## _cr1164 - Executive Summary ## Source details **Canonical URL:** [_cr1164 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1164.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1164.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1164.pdf.json) --- ### Background and recent performance - Qatar weathered the global financial crisis exceptionally well due to a swift and strong policy response. - LNG capacity growth: - 1997: less than 5 mpty - 2008: 30 mtpy - 2011 (peak): 77 million tons per year (mtpy) - Growth (1990–2009 averages): - Hydrocarbon GDP: about 11 percent - Non-hydrocarbon GDP: 9.5 percent ### 2010 key developments - Real GDP growth: - Projected rebound to 16 percent in 2010 (up from 8.6 percent in 2009). - Real hydrocarbon growth: 22.7 percent in 2010 (driven mainly by a 38 percent increase in LNG production in 2010). - Nonhydrocarbon sector growth: expected 10 percent in 2010. - Inflation and prices: - Headline consumer prices projected to decline by 2.6 percent in 2010 (negative headline inflation). - Core inflation (excluding food and rents) projected to average 2.5 percent in 2010. - September 2010: non-rent inflation increased by 4.1 percent year-on-year; food prices increased by 2.4 percent. - Note: CPI measurement issues; rental inflation decline overestimated due to survey coverage. - Fiscal position (2010/11 projections): - Fiscal surplus projected at 9.7 percent of GDP (2010/11) versus 14.2 percent of GDP (2009/10). - Revenues projected to increase by 7 percent in 2010/11. - Budget incorporates 14.6 percent growth in development expenditure (flat at 10 percent of GDP); current spending contained at 17.5 percent of GDP (down from 19.6 percent). - Development expenditure allocations include about $17 billion toward infrastructure, education, and healthcare. - External sector and reserves: - Current account estimated surplus: $22 billion (17.3 percent of GDP) in 2010 (vs. $10 billion, 10 percent of GDP in 2009). - Central bank net foreign assets (NFA) increased by $6 billion at end-September 2010; reserve adequacy nearly eight months of prospective imports of goods and services. - Monetary and credit developments: - Broad money growth estimated at 21.3 percent in 2010. - Total domestic credit projected to rise by 12 percent in 2010 (reflecting a 40 percent increase in credit to the public sector). - Bank claims on private sector projected to increase by 8.5 percent in 2010. - Private sector deposit growth estimated 26.5 percent in 2010 (mainly corporate domestic deposits). - Financial sector soundness: - Capital adequacy ratio: 17.4 percent (end August 2010). - Nonperforming loans ratio: 1.9 percent (end August 2010). - Provisioning coverage: 85 percent (end August 2010). - Bank profitability: 20 percent higher in first three quarters of 2010 vs. same period 2009. - Qatar Exchange index recovered 66 percent of pre-crisis levels (vs. 97 percent S&P 500 and 71 percent MSCI GCC). - Credit default swap (CDS) spread: about 85 basis points (marginally above pre-Dubai announcement level of 80 basis points). - External borrowings of sovereign and corporates doubled to $70 billion between 2008 and 2010; sovereign and guaranteed external debt mostly long term. ### Staff recommendations (summary) - Fiscal and monetary stance: - Maintain current expansive fiscal stance; monitor aggregate demand to avoid inflationary pressures. - Monetary policy to support credit growth while QCB relies increasingly on macroprudential instruments to manage the credit cycle and potential capital inflow surges. - Intergenerational saving and productivity: - Preserve policy of saving a share of hydrocarbon wealth for macroeconomic stability and intergenerational equity. - Improve productivity to support long-term nonhydrocarbon growth. - Exchange rate and market capacity: - Dollar peg broadly aligned with fundamentals; enhance technical, institutional, and operational capacity (including local debt market development) in case an alternative regime is needed for GCC monetary union. - Institutional reforms: - Establish a debt management office and set up a macro-fiscal unit. - Statistics: - Further improvements in statistics required; greater coordination among agencies necessary. * _cr1164 - Executive Summary* --- ### Economic outlook for 2011 and medium term (2012–15) ### 2011 outlook (key projections) - Real GDP growth projected: 20 percent (driven by further LNG expansion and nonhydrocarbon activity). - Nonhydrocarbon sector growth: 9.5 percent. - Headline inflation projected: 3.0 percent (rents expected to remain low). - Fiscal and external balances (2011): - Fiscal surplus projected at $13 billion. - External surplus projected at $39 billion. ### Medium-term (2012–15) projections and dynamics - Growth: - Government investment to keep nonhydrocarbon growth high beyond 2011. - Overall growth declines due to constant LNG production and a self-imposed moratorium on increasing gas production after 2012. - Average nonhydrocarbon growth during 2012–15 projected at 9 percent. - Inflation: - Headline consumer price inflation projected at 4 percent over the medium term as rents stabilize. - Non-rent inflation could resurge with recovery in international commodity prices and domestic demand growth. - Fiscal and external balances: - Projected to remain in surplus through 2015. ### Downside risks and illustrative scenarios - Main risk: a fall in natural gas prices. - Tail risk: a collapse in hydrocarbon prices reducing revenues and harming investments and nonhydrocarbon prospects. - Illustrative oil-price scenario: - Oil price assumed at $40 per barrel in 2011, thereafter increases at the same rate as benchmark scenario. - Under assumption of oil prices around $40 per barrel and no policy change: - Budget deficit from 2012 onwards. - Current account: from a projected surplus of $39 billion to "a deficit slightly lower than $4 billion in 