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Analysis

Qatar’s resilience to falling oil prices

by Abdullah Saud Al-Thani

Qatar’s resilience to falling oil prices

The sharp fall in crude oil prices and slower-than-projected global growth have substantially altered the economic context for countries in the Middle East and north Africa. While lower oil prices have weakened the external and fiscal balances of oil exporters, including members of the Gulf Co-operation Council, it provides much needed breathing space for oil importers in terms of reduced oil import bills and lower energy subsidy bills.

Against this backdrop, stock markets in GCC countries declined sharply in late 2014. Energy-related firms and banks with large exposure to the oil sector are facing more difficult refinancing conditions. Capital flows to the GCC have slowed, though they remain broadly in line with trends for other emerging markets.

Consequently, most GCC countries have revised downward their near-term economic growth. However, large buffers in the form of foreign assets and available financing should allow most GCC oil exporters to avoid sharp cuts in government spending, limiting the impact on near-term growth and financial stability.

Strong GDP

Despite a fall of over 55% in global crude oil prices between June 2014 and January 2015, reflecting weak demand and ample supply, Qatar has maintained strong GDP growth at about 6% over the past two years, driven by double-digit growth in the non-hydrocarbon sector. The large public investment spending to diversify the economy and prepare for the FIFA World Cup 2022 has resulted in a significant inflow of expatriate population, adding to aggregate demand and supporting growth. Falling global commodity prices have helped contain inflation.

The budget continues to post surpluses and growth is expected to accelerate in 2015 reflecting solid expansion in nonhydrocarbon activities propelled by investment spending, expansionary fiscal policy and population growth.

Despite its reliance on hydrocarbon exports, Qatar may not be affected as severely as expected by the oil price fall, given the dominance of liquefied natural gas in hydrocarbon exports and relatively lower decline in global LNG prices, which were down only by 10-35% in the June-January period. LNG prices in the Asian market, which is the most relevant for Qatar given its dominant share in exports, fell only 14% over the same period. Qatar’s LNG exports are expected to increase somewhat when production from the Barzan gas plant comes on stream in 2015. Moreover, global crude oil prices are projected to recover in 2015 and stabilise, which should have a steadying impact on gas prices.

How this works depends on the links between the world economy and oil demand, subject to multiple risks. Another risk lies in falling investment spending by oil companies, which could begin to have an impact on production by 2016-17, adding upward pressure to prices as the supply glut is cleared.

Managing risks

Mindful of the risks associated with falling oil prices, including related financial sector vulnerabilities, the Qatari authorities have taken steps to prioritise public investment while raising efficiency. The Qatar Central Bank for its part is actively managing systemic liquidity, closely monitoring emerging risks to the financial system, and implementing macroprudential measures to sustain growth while maintaining price and financial stability.

So far, the banking sector continues to be resilient despite the fall in global oil prices and associated uncertainties. This reflects strong macroeconomic performance as well as sound policies. Total assets of the banking system continue to grow robustly, driven by credit to the private sector and a rise in Islamic finance.

As of December 2014, credit quality improved, with Tier I capital ratio well above the regulatory minimum required under the Basel III framework and the non-performing loan ratio falling below 2%. Profitability levels remained high with return on assets above 2%. If lower oil prices persist for a prolonged period, most GCC countries may need to reassess medium-term spending plans. Some countries that do not have significant buffers or borrowing capacity will need to adjust more quickly, with adverse consequences for growth.

In all oil-exporting countries, deepening reforms aimed at diversifying economies away from oil, and encouraging growth and job creation, would help mitigate any adverse effects of fiscal consolidation on growth. In reference to my previous OMFIF Bulletin article in November 2013, ‘Wide range of Gulf influence: A region that looks beyond oil and gas’, I can only repeat that lower oil prices emphasise the need for GCC countries to speed up their structural reforms. The objective must be to propel private sector activity and foster a diversified, competitive and inclusive economy.

In the case of Qatar’s economy, nonhydrocarbons sector growth is significant. This led GDP growth in 2014. The development of a diversified and more resilient economy is at the core of the QCB’s Strategic Plan for Financial Sector Regulation 2013-16. As envisaged in the strategic plan and conforming to international standards, QCB has been moving to risk-based regulation, expanding macroprudential oversight, enhancing transparency, strengthening market infrastructure, and improving consumer and investor protection. Progress achieved under the QCB’s regulatory agenda has opened up the financial market as part of steps to develop the financial industry and to provide a stable environment to a broad range of businesses.

Other supportive influences include Qatar’s upgrading to emerging market status by leading rating agencies, an increase in foreign investors’ activity, and more recently the establishment of Qatar as the region’s first renminbi clearing centre.

■ Gulf Co-operation Council Established in 1981, six member states Abdullah Saud Al-Thani is Governor of the Qatar Central Bank.

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