Emerging

The limits of diversification

th  
19  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Qatar  
The limits of diversification  
The Qatari economy is struggling to find new sources of growth beyond the hydrocarbon sector. Given the stability of hydrocarbon  
production and the ending of the infrastructure investment cycle, economic growth is likely to hit a record low in 2019. Over the  
medium term, the introduction of new LNG production capacity is likely to bolster the economy. Against the background of a  
sluggish economy, inflation is likely to be dragged into negative territory by the on-going fall in real estate prices. This said, the  
public finances and external accounts remain solid and are likely to improve further as the gas rent increases over the medium  
term.  
The economic slowdown continues  
1- Forecasts  
Despite attempts to diversify, economic growth remains dependent  
on the hydrocarbon sector. The rest of the economy has not  
managed to generate sustainable and significant growth. Over the  
past decade the Qatari economy has seen three phases of growth.  
Real GDP growth was above 15% per year between 2007 and 2011  
thanks to the steady increase in hydrocarbon production, mainly  
LNG. Over the following four years, the non-hydrocarbon sectors of  
the economy, particularly construction and services, were the main  
growth engine. Between 2012 and 2015 growth averaged 4.2% per  
year. Since 2016, growth has dropped by a further notch, and  
averaged 1.7% per year between 2016 and 2018. These mediocre  
performances were due to a number of factors: the stagnation of  
hydrocarbon GDP, the end of the project cycle with the completion  
of the main infrastructure projects, the consequences of the  
embargo and the weakness of the real estate sector.  
2017  
1.7  
2018  
1.4  
2019e 2020e  
Real GDP growth (%)  
1.0  
2.3  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
0.3  
0.2  
0.5  
-0.5  
1.0  
1.5  
2.3  
-5.8  
50  
48  
47  
46  
Current account balance / GDP (%)  
External debt / GDP (%)  
3.8  
8.7  
5.1  
3.9  
100  
14  
101  
26  
107  
28  
98  
29  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDQAR (year end)  
2.3  
4.4  
4.4  
4.5  
3.64  
3.64  
3.64  
3.64  
e: BNP Paribas Group Economic Research estimates and forecasts  
1 - Real GDP Growth  
y/y %  
The latest economic data confirm the weak performance of the  
Qatari economy. GDP in the hydrocarbon sector, representing 48%  
of total GDP, fell by 1.9% in Q2 2019, taking its average fall over the  
previous 12 months to 0.4%. This reflects the dependence of this  
segment of the economy on gas production; since 2015, gas  
production has been stable whilst, in the absence of any new  
discoveries, oil production has been in steady decline. Non-  
hydrocarbon GDP fell 1.1% y/y in Q2 2019. The construction and  
real estate sectors (accounting for around 15% of GDP) shrank by  
Non-hydrocarbon GDP ▪▪▪ Hydrocarbon GDP  
15,0  
10,0  
5
,0  
,0  
0
2
.1%. This reflected the regional depression in the real estate sector.  
-
5,0  
Throughout the Gulf, abundant supply of real estate faced with soft  
demand has resulted in a decline in activity in this sector. At the  
same time, the end of the project cycle, and in particular the  
completion of the bulk of the infrastructure planned for the football  
World Cup in 2022, has naturally resulted in a slowdown in the  
construction sector. Reflecting the mediocre performances of the  
construction industry and the non-hydrocarbon segment in general,  
growth in Qatar’s total population has slowed significantly since  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Sources: Qatar Planning and Statistics Authority, BNP Paribas  
the number of arrivals to the country in the year to the end of  
Q1 2019, at 12 million, was well below the figures of more than 19  
million seen up to 2016. Symbolising of this steady slowing of the  
non-hydrocarbon economy, growth in the financial services sector  
has fallen steadily since 2015. This sector saw growth of only 3.4%  
y/y in Q1 2019, from an average of over 10% prior to 2016.  
2
015. The expatriate population, which accounts for more than 80%  
of the Emirate’s total population, increased by an average of only  
.5% per year between 2016 and 2018, compared to a figure of  
2
over 10% in previous years.  