2011 itself." ### Fiscal policy guidance and medium-term priorities - Expansive fiscal stance appropriate given fiscal space and low probability of oil price shock, but monitor demand and keep current expenditure in check. - Infrastructure plans: - Large investments about $100 billion between 2010 and 2015. - FIFA World Cup 2022–related expenditures largely already planned or under implementation; not expected to significantly affect surpluses in benchmark. - Revenue structure projections: - Hydrocarbon revenues projected at 52 percent of total revenues on average over medium term (vs. 58 percent over last five years 2005/06–2009/10). - Share of non-tax revenue projected stable around 26 percent of total revenues. - Policy recommendations: - Monitor aggregate demand; contain current expenditure. - Continue saving hydrocarbon surpluses via sovereign wealth fund. - Pursue medium-term fiscal consolidation to mitigate hydrocarbon price shocks and reach objective of fully financing budget after 2020 from nonhydrocarbon revenues. - Reappraise public enterprise projects (particularly real estate), rationalize energy subsidies, diversify the revenue base. - Fiscal mechanics and projections: - Staff baseline: income from sovereign wealth fund would cover capital expenditure (~40 percent of total expenditure in 2015/16). - Combined with projected tax revenues, nonhydrocarbon revenues projected to cover about 73 percent of total expenditure in 2015/16. - Sovereign wealth fund accumulation assumes return of 7 percent per annum. --- ### Monetary policy, credit conditions, and macroprudential framework - Credit dynamics: - Pre-crisis domestic credit growth averaged over 50 percent a year (2004–08); slowdown reflects demand and supply factors. - Slowdown has not dampened nonhydrocarbon growth driven by government and government-owned corporate investments. - Credit to public sector continued to increase; stagnation in consumption and real estate credit partly due to central bank regulation and bank risk aversion. - Central bank actions: - QCB reduced policy deposit rate by 50 basis points in August 2010. - Staff supports rate reduction given room to reduce interest rate differentials, benign headline inflation, and relatively low credit growth. - Central bank’s credit bureau commencement expected to increase transparency and reduce investor risk aversion. - Macroprudential role: - Under the dollar peg, QCB will rely increasingly on macroprudential instruments (certificates of deposit, reserve requirements, limits on credit ratios and sectoral exposures) to manage the credit cycle and counter capital inflow surges. - Central bank ready to use macroprudential measures when warranted. --- ### Financial sector resilience, supervision, and governance - Stress tests and recapitalization needs: - Updated stress tests show marginal increase in risk on bank capital under combined credit and market stress at end-June 2010 (after Government support ~7 percent of GDP). - Recapitalization needs estimated about 2 to 3 percent of GDP even under severe combined stress (NPLs to 20 percent and investment value drop by 50 percent). - Supervisory measures: - QCB established a Financial Stability Unit. - Existing prudential regulations: credit ratio limits on bank credit growth; limits on real estate financing; ban on bank financing for trading in securities; limits on proprietary equity investments; limits on foreign currency exposure. - Mission encouraged widening stress tests to cover cross-border, contagion and concentration risks and to pursue ongoing stress testing. - Moral hazard and crisis response: - Authorities supported banks in 2009 via capitalization rounds and purchases of equity and real estate assets. - Authorities deviated from preannounced exit strategy by planning to transfer equity portfolio to Government pension fund and retain real estate portfolio abroad. - Staff views decision not to resell equity assets to banks as desirable to reduce moral hazard. - Lessons: build banks’ risk assessment capacity, enhance information sharing, improve corporate governance and transparency. - Regulatory reform: - QCB plans to implement Basel III early. - Almost all banks above common equity requirement of 4.5 percent; all banks have Tier 1 capital over prescribed 6 percent under Basel III. - Commitment to establish a single regulator under the central bank. - Corporate sector: - Staff analysis suggests Qatari corporates appear well cushioned to withstand shocks. --- ### External sector, debt, and vulnerability indicators (selected figures) - 2010/2011 and projections (selected) - Current account (2010 estimate): $22 billion (17.3 percent of GDP). - External surplus projected (2011): $39 billion. - Central bank reserves, gross (selected years, million U.S. dollars): 18,352; 26,786; 30,706 (series across 2008–11). - Central bank reserves in months of imports of goods and services (selected): 6.2; 8.1; 8.5. - Total external debt (excluding banks, million U.S. dollars): 53,969; 69,539; 78,412; projected up to 100,025 in medium-term baseline. - Total debt (percent of GDP, selected): 41.5; 43.5; 51.8; 51.8; 85.2 (selected historical series). - Total external debt in percent of GDP (selected projection): 30.7; 30.2; 54.9; 54.8; 47.3; 47.3; 47.4; 46.7; 44.6. - Balance of payments (selected flows, million U.S. dollars, 2005–11): - Exports: 26,122; 35,083; 44,142; 67,212; 46,928; 65,375; 86,751 - LNG and related exports (subset): 8,738; 13,360; 18,710; 32,267; 23,947; 33,272; 50,907 - Trade balance: 17,058; 20,272; 24,318; 42,077; 24,476; 39,999; 57,859 - Current account (million U.S. dollars): 13,301; 15,295; 20,186; 32,197; 10,013; 21,922; 38,774 --- ### Appendix I — Medium-term prospects in Qatar’s LNG sector (risks and scenarios) ### Global and market context - Qatar holds the third largest natural gas reserves (North Gas field) and leads in the worldwide increase in