Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Qatar—2014 Article IV Consultation Concluding Statement of the IMF MissionFebruary 19-20, 2014
This statement presents the preliminary assessment of the 2014 Article IV mission to Qatar. The mission met with H.E. Ali Shareef Al-Emadi, Minister of Finance, H.E. Sheikh Abdullah Bin Saoud Al-Thani, the Governor of Qatar Central Bank (QCB), H.E. Saleh Bin Mohammad Al-Nabit, Minister of Development Planning and Statistics, and other senior government and central bank officials, as well as representatives of financial and non-financial sectors. The mission would like to thank the Qatari authorities for their warm hospitality and wishes the government and people of Qatar all the best in their future endeavors.
I. Recent developments
1. Qatar’s macroeconomic performance has remained strong. GDP growth slowed from 13 percent in 2011 to 6.2 percent in 2012, largely as a result of the long-standing self-imposed moratorium on additional hydrocarbon production from the North Field. Growth is estimated to have remained around 6 percent in 2013, driven by a 10 percent expansion in the nonhydrocarbon sector, particularly construction, transport, communications, and finance. The nonhydrocarbon sector now accounts for almost one-half of the economy. Negative spillovers from the global slowdown have been limited since the tight LNG market and supply disruptions among other oil producers have kept hydrocarbon prices high. Announcements regarding the U.S. Federal Reserve’s asset purchases modestly raised the cost of external funding and contributed to money market volatility, but have had no discernible effect on the local lending rates so far.
2. Inflation increased early last year due to increased housing demand, but has fallen since then. With rents constituting over 30 percent of the CPI basket, a strong inflow of expatriate workers in the context of diminishing housing market slack pushed up CPI inflation to 3.7 percent y-o-y in April 2013. However, inflation has eased to 2.3 percent y-o-y in January as rents stabilized. Core inflation excluding food, rent, and utilities has also been on a downward trend, with January core inflation at 1.4 percent. House prices have been growing strongly since the crisis-related drop in 2008-09, but according to crude measures, valuations appear broadly in line with fundamentals.
3. The central government budget continues to post large surpluses. The FY2012/13 budget surplus increased to 9 percent of GDP on the back of strong growth in revenues (especially from the nonhydrocarbon sector), despite a substantial overrun in current expenditures. Spending on infrastructure and other capital projects was broadly unchanged, but capital expenditures have picked up during the current fiscal year. Gross government debt for fiscal year 2013/14 (ending March 2014) is projected at 33 percent of GDP, with the authorities issuing T-bills and T-bonds for financial market development and liquidity management purposes. Net debt taking into account Qatar’s large sovereign wealth fund assets (Qatar Investment Authority, QIA) remains negative.
4. The current account recorded a surplus of 32 percent of GDP in 2012 and another high surplus can also be expected in 2013, reflecting sustained high prices of LNG, crude oil, and condensates exports. LNG prices in Qatar’s main export markets in Asia have so far remained largely unaffected by the rapid growth in the U.S. unconventional gas and oil production. The real effective exchange rate is estimated to have remained roughly unchanged during 2013.
5. Monetary and credit conditions have remained accommodative, but public sector credit growth has slowed substantially. Accommodative monetary policy in the United States has been mirrored by low policy rates in Qatar. Indicators of broad money and private sector credit have continued to grow robustly, while the share of loans to the real estate-related segments of the economy has somewhat moderated. However, public sector credit growth has slowed substantially, partly reflecting previous strong growth and delays with infrastructure investments. The Ministry of Finance started requiring an approval for new borrowing by public sector enterprises since October 2013.
6. The banking sector is profitable and well capitalized. Commercial banks’ Tier 1 capital stood at 15 percent of risk-weighted assets at end-2013 and NPLs remain below 2 percent despite their recent slight increase. The banking system remains highly profitable with a return on assets at 2 percent. Liquidity buffers are strong, with liquid assets around 50 percent of total assets. Foreign funding of commercial banks—which increased substantially in recent years—has been pared back from 30 percent of total liabilities at its peak in early 2012 to about 23 percent at present, and its maturity structure has improved, with short-term loans gradually replaced by longer-term securities. The aggregate loan-to-deposit ratio has fallen from 1.2 to 1.0 over the past year, partly due to rising public sector deposits.