In the short term, prospects are mixed, and are likely to confirm the  
regime of much slower growth that began in 2016. The  
hydrocarbons sector is unlikely to see any significant changes given  
that no new production is coming on stream. Moreover, Qatar left  
OPEC at the beginning of the year and therefore does not follow  
Although its economic importance is more symbolic than real, the  
tourism sector has struggled to expand since mid-2017 and is facing  
a steep decline in tourists from other Gulf states. Although visitor  
numbers appear to have recovered since the beginning of the year,  
th  
20  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
anymore its policy of regulating oil production. We expect  
hydrocarbon sector GDP to grow very slightly  by 0.5% in 2019  
and 2% in 2020, with the coming on stream of the Barzan gas  
project, intended to meet rising domestic energy demand. The  
performance of the rest of the economy is likely to remain modest.  
The bulk of activity is likely to be related to growth in government  
spending, particularly investment spending. We would note,  
however, that at the regional level, the positive effects of public  
spending on the whole economy have diminished. It seems that  
after years of sustained growth in government investment, the  
economy’s ability to absorb it has been reduced. Growth in the non-  
hydrocarbon economy looks set to slow further, to 1.5% in 2019  
3
- Back to surpluses  
% of GDP  
Budget Current account  
30  
25  
20  
15  
10  
5
0
5
-
(
from 3.0% in 2018), before climbing to 2.5% in 2020.  
-
-
10  
15  
All in all, we expect total GDP growth of 1.0% in 2019, its weakest  
level for twenty years, followed by a slight recovery to 2.3% in 2020.  
2014  
2015  
2016  
2017  
2018  
2019f  
Support from the hydrocarbons sector over the  
medium term  
Source: BNP Paribas  
Over the medium term there are two factors that will support  
economy activity. The World Cup will bring a temporary economic  
boost, at least in the services sector, although its impact on non-  
hydrocarbon GDP growth should not be overestimated. The main  
risk is at the geopolitical level. The Gulf region is currently a nexus  
of significant regional tensions, and any increase in political risk in  
the area has an unfavourable effect on economic activity,  
particularly in the services sector. The construction sector  
meanwhile should benefit from the additional activity created by the  
Qatar National Vision 2030 plan. This covers investment in  
infrastructure and real estate equivalent to USD 16 bn in order to  
boost economic activity from 2022 onwards. This raises the  
question of the match-up between investment and the needs of the  
local market.  
back into surplus in 2018 (0.5% of GDP). Control of public spending  
is likely to produce further surpluses in 2019 and 2020 (1.0% and  
2.3% of GDP respectively). The solvency of public finances remains  
comfortable, given modest government debt (41% of GDP in 2018,  
though 78% if one includes public companies), access to capital  
markets on favourable terms (the risk premium on foreign currency  
bonds is currently 53bp, one of the lowest in the region) and the  
government’s foreign currency assets, which are estimated at more  
than 1.6 times GDP. Similarly, external balances are solid, with  
recurrent current account surpluses (8.7% of GDP in 2018).  
In the banking sector, the negative consequences of the embargo  
that began in 2017 have been compensated by the substantial  
public support (deposits from the central bank and the government)  
and then the return of foreign depositors, particularly from Asia.  
However, the rapid growth in the banks’ net external liabilities  
should be noted. Given the rapid increase in lending to the public  
and private sectors (17% and 9% y/y respectively in June 2019  
according to the IMF) and the decline in deposits (-1.9% y/y), a  
growing share of resources comes from abroad. The country’s  
banks thus had a net external liabilities position of USD 73 bn (39%  
of GDP) in June 2019.  
The second source of economic support will come from increased  
investment in the LNG sector, with the aim of increasing Qatar’s  
export capacity by 40% by 2023-24. The economic rationale of the  
project is strong given the medium-term growth prospects in this  
market (notably in Asia).  
Negative inflation  
In common with other Gulf states, consumer price inflation has  
fallen sharply due to the on-going fall in real estate prices. The  
housing component of the price index (22% of the total) has fallen  
steadily since the end of 2016 (dropping an average of 2.1% since  
the beginning of the year). We expect an average inflation rate of  
-
0.4% in 2019. There could be a return to positive territory next year  
with the possible introduction of VAT. However, if we look at  
regional precedents, its rate and scope are likely to be limited, thus  
reducing its effect on the general level of prices. In 2020, average  
inflation is likely to be 1.5%.  
Solid fundamentals  
Despite these depressed economic conditions and the unfavourable  
regional political climate, Qatar remains financially solid. After three  
years of deficits linked to falling oil prices, the government moved  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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