LNG production. - Market pricing structures: - About one-third of global gas consumption priced on a spot basis. - One-fifth indexed to crude oil. - Around 40 percent subject to direct price regulation. - Remaining sold at subsidized prices. - Diversion dynamics allowed Qatar to redirect volumes to higher-priced markets when U.S. gas prices were $4–6 per MBTU and Asian/European prices were $10–12 per MBTU. ### Shale gas developments - Nonconventional gas: less than 5 percent of global reserves, 12 percent of global production. - U.S. shale gas accounted for about 46 percent of total U.S. production (EIA, 2010). - U.S. recoverable reserves estimated at 650 trillion cubic feet (about 30 years of 2009 consumption). - Advances in horizontal drilling and hydraulic fracturing key to shale economics. - MIT (2010) estimated shale gas break-even price at 4 to 8 per million cubic feet (at 2007 cost). ### Scenarios and macro sensitivities (preserve figures) - Baseline: gas prices anchored to WEO oil price projections in medium term. - Scenario 1: one-time -30 percent shock in 2011 (then WEO growth rate retained). - Scenario 2: two consecutive -30 percent shocks over first two years. - Macroeconomic outcomes: - External current account: - Baseline average medium-term surplus: 20 percent of GDP per year (2011–15). - Scenario 1 average: 5.8 percent of GDP per year. - Scenario 2: deficits as early as 2012; average medium-term surplus turns into deficit of 6 percent of GDP a year. - Cash flow to the state: - Baseline average: some $70 billion per year. - Scenario 1: shrinks by 30 percent to $49 billion per year. - Scenario 2: shrinks by 47 percent to $37 billion per year. ### Implication - Increase in LNG supply, LNG tankers, and U.S. shale production likely to pressure conventional gas producers reliant on oil-indexed long-term contracts and pipeline transportation, shifting pricing toward spot markets and creating downside risk to Qatar’s medium-term outlook. *Prepared by Reda Cherif and A. Prasad.* --- ### Appendix III — Productivity focus: evidence and policy directions ### Key messages - Hydrocarbon production projected to plateau in 2012, making productivity gains critical for sustaining nonhydrocarbon growth. - Growth accounting (2000–07): - Qatar had relatively high GDP growth but negative average TFP growth. - Contribution to GDP growth (Qatar, averages 2000–07): - GDP: 9.2 - Capital: 7.2 - Labor: 2.8 - Human capital: 0.5 - TFP: -1.3 - Sectoral productivity concerns: - Building and construction employed more than 37 percent of labor force in 2007; labor productivity in building and construction declined at average annual rate of 0.5 percent (2001–07). - Manufacturing labor productivity declined at average annual rate of 1.4 percent (2001–07). - Services productivity: trade/restaurants/hotels 2.8 percent; finance/insurance/real estate 6.1 percent. - Human capital shortfall: average years of schooling low relative to GDP per capita for 2000–07. ### Policy directions to raise productivity - Improve efficiency of fiscal spending and public financial management (given massive infrastructure investments). - Change migrant labor market paradigm: shift from unskilled short-term workers in construction to skilled long-term workers in high value added sectors; attract, train, and retain talent. - Continue education reform, training, and business environment improvements. - Build institutional framework to encourage entrepreneurship and innovation. - Encourage private participation in economic and social infrastructure (Public Private Partnerships); PPP Department established in Ministry of Business and Trade to advise on PPP policies and models. --- ### Statistical issues and capacity building ### Main findings - Data broadly adequate for surveillance but need improvements in frequency, timeliness, and coverage—particularly real GDP, financial accounts of BOP, and external debt statistics. - National accounts: key aggregates limited to quarterly estimates of GDP at current prices; nonhydrocarbon accuracy undermined by lack of comprehensive source data. - Price statistics: monthly CPI published (2007=100) but CPI deficient—rent information covers only new contracts, overstating deflation. - Monetary statistics: QCB and commercial bank data generally timely and high quality; QCB reports monthly to IMF STA with ~three-week lag. - Balance of Payments: - ITRS not stabilized; misunderstandings in concepts and classifications. - Significant data gaps in financial account: no inward/outward direct investment compilation; no portfolio investment data for nonbank sector; large errors and omissions. - Official statistics likely underestimate total imports. - Source data for government external assets not provided to QCB; flows estimated from budget but stock of external assets not provided. - Potential data sources: Qatar Investment Authority, Qatar Statistics Authority, Qatar Financial Center, Qatar Exchange. - External debt: detailed medium- and long-term external debt provided to missions; recent international bond issuance increases need for improved data and maturity profiles. - Participation: Qatar in GDDS since December 2005; IMF assisted with NSDP and Advance Release Calendar. ### Recent updates (Statement by IMF Staff Representative, February 16, 2011) - New information does not change staff appraisal thrust. - Official average headline CPI inflation: -2.5 percent in 2010. - January 2011: authorities increased local fuel prices by 25 percent; staff estimates inflation effect about 0.9 percent. - Bank credit to private sector rose 10.6 percent in 2010. - Broad money increased by 23 percent in 2010. - QCB issued 3-year government bonds (Islamic and conventional) face value $13.7 billion at 5.0 percent coupon to absorb excess liquidity. - QIA plans to infuse 10 percent equity in local banks in first quarter 2011 to complete third tranche of 20 percent capital increase decision. - Since January 10, sovereign spreads widened by 10 basis points (86 bps to 96 bps) and Qatar Exchange lost less than 1 percent. - Staff restated that new information does not change staff appraisal. *Source: IMF staff report content provided in the input.