II. Macroeconomic Outlook and Risks
7. The short- and medium-term macroeconomic outlook is positive under the baseline. GDP growth could stay around 6 percent in 2014 as the pickup in the public investment program is roughly offset by a modest decline in hydrocarbon output. Public investments are expected to keep growth roughly 6–7 percent over the medium term, with nonhydrocarbon growth remaining about 10 percent. Inflation is projected to remain benign at 3 to 4 percent going forward—a modest increase from recent years. The anticipated gradual decline in commodity prices, including for food, should help reduce price pressures from strong economic activity in the context of the exchange rate peg. Fiscal and external balances are projected to taper down significantly over time due to flat LNG production, falling crude oil output from mature fields, expected lower hydrocarbon prices, and growing nominal expenditures. The public debt ratio is expected to fall, but the headline budget balance could—according to IMF staff projections—turn into deficit over the medium term, while the current account surplus could drop to 5 percent of GDP.
8. Domestic risks to the above baseline are mostly related to the ongoing public investment program. The investment projects are essential to propel nonhydrocarbon sector growth and facilitate economic diversification. However, the program entails the possibility of overheating in the near term, and low return and overcapacity in the medium term. In particular, the extent to which public investment will durably boost private sector productivity remains uncertain. To address overheating risks, the authorities are monitoring price developments and attempting to identify and address any supply bottlenecks emerging from increased investment activity.
9. Meanwhile, Qatar remains exposed to several global risks.
In the short-term, these risks include global financial market volatility due to the exit from unconventional monetary policies (UMP) in advanced economies, a persistent slowdown in emerging markets, and a renewed crisis in the Euro area. Revenue losses from lower oil and natural gas exports would likely be the most significant spillover channel for Qatar given the high share of hydrocarbons in budget revenues and exports. However, the financial channel could also emerge as important depending on circumstances, given Qatar banks’ remaining wholesale funding exposures abroad and external financing needs for the infrastructure program. A global financial shock would also reduce the value of Qatar’s sizeable foreign assets.
The main medium-term risk remains the possibility of a sharp decline in oil and gas prices in light of growing unconventional oil and natural gas supplies, sluggish global growth, and rising energy efficiency. Indeed, there is anecdotal evidence that while the U.S. shale gas boom has not meaningfully affected revenues so far, it is starting to put downward pressure on prices negotiated for future LNG supplies. According to staff calculations, a plausible drop in oil prices relative to the baseline (by $26.5 a barrel which is the historical standard deviation of oil prices) could place the public debt ratio on an upward path. Given its geographic location, Qatar is also susceptible to the tail risk of a conflict in the region and related transport disruptions.
10. Qatar has ample policy space to deal with unexpected circumstances in the short term. Fiscal buffers and remaining natural resources are sizeable and spending is unlikely to be affected by a drop in hydrocarbon prices or market volatility in the near term. The QCB can inject liquidity into the financial system through its lending window and repo operations, and the government could achieve the same goal by managing portfolio allocations of the QIA and public sector enterprises. The government also aided the banking system with equity injections and purchases of impaired assets during the global financial crisis. Yet, a worsening of the euro area debt crisis or excessive volatility related to UMP exit would still likely lead to capital outflows and reduced access to foreign funding, thereby affecting the liquidity position of some banks and hindering infrastructure investment plans. The tail risk of transport disruptions is managed by building strategic stocks of food and construction materials.
III. Policy Challenges and Priorities
A. Managing Risks from Public Investment Program
11. Inflationary pressures appear contained at the moment, but policymakers need to remain vigilant. The authorities—mindful of Qatar’s 2006-08 experience with double-digit inflation—intend to phase in the investment projects gradually. However, if signs of overheating emerge, the authorities should smooth fiscal spending, and deploy further macroprudential measures and liquidity withdrawal operations in case of excessive credit growth or risk-taking. This strategy can be supplemented by the authorities’ efforts to identify and remove bottlenecks in the supply chain.
