“The Qatari population is very small and the economic potential of the country is vast,” says Simon Williams, chief economist of HSBC Middle East. “To bridge that gap you’re going to have an economy that runs heavily on expatriates rather than local nationals.”

The small number of locals helps to explain Qatar’s poor showing in the Euromoney survey in terms of demographics. It was ranked just 10th in the region, behind most of its GCC peers but also lagging behind several North African markets such as Tunisia, Algeria and Libya. On a global basis, Qatar was ranked just 69th for demographics.

In terms of private sector employment, it is not just about the number of locals. The incentives that Qataris have to work in the private sector are also limited by the high wages and pleasant working conditions that state employers offer. “The trouble is it is just so comfortable to work for the state that the incentives to move to the private sector aren’t particu-larly strong,” says Gilmour.

Rank Country Score1 Israel 6.12 Oman 5.83 Qatar 5.74 Jordan 5.65 Kuwait 5.4Source: Euromoney Country Risk

MENA inastitutional risk scores: Qatar 3rd regionally

Rank Country Score1 Qatar 6.02 Israel 5.53 Oman 5.14 Bahrain 5.15 Saudi Arabia 5.0Source: Euromoney Country Risk

MENA regulatory and policy framework scores: Qatar 1st regionally

Despite the healthy position of the economy, conditions for expatriate workers are not always so comfortable, whether they are blue or white collar workers. In most cases, non Qataris cannot change jobs without the approval of their existing employer, nor can they gain an exit visa to leave the country without the approval of their employer. The system is differ-ent for those working for firms in the Qatar Financial Centre (QFC), where the conditions are closer to international norms, but the situation in the rest of the country can create problems.

“There are a lot of people, not just blue collar workers but white collar workers as well, who are stuck here,” says one expatriate professional living in Doha. “If they want to get educated young professionals to come and live and work here, they’ll need to relax those rules.”

There are no trade unions in Qatar and little that any individual can do to challenge the status quo. To date there have been no obvious public signs of protest by workers and in the Euromoney survey Qatar was ranked in third place in the region in term of its labour market industrial relations, after Israel and Kuwait. On a global basis, Qatar, like others in the region, does not do so well, coming in at 44th place.

Dual legal systemIt is not only in terms of employment conditions that the QFC differs from the rest of the country. Qatar runs a dual legal system, with one set of courts covering the entire country and a second, parallel system for the QFC. To date, relatively few cases have passed through the QFC courts, and most contracts continue to be written up based on the national legal system.

Shashank Srivastava, acting chief executive officer and chief strategy officer of the QFC Authority acknowledges that it will take time for confi-dence to build up in the system it has introduced. “The regime is six years old,” he says. “Companies have started using the legal system and, as the system is tested and comfort is built up over a period of time, then you will see increased usage of the system.”

Despite the relatively untested nature of the legal code, most lawyers ap-pear confident that it is well suited to the needs of Qatar and companies based in the QFC.

“The QFC’s legal code is well drafted law and is based on common law precedent,” says Andrew Macklin, a partner at law firm Latham & Watkins. “In addition to the rules and regulations governing QFC-licensed entities, you’ve also got a court and a tribunal as well. They’ve got a very hard mandate, because trying to persuade clients to go to a new dispute resolution forum rather than more established seats such as London, New York or Singapore is always tough. So you have a chicken-and-egg situation. However, the QFC is committed to the cause, has great facilities and is definitely having some success.”

Unlike the Dubai International Financial Centre, the QFC does not have a

strict geographic location. Companies licensed by the QFC Authority can be based anywhere in the country as long as the regulator has approved their location. In practice most are clustered in the glistening new towers of West Bay, at the far end of the Doha Corniche from the capitla’s old centre.

The regulatory system for companies in the QFC could well change in the coming years, with expectations high that a single regulator will take charge of the financial sector, under the auspices of the Qatar Central Bank.

Such a move has long been discussed, but was put on hold during the 2009 financial crisis. It appeared to get a boost on 13 March this year, when the QFC Regulatory Authority announced the composition of its new board of directors with Sheikh Abdullah bin Saud al Thani, governor of the central bank, as the new chairman.

“The issue of the single regulator has been around for a long time,” says Leigh Hall, managing partner of law firm SNR Denton. “Talk of it goes up and then it goes down. As of now it is up and we’re a bit more confident this time that it will happen. We understand it is being discussed quite thoroughly in government.”

As yet there has been no official announcement about a single regulator and thus there is no timetable for the move, but Srivastava says his or-ganization is in favour of it. “The QFC is a big supporter of having a single regulatory regime within Qatar,” he says. “It’s a matter of finding the right timing in the economic cycle.”