* ### Executive Summary ...................................................................................................... ### _cr1164 - Executive Summary ### Background - Qatar has weathered the global financial crisis exceptionally well, reflecting the swift and strong policy response by the authorities. - LNG capacity will reach a peak of 77 million tons per year (mtpy) in 2011 compared to 30 mtpy in 2008, and less than 5 mpty in 1997. - Hydrocarbon GDP grew at an average rate of about 11 percent between 1990 and 2009, while non-hydrocarbon GDP grew at an average rate of 9.5 percent. ### Current Economic Developments - Growth - Real GDP growth in 2010 is projected to rebound to 16 percent, up from 8.6 percent in 2009. - Real hydrocarbon growth of 22.7 percent in 2010 is driven mainly by a 38 percent increase in LNG production in 2010. - The nonhydrocarbon sector is expected to grow by 10 percent. - Inflation and Prices - Headline consumer prices are projected to decline by 2.6 percent in 2010, reflecting the slump in real estate (negative headline inflation). - Core inflation (excluding food and rents) will average 2.5 percent in 2010. - In September 2010, non-rent inflation increased by 4.1 percent year-on-year, of which food prices increased by 2.4 percent. - Note: There are measurement issues in the CPI; the sharp decline in rental inflation is overestimated to some extent due to survey coverage. - Fiscal Position - Staff projects a fiscal surplus of 9.7 percent of GDP in 2010/11, compared to 14.2 percent of GDP in 2009/10. - Revenues are projected to increase by 7 percent in 2010/11. - The budget incorporates a 14.6 percent growth in development expenditure (albeit flat at 10 percent of GDP), while current spending is expected to be contained at 17.5 percent of GDP in 2010/11, down from 19.6 percent of GDP in the previous year. - Development expenditure includes allocations of about $17 billion toward infrastructure (New Doha airport, New Doha port, roads, sewage, land reclamation, and expansion of electricity and water network), education, and healthcare. - External Sector and Reserves - The current account is estimated to record a surplus of $22 billion (17.3 percent of GDP) in 2010, compared to $10 billion (10 percent of GDP) in 2009. - The overall balance of payments accumulated a large surplus, enhancing the net foreign assets (NFA) of the central bank by $6 billion at end-September 2010, and increasing reserve adequacy to nearly eight months of prospective imports of goods and services. - Monetary and Credit Developments - Broad money growth is estimated at 21.3 percent in 2010. - Total domestic credit extended by the banking system would rise by 12 percent in 2010, mainly reflecting a 40 percent increase in credit to the public sector. - Bank claims to the private sector are projected to increase by 8.5 percent in 2010, as credit for consumption and real estate remained constant in 2010. - Private sector deposit growth accelerated to an estimated 26.5 percent in 2010—mainly due to a rise in corporate domestic deposits. - Commercial banks’ liquidity position continued to be comfortable and their claims on the central bank increased. - Financial Sector Soundness and Markets - Banks had a capital adequacy ratio of 17.4 percent, nonperforming loans ratio of 1.9 percent, and provisioning coverage of 85 percent at end August 2010. - Profitability was 20 percent higher in the first three quarters of 2010 compared to the same period of 2009. - The Qatar Exchange index has recovered 66 percent of its pre-crisis levels, compared to 97 percent by S&P 500 and 71 percent by MSCI GCC index. - The credit default swap (CDS) spread is about 85 basis points currently, which is below the level at the announcement of the Dubai World restructuring, but marginally above the pre-Dubai announcement level of 80 basis points. - The government and corporates increased external borrowings: external borrowings of the sovereign and corporates doubled to $70 billion between 2008 and 2010. - The sovereign and guaranteed external debt is mostly long term and the debt servicing profile does not indicate potential refinancing difficulties in the foreseeable future. ### Staff’s recommendations - Fiscal and Monetary Stance - While the current expansive fiscal stance remains appropriate and monetary policy should remain geared towards supporting credit growth, aggregate demand needs to be carefully monitored in order to avoid the emergence of inflationary pressures. - Qatar Central Bank (QCB) will have to rely increasingly on macroprudential instruments to manage the credit cycle and to counter potential surges in capital inflows. - Intergenerational Saving and Productivity - Preserving the policy of saving a share of hydrocarbon wealth is key to maintaining macroeconomic stability and intergenerational equity. - Improving productivity will be important to support self-sustaining long-term growth in the nonhydrocarbon sectors. - Exchange Rate and Market Capacity - The exchange rate is broadly aligned with fundamentals. The dollar peg has served as an effective nominal anchor. - It will be important to enhance the technical, institutional, and operational capacity, including development of a local debt market, in case an alternative exchange rate regime becomes desirable in the context of the Gulf Cooperation Council (GCC) monetary union. - Institutional Reforms - Establishing a debt management office and setting up a macro-fiscal unit will constitute important institutional reforms to support policy making. - Statistics - Further improvements in statistics will be essential, and