12. There is scope for improving the public investment management process to achieve optimal allocation of resources and high return on investment. The authorities have made some progress in developing the institutional structures needed for efficient implementation of the National Development Strategy, such as the establishment of the Central Planning Office overseeing infrastructure investments. Certain big-ticket projects such as the metro, port, and airport have been scaled down or divided into phases to reduce the risk of overcapacity, and the authorities are preparing a short list of critical projects. However, the large-scale nature of the program has led to implementation delays and cost overruns. Qatar will continue facing the risk of cost escalation given its commitment to a compressed timetable ahead of the 2022 FIFA championship. An integrated approach to public investment management, including procedures for selection and appraisal of all projects, and a comprehensive and transparent treatment of public programs in the budget would be highly desirable, requiring substantial capacity building. The authorities have started working toward these objectives.
B. Enhancing Institutional Framework for Fiscal Policy
13. The fiscal policy stance remains consistent with intergenerational equity. According to IMF staff calculations, both current and projected fiscal deficits (measured by the nonhydrocarbon deficit excluding investment income in percent of nonhydrocarbon GDP) are somewhat lower than, but close to, the deficits consistent with a constant real per capita annuity. This means that the government saves sufficiently for future generations, but does not over-save. Should hydrocarbon prices surprise on the downside, additional measures to contain current expenditures and prioritize capital spending would need to be considered. The longer-term objective of fully financing the budget from nonhydrocarbon revenues underscores the commitment of the authorities to diversify the economy and maintain the health of public finances. However, if implemented literally, the objective would lead to over-saving since the QIA asset accumulation would continue indefinitely.
14. Qatar has started introducing a medium-term focus into the budget process. The budget circular for FY2014/15 requires ministries and agencies to provide indicative budget estimates until FY2016/17 and to share performance information about the execution of their programs. Once fully effective, the medium-term budget framework (MTBF) will help ensure that government spending is shielded from revenue volatility and expenditure targets are not exceeded, while providing a platform for assessing the quality of spending. The authorities are confident that the tradition of spending overruns can be largely eliminated already during the current budget cycle. The MTBF should be accompanied by credible annual budgets based on realistic hydrocarbon price assumptions and a more detailed multi-year expenditure framework backed up by a fully-consistent macroeconomic forecast.
15. The authorities plan to make the recently established macro-fiscal unit operational as soon as possible, in line with IMF advice. The unit would prepare macroeconomic forecasts, revenue and expenditure projections (including compilation of detailed forward-looking information about investment projects), and public debt forecasts. The IMF is ready to field a diagnostic mission and help find a resident advisor for the unit.
C. Strengthening Financial Regulation and Monetary Operations to Maintain Financial Stability
16. Banks remain well capitalized and profitable, but the authorities should continue carefully monitoring vulnerabilities through an enhanced early warning system. Stress tests by the QCB show resilience to plausible shocks due to high capital and liquidity buffers. That said, deposits and credit are substantially concentrated, and asset quality is exposed to risks from high single party exposures. The authorities are considering a reduction of the loan-to-deposit ratio which would further improve the strong liquidity profile of the banking system and its asset quality. Despite reduced reliance on international wholesale funding, a drying up of external liquidity could adversely impact the banking system; however, policymakers would have ample room to respond in this scenario, as noted above. Meanwhile, regional expansion of the largest Qatari banks could stretch their risk management capacity given the turbulent macroeconomic developments in many MENA countries, and the reliance on foreign funding could increase again when infrastructure projects pick up. While the current situation does not seem to warrant policy action, the policymakers should continue to closely monitor lending standards, concentration risks, and cross-border activities of banks. The QCB’s early warning system should be enhanced to identify risks and links across all sectors of the economy.