If the move to a single regulator does go ahead, it could remove one area of potential confusion for businesses. However, a single regulator is not the same as having a single regulatory regime and Srivastava says that it is likely that the QFC will continue to operate its own legal code, based on English common law, while a separate code remains in place for the rest of the country.

There will also still be some question marks given the Central Bank’s recent performance as a regulator. In February 2011, the bank surprised the financial sector by announcing that, from the end of that year, conventional banks would no longer be able to operate Islamic finance subsidiaries, known as “Islamic windows”. Instead, all Islamic banks would have to be stand-alone institutions.

While there were some good reasons for the change in policy, the way it was announced without any public consultation was an uncomfortable reminder of how the policy-making system in Qatar does not always match what international companies are used to elsewhere.

Such are the risks of living in a economy where decisions are made in a top-down fashion and where public consultation is a option that is occasionally used rather than a legal requirement. However, the huge wealth in the economy means that, for most businesses, it will be a risk worth taking.

2012

Gui

de to

Qat

ar

13

Easy market access and credit rating boost QatarKingdom’s positive scores for debt indicators, access to capital and credit ratings supportive of overall country risk rating

The quantitative section of ECR buttresses economists’ qualitative assessment with hard data points, providing additional inputs for the calculation of country risk.

Constituting 30% of the overall survey weight, the quant scores pro-vide an important counterbalance to economists’ sentiment.

Qatar has the highest combined quantitative scores of any country in the MENA region. Its combined score places it 20th globally.

The Access to Capital Markets (ATCM) indicator uses Euromoney’s proprietary survey of heads of syndication at money-centre banks. Analysts are asked to rate the ease with which they could arrange financing for a corporate or sovereign in a given country, rating both the size and terms of the financing.

ATCM scores gauge market sentiment towards a country among bank credit markets. For any country reliant on foreign financing, this is a crucial indicator of confidence among investors, particularly in an era of rapid movement of capital.

Qatar, UAE, Saudi Arabia and Oman have the highest access to capital scores in the region. Kuwait and Bahrain receive lower scores, in light of the perceived less favourable investment cases in each country.

In the March 2012 ATCM survey, global scores fell during the quarter, indicating credit conditions had deteriorated further since Q4 2011.

International conditions still fragileAverage access to capital scores fell across Europe, Latin America, MENA and Asia in Euromoney’s survey, illustrated that international funding conditions are still fragile as a result of tightened liquidity

among European banks.

The result supports the recent results of the IIF’s emerging market banks survey, which showed tightened international lending condi-tions in the fourth quarter of 2011, and other indices which show the deterioration in external funding conditions.

A number of factors play a part in this, not least the constraining ef-fects on dollar funding of stricter capital requirements for European banks under Basel III, and the tightening of credit conditions in Europe as the eurozone crisis intensified.

MENA was the second hardest hit region in the survey after sub-Saharan Africa, with average scores deteriorating by one point over the quarter.

Qatar’s score deteriorated over the quarter but the country retains the joint highest score in the region at 7.6, alongside UAE. Its score is in line with the OECD average (7.8).

High credit ratingIn ECR’s credit rating indicator, the long-term foreign currency rating from each of the three largest rating agencies is converted into a numerical scale. The scores are then averaged to produce an overall credit rating score out of 10.

In terms of credit ratings, Qatar and Kuwait have the highest scores in the region (8.8), followed by Saudi Arabia (8.1).

While ratings elsewhere in the region have come under pressure from the political and economic disruption in the region, Qatar’s rating has not been unduly affected.

Standard & Poor’s affirmed its AA+ rating of Qatar in September 2011, reflecting the government’s strong reported fiscal and external bal-ance sheets.

ECR’s debt indicators category uses IMF and World Bank statistics to calculate government debt/GDP ratios and current account balance for each country where statistics are provided.

The GCC performs well in the debt indicators category, supported by the positive effects of energy exports on current account balance and moderate levels of government debt.

Qatar’s score of 7.3 out of 10 places it third in the GCC, behind Oman and Kuwait. The kingdom’s score is superior to both the OECD and Eurozone averages, and places it in the top 30 globally.

Credit Debt Access to ratings indicators capitalUnited States 9.8 6.5 10.0Japan 8.3 6.6 9.9Bermuda 8.8 0.0 9.8Hong Kong 9.6 8.2 8.8New Zealand 9.2 7.5 8.6Belgium 8.5 6.9 8.2Qatar 8.8 7.3 7.7United Arab Emirates 8.4 2.8 7.7Saudi Arabia 8.1 7.6 7.3Kuwait 8.8 7.6 5.5Source: Euromoney Country Risk

Qatar: In good company – Quantititive Scores vs ranking peers