will require greater coordination between various agencies. ### Authorities’ views - Fiscal and Banking Response - The authorities highlighted that the countercyclical fiscal stance and the government’s support to the banking system ensured financial stability and helped sustain high growth rates through the global crisis. - Over the medium term, the government budget would continue to allocate increased resources for infrastructure investment, while keeping current expenditure in check. - Major infrastructure upgrades related to the FIFA World Cup 2022 (integrated metro/rail systems, roads, and airport) have already been taken into account in the medium-term expenditure profile. - Additional expenditure to the government budget is not expected to be significant. - QCB Policy Tools and Inflation View - QCB has a range of instruments to manage liquidity, has further room to reduce interest rates, and can resort to prudential regulation by limiting credit ratios and sectoral exposures to manage both credit growth and potential surges in capital inflows. - Inflation is not viewed as an issue of concern in the short term, mainly because of the current excess supply in real estate. - Revenue and Expenditure Strategy - The authorities will continue to save part of the hydrocarbon revenues through their sovereign wealth fund, to facilitate intergenerational equity. - They expect nonhydrocarbon revenues to increase as a result of recently introduced measures to rationalize and broaden the corporate tax base. - The establishment of the value-added tax in the context of the GCC monetary union would broaden the tax base further. - Current expenditure would be contained over the medium term by enhancing spending efficiencies, resisting increases in salaries, and shrinking the size of government to the extent possible. - Their objective is to fully finance their budgets after 2020 from nonhydrocarbon revenues. - Exchange Rate and Financial Regulation - The authorities are committed to the exchange rate peg to the U.S. dollar, while strengthening institutional and operational capacity in financial markets to be prepared if an alternative exchange rate system becomes desirable in the context of the GCC monetary union. - QCB is closely monitoring potential risks to the banking system, published its first Financial Stability Review and intends making this an ongoing process. - The authorities remain committed to establishing a single financial regulatory authority under the umbrella of the central bank, continue to align supervisory and regulatory frameworks with best standards and practices, and plan to implement Basel III proposals early. - Statistics - The authorities are making efforts to improve data quality and coverage as they advance toward the GCC monetary union and have sought technical assistance on improving Consumer Price Index (CPI) statistics. ### Outlook and Risks - The economic outlook is favorable. - The main downside risk to the outlook comes from lower oil and gas prices. * _cr1164 - Executive Summary* ### 8. The economic outlook for 2011 remains strong. A further expansion in LNG ### _cr1164 - 8. The economic outlook for 2011 remains strong. A further expansion in LNG ### Economic outlook for 2011 - Real GDP growth projected to be 20 percent driven by: - further expansion in LNG capacity, and - activity in the nonhydrocarbon sectors. - Nonhydrocarbon sector growth driven by continued manufacturing growth, pickup in construction, and sustained activity in financial and government services, transportation and communication: - nonhydrocarbon sector growth of 9.5 percent. - Headline inflation: - headline inflation projected at 3.0 percent, as rents are expected to remain low. - Fiscal and external balances (2011): - fiscal surplus projected at $13 billion. - external surplus projected at $39 billion. ### Medium-term outlook (2012–15) - Growth dynamics: - government investment will keep nonhydrocarbon growth high beyond 2011. - overall growth would decline due to constant LNG production and a self-imposed moratorium on increasing gas production after 2012 that will lead to a sharp tapering off of hydrocarbon-sector growth. - average nonhydrocarbon growth during 2012–15 projected at 9 percent. - Inflation: - headline consumer price inflation projected at 4 percent over the medium term as rents stabilize due to gradual narrowing of excess real estate capacity. - non-rent inflation could resurge due to recovery in international commodity prices affecting Qatar’s import basket and domestic demand growth. - Fiscal and external balances: - projected to remain in surplus through 2015. ### Downside risks and alternative scenarios - Main risk: - a fall in natural gas prices poses the main risk to the outlook. - Tail risk: - a collapse in hydrocarbon prices would reduce hydrocarbon revenues, create uncertainty for investment, and harm nonhydrocarbon growth prospects. - Illustrative oil-price scenario: - assumption of oil prices of around $40 per barrel and no policy change points to a budget deficit from 2012 onwards. - under that assumption, the current account surplus would turn from a surplus of $39 billion to "a deficit slightly lower than $4 billion in 2011 itself." - note: Oil price is assumed at $40 per barrel in 2011, and thereafter increases at the same rate at which oil prices increase in the benchmark scenario. ### Fiscal policy: stance, projections, and recommendations - Current stance: - expansive fiscal policy stance remains appropriate given existing fiscal space and low probability of an oil price shock. - Infrastructure plans and spending: - large investments valued at about $100 billion between 2010 and 2015 are in various stages of planning and implementation. - much of the infrastructure-related expenditures related to hosting the FIFA World Cup in 2022 had already been planned or are under implementation; increase