17. The authorities have made considerable progress on the financial sector regulatory agenda centered on establishing an umbrella advisory committee and adopting Basel III rules. The QCB Governor has become the head of the Financial Stability and Risk Committee established by the 2012 Central Bank Law and serves as a chairman of all three regulatory agencies. The QCB has taken over responsibility for the previously lightly-regulated insurance industry, and work is underway to produce joint risk-based analysis of the entire financial system. In December 2013, the three main regulatory agencies published their Strategic Plan for Financial Sector Regulation until 2016, laying out an ambitious agenda for moving to risk-based regulation, expanding macro-prudential oversight, strengthening market infrastructure, and consumer and investor protection. The final Basel III circular for capital, liquidity, and leverage ratios was issued in January 2014. The authorities continue to implement a number of macro-prudential measures. Qatar has been granted emerging market status by MSCI, effective May 2014.
18. There is further scope to increase transparency and improve the functioning of the QCB’s liquidity management framework. The QCB has taken several steps to alter its liquidity management operations, including capping commercial banks’ interest bearing deposits with the central bank and facilitating issues of T-bills and T-bonds. The issuance has so far proceeded at fixed nominal allotments, with the short-term T-bill rates continuing to exhibit some volatility. The money market tightened during summer and fall of 2013, partly as a result of international events such as the Syrian crisis and negotiations related to the U.S. budget and debt ceiling. The money market tightening was mostly reversed using a large liquidity injection in January 2014. These developments underscore the need for sending clear signals to markets through a transparent and well structured liquidity management framework. The scope for QCB open-market operations is limited due to low secondary-market liquidity. Consideration should, therefore, be given to some flexibility in setting T-bill and T-bond issuance volumes to reduce the volatility of yields. Close coordination between the MoF and the QCB would enhance liquidity forecasting.
19. The fixed exchange rate regime remains appropriate for Qatar. The peg to the U.S. dollar has anchored prices of tradables and provided stability to income flows and financial wealth given the dominance of dollar denominated hydrocarbon exports.
D. Deepening Financial Markets
20. Developing deep and liquid domestic debt markets can bring important benefits. These include funding for the large infrastructure investment program as Qatar advances its diversification agenda, enhancing the monetary transmission mechanism, and facilitating liquidity management. Indeed, the government has been issuing local currency-denominated securities with the stated objective of domestic debt market development despite running large fiscal surpluses. While the government intends to reduce public debt over time, this would be achieved by trimming foreign borrowings and domestic loans, and the authorities would continue issuing government securities to support bond market development. The forthcoming creation of the domestic credit rating agency will support corporate bond issuance, and the public investment program provides an opportunity to issue corporate bonds for revenue-generating projects. Additional initiatives to improve consumer and investor protection and strengthen market infrastructure are envisaged in the Strategic Plan.
E. Structural and Data Issues
21. Qatar ranks 13th in the Global Competitiveness Index, the highest in the GCC region, but it lags behind in terms of SME development and educational quality. The SME sector contributes only 10 percent of GDP, compared with almost 30 percent in the entire MENA region. The authorities have stepped up their diversification efforts through the Qatar Development Bank and Enterprise Qatar. To support greater private sector activity, the Ministry of Finance has started outsourcing some activities and privatizing selected assets. Efforts are being made to improve the quality of educational curricula, including through activities of the Qatar Foundation, and to align them with the labor market needs, while expanding study-abroad programs to increase foreign language proficiency and acquire specialized skills.
22. Vast infrastructure spending ahead of the 2022 FIFA Championship has placed a spotlight on labor market conditions for expatriate workers. Working conditions of some construction workers and domestic help has made global headlines and could affect the availability and cost of hiring new workers in the future. This would hinder growth since the success of Qatar’s current development model depends importantly on the ability to rapidly hire expatriate workers. Committed to improving the situation, the authorities are focusing, among other measures, on better enforcement of existing labor laws, and issued a Welfare Charter which will apply to workers involved in FIFA-related projects.
23. Considerable additional effort is necessary to improve macroeconomic statistics. The Ministry of Development Planning and Statistics (MDPS) is finalizing its work on compilation of the Foreign Investment Survey which should substantially improve the BoP and IIP statistics. The MDPS also plans to begin publishing quarterly GDP by expenditure from the summer of 2014. Further improvements in the areas of the real estate sector statistics and household and corporate balance sheets data would support development of the QCB’s early warning system. Close collaboration with the GCC Stat would help reinforce the authorities’ efforts to enhance the macroeconomic statistics.