in expenditure for the event does not seem to have a significant impact on surpluses in the benchmark scenario. - Revenue structure and projections: - hydrocarbon revenues projected to be lower on average at 52 percent of total revenues over the medium term, compared to 58 percent of total revenues over the last five years (2005/06 to 2009/10). - share of non-tax revenue projected to remain stable around 26 percent of total revenues (investment income from public enterprises). - Policy recommendations and medium-term priorities: - carefully monitor aggregate demand to ward off inflation risks; keep current expenditure in check. - preserve macroeconomic stabilization and continue saving a share of hydrocarbon wealth through the sovereign wealth fund to facilitate intergenerational equity and sterilization. - fiscal consolidation in the medium term would mitigate impact of sharp falls in hydrocarbon prices and help attain objective of fully financing the budget from 2020 onwards from nonhydrocarbon revenues. - reappraise future projects of government-owned companies (particularly in real estate), rationalize energy subsidies, and diversify the revenue base. - Projections and fiscal mechanics: - in the staff’s baseline scenario, income earned from the sovereign wealth fund would cover capital expenditure, which is roughly about 40 percent of total expenditure in 2015/16. - combined with projected tax revenues, nonhydrocarbon revenues are projected to cover about 73 percent of total expenditure in 2015/16. - sovereign wealth fund accumulation calculations assume a return on investment of 7 percent per annum on the assets. ### Monetary policy and credit conditions - Credit growth dynamics: - slowdown in bank credit to the private sector reflects both demand and supply factors after pre-crisis domestic credit growth rates averaging over 50 percent a year in the pre-crisis period (2004–08). - slowdown has not dampened nonhydrocarbon growth engines, which are mainly sustained by government and government-owned corporate investments. - credit to the public sector continued to increase; stagnation in credit to consumption and contractors/real estate partly attributed to central bank regulation halting consumption credit for equity investments and increased bank risk aversion. - Central bank actions and support: - Qatar Central Bank (QCB) reduced its policy deposit rate by 50 basis points in August 2010. - staff supports the rate reduction given room to reduce interest rate differentials, benign headline inflation, and relatively low credit growth. - commencement of operations of the central bank’s credit bureau expected to increase transparency, promote information sharing, and reduce investor risk aversion. - Macroprudential focus: - given the pegged exchange rate regime, QCB will rely increasingly on macroprudential instruments to manage the credit cycle and counter potential surges in capital inflows (instruments include certificates of deposit and reserve requirements). - central bank is ready to use macroprudential measures when warranted. ### Financial sector resilience and supervision - Stress-test results: - updated stress tests show a marginal increase in risk on bank capital of a combined credit and market stress at end-June 2010 (after Government support amounting to about 7 percent of GDP), compared to end-2008. - recapitalization needs of the banking system would be about 2 to 3 percent of GDP even under a severe combined stress of an increase in NPLs to 20 percent and a drop in the value of investments by 50 percent. - Supervisory actions and prudential measures: - QCB established a Financial Stability Unit to monitor potential risks. - existing prudential regulations include a credit ratio limiting bank credit growth, limits on real estate financing by banks, a ban on bank financing for trading in securities, limits on banks’ proprietary equity investments, and limits on foreign currency exposure of banks. - mission encouraged QCB to widen scope of stress tests to cover cross-border, contagion and concentration risks and to pursue stress testing on an ongoing basis. - Corporate sector resilience: - staff’s analysis suggests Qatari corporates appear well cushioned to withstand shocks. *Source: IMF staff report content provided in the input.* ### 24. The authorities and staff agreed on the importance of reducing moral hazard and ### _cr1164 - 24. The authorities and staff agreed on the importance of reducing moral hazard and ### Financial sector support and moral hazard - Authorities supported the banking system in 2009 through two rounds of capitalization, and purchase of local equity and real estate assets from banks. - Authorities deviated from the preannounced exit strategy of selling the portfolio back to banks within three to five years at the sale price, and instead: - transfer the equity portfolio to the Government pension fund at a future date; and - plan to retain the real estate portfolio, much of which is abroad. - Staff view: the ex post decision not to resell the equity assets to banks is desirable as this reduces moral hazard. - Lessons from the crisis emphasized: - building banks’ capacity to assess risks; - greater information sharing among banks; and - improving corporate governance and transparency. ### Regulatory reforms and capital adequacy - QCB plans to implement Basel III early. - Capital ratios reported: - Almost all banks are above the minimum threshold for the common equity requirement of 4.5 percent. - All banks have Tier 1 capital over the prescribed 6 percent under Basel III. - Institutional reform: - Commitment to establish a single regulator for the financial system under the umbrella of the central bank to address regulatory and supervisory gaps. - Anti–money laundering / countering the financing of terrorism (AML/CFT): - Staff compliments the authorities for significant improvements to the AML/CFT regime and welcomes Qatar’s delisting from the International Cooperation Review Group (ICRG). - Staff encourages the authorities to build upon progress and pursue further efforts in this area. ### Developing institutions to support policy - Macro-fiscal unit: - Staff supports authorities’ plan to create a macro-fiscal unit in the Ministry of Economy and Finance to help develop a medium-term budget framework. - Authorities recognize the need to align annual budgets with medium-term priorities and strengthen the public financial management framework. - Debt management and markets: - Authorities and staff agreed on the need for setting up an institutional framework for debt management. - Authorities have made initial advances in preparing a framework for setting up a debt office and in collating and disseminating debt statistics. - Staff encouraged proceeding with plans to develop the domestic bond market. - Government objectives would be better achieved by consolidating debt management and development functions in a debt office. ### Enhancing productivity for long-term growth - Staff assessment: - Improving productivity is key to self-sustaining long-term growth in the nonhydrocarbon sectors. - Preliminary growth accounting reveals that the rate of change in total factor productivity (TFP) in Qatar contributed negatively to real GDP growth over the period 2000–07. - Plausible explanations noted by authorities: - Labor concentration in sectors with low productivity gains, particularly construction. - Qatar’s constant hydrocarbon production after 2012 would limit the government’s overall capacity to finance investments, making productivity improvements crucial for sustainable growth. - The current development phase focuses on building physical infrastructure using unskilled labor; a shift to higher value added sectors with skilled labor would improve productivity. - Sectoral productivity statistics: - Labor productivity in building and construction—which employed more than 37 percent of the labor force in 2007—declined at an average annual rate of 0.5 percent over the period 2001–07. - In the manufacturing sector— the second largest sector in terms of employment—labor productivity declined at an average annual rate of 1.4 percent. - The contribution of TFP gains to growth in Qatar compares with about 1 percent in advanced countries and higher than 3 percent in fast growing emerging economies. - Policy directions to improve productivity: - Move from low-skilled to high-skilled labor in the long term. - Ensure efficiency of expenditure to improve productivity. - Encourage private participation in delivery of economic and social infrastructure to induce efficiency gains. - A Government decree established a Public Private Partnership (PPP) Department within the Ministry of Business and Trade to advise on partnership policies, identify sectors for PPPs, prepare samples or models of PPP contracts, and recommend supportive measures. ### Monetary union progress and remaining tasks - Achievements: - Much progress in establishing the GCC monetary union. - Qatar, Bahrain, Kuwait and Saudi Arabia ratified the charter establishing the GCC Monetary Council. - Qatar shifted the base year of the CPI from 2006 to 2007 to standardize the CPI base year for the GCC monetary union. - GCC monetary council agreed to establish GulfStat to standardize data collection and dissemination. - Remaining tasks: - Setting of the monetary policy framework. - Identifying a common payment and settlement systems. - Unifying the banking supervision system. - On the fiscal side, setting up a common accounting framework and adequate budgetary procedures prior to a common currency. ### Statistical issues and capacity building - Progress has been made in improving data quality and coverage, but scope remains to improve timeliness, quality, and periodicity of all economic data. - Need for greater coordination among ministries, QCB, Qatar Statistical Authority and the General Secretariat for Development Planning. - Specific data shortcomings and assistance: - Authorities recognize shortcomings in national accounts and inflation data and sought IMF technical assistance on CPI compilation. - Authorities lack capacity in compilation of the international investment position statistics. - They recently received technical assistance on the financial account of the balance of payments and are preparing a roadmap for implementing TA recommendations. ### Staff appraisal — key findings and policy recommendations - Growth and structural context: - Qatar remains one of the fastest growing economies in the world, driven by a doubling of natural gas capacity, timely banking sector intervention, and ongoing large public investments across the supply chain. - Fiscal policy: - Staff supports the expansionary fiscal stance in 2010/11. - Although spending has increased substantially, fiscal buffers remain and fiscal sustainability is not at issue in the medium term. - Risk: non-rent inflation could reemerge; aggregate demand should be carefully monitored to ward off inflation returning to the high levels experienced before the global crisis. - Recommendation: continue to save and invest part of hydrocarbon surpluses abroad over the medium term to contain domestic demand pressures, facilitate intergenerational equity, and mitigate impacts of a sharp fall in hydrocarbon prices. - Support increasing spending for infrastructure, while containing current expenditures and increasing the tax base to reduce dependence on hydrocarbon revenues. - Monetary policy: - Main challenge is to support credit growth without fuelling inflationary pressures or short-term capital inflows. - QCB has room to further reduce interest rates, if warranted. - Given the pegged exchange rate regime, the central bank should rely increasingly on macroprudential instruments to manage the credit cycle and counter potential surges in capital flows. - Institutional reform: - Strengthening institutions should be part of the medium-term strategy. - Pursue the planned macro-fiscal unit in the Ministry of Economy and Finance to help develop a medium-term budget framework and support macroeconomic policy formulation. - Rising debt levels of sovereign and government-owned enterprises underscore the need for an institutional framework for debt management. - Exchange rate and monetary union: - Staff supports the authorities’ decision to maintain the dollar peg, but encourages enhancing technical, institutional, and operational capacity in case an alternative exchange rate regime becomes desirable in the context of the GCC monetary union. - Assessment suggests the riyal is broadly aligned with its fundamentals. - Financial sector governance: - Importance of reducing moral hazard and instituting a sound risk assessment culture in the banking system is underscored. - Reiterate need to build capacity in banks to assess risks, encourage greater information sharing, and improve corporate governance and transparency. - Commitment to establish a single regulator under the central bank is an appropriate response to regulatory and supervisory gaps. - Statistics: - Further efforts required to improve statistical systems — quality, timeliness, and coverage — and enhance coordination among relevant institutions. *Source: IMF staff report content provided.* ### 41. The next Article IV consultation is expected to take place on the standard ### _cr1164 - 41. The next Article IV consultation is expected to take place on the standard ### Summary - The next Article IV consultation is expected to take place on the standard 12-month cycle. ### National income, production, and prices (selected indicators, 2005–11; projections noted) - Nominal GDP (in million Qatari riyals): 156,666; 220,208; 293,933; 402,993; 357,860; 461,755; 584,121 - Nominal hydrocarbon GDP (in million Qatari riyals): 92,091; 130,203; 166,642; 215,053; 165,325; 257,626; 351,708 - Nominal GDP (in million U.S. dollars): 43,040; 60,497; 80,751; 110,712; 98,313; 126,856; 160,473 - Nominal GDP per capita (in U.S. dollars): 48,444; 58,073; 65,854; 76,435; 59,990; 74,621; 90,765 - Real GDP growth (in percent per annum): 7.61; 8.62; 6.82; 5.48; 8.61; 6.32; 0.0 - Hydrocarbon: 7.71; 4.32; 3.32; 3.17; 7.72; 2.72; 9.5 - Nonhydrocarbon: 7.52; 3.73; 0.62; 7.28; 9.61; 0.09; 9.5 - Crude oil output (in thousand barrels per day): 760; 803; 839; 836; 792; 822; 802 - LNG production (in million tons per year): 21.2; 24.7; 29.9; 31.5; 36.0; 50.0; 70.0 - Oil export price (in U.S. dollars per barrel): 51.76; 62.97; 70.09; 96.96; 62.67; 77.27; 79.8 - CPI period average: 8.8; 11.8; 13.8; 15.0; -4.9; -2.6; 3.0 ### Public finance (fiscal year basis where noted) - Total revenue (percent of GDP, 2005–11): 38.1; 36.1; 36.7; 36.0; 44.1; 36.8; 35.0 - Hydrocarbon revenue: 26.9; 23.2; 22.0; 20.4; 21.6; 20.2; 19.2 - Other revenue: 11.2; 12.8; 14.7; 15.6; 22.5; 16.6; 15.7 - Total expenditure and net lending (percent of GDP): 29.4; 28.1; 26.9; 25.3; 29.9; 27.0; 24.8 - Current expenditure: 19.0; 20.8; 16.3; 16.8; 19.6; 17.5; 15.4 - Capital expenditure (including net lending): 10.4; 7.3; 10.6; 8.5; 10.2; 9.6; 9.4 - Overall fiscal balance (percent of GDP): 8.6; 7.9; 9.8; 10.6; 14.2; 9.7; 10.2 - Excluding hydrocarbon revenue (percent of GDP): -18.2; -15.3; -12.2; -9.8; -7.4; -10.5; -9.1 - Nonhydrocarbon fiscal balance in percent of nonhydrocarbon GDP: -44.4; -36.8; -27.5; -20.3; -14.5; -24.4; -22.7 - Table 2a (selected government finance totals, 2008/09–2011/12, in million Qatari riyals) - Total revenue: 140,993; 169,095; 127,547; 181,099; 210,865 - Hydrocarbon revenue: 80,009; 82,807; 62,194; 99,538; 116,038 - Oil related: 61,245; 61,742; 33,365; 69,333; 74,090 - LNG related revenue: 18,764; 21,065; 28,829; 30,205; 41,948 - Other revenue: 60,984; 86,288; 65,353; 81,561; 94,827 - Investment income from public enterprises: 33,271; 53,879; 47,264; 47,264; 55,695 - Total expenditure: 99,294; 114,575; 117,873; 133,113; 149,615 - Current: 65,817; 75,334; 74,387; 85,963; 93,003 - Development expenditure: 33,477; 39,241; 43,486; 47,149; 56,612 - Overall balance: 41,699; 54,520; 9,674; 47,986; 61,249 - Nonhydrocarbon fiscal balance: -38,310; -28,287; -81,349; -51,552; -54,788 - Financing (total): -41,699; -54,520; -9,674; -47,986; -61,249 - Domestic financing (net): 1,825; 12,131; ...; 4,694; -1,694 - Foreign financing (net): -43,524; -66,651; ...; -52,680; -59,555 - Memorandum: Nominal GDP (fiscal year basis): 391,710; 383,833; 492,347; 492,347; 603,223 - Table 2b (percent of GDP, 2008/09–2011/12) - Total revenue: 36.0; 23.1; 44.1; 25.9; 36.8; 35.0 (row shows multiple columns; preserve values as presented) - Hydrocarbon revenue: 20.4; 11.0; 21.6; 12.6; 20.2; 19.2 - Other revenue: 15.6; 12.1; 22.5; 13.3; 16.6; 15.7 - Total expenditure: 25.3; 24.6; 29.9; 23.9; 27.0; 24.8 - Overall balance: 10.6; -1.5; 14.2; 2.0; 9.7; 10.2 - Nonhydrocarbon fiscal balance: -9.8; -16.0; -7.4; -16.5; -10.5; -9.1 - Financing: -10.6; 1.5; -14.2; -2.0; -9.7; -10.2 ### Money and credit (selected indicators, 2005–11; projections noted) - Broad money (annual change, percent): 44.6; 38.0; 39.5; 19.7; 16.9; 21.3; 12.0 - Net foreign assets (annual change, percent): 50.3; 28.1; 0.3; -20.5; -4.2; 4.5; 27.5 - Net domestic assets (annual change, percent): 36.8; 52.8; 88.6; 47.0; 24.0; 26.0; 8.5 - Domestic credit (annual change, percent): 60.0; 45.7; 66.1; 48.7; 2.0; 12.1; 16.4 - Claims on public enterprises: 34.9; 44.0; 198.1; 77.1; -16.1; 29.0; 26.5 - Claims on private sector: 63.5; 45.9; 51.3; 42.4; 7.0; 8.5; 13.9 - Depository Corporations Survey (selected levels, in million Qatari riyals) - Net foreign assets: 47,820; 61,250; 61,444; 48,869; 46,835; 48,925; 62,402 - QCB: 16,580; 19,694; 34,747; 35,790; 66,800; 97,500; 111,769 - Commercial banks: 31,240; 41,557; 26,696; 13,079; -19,965; -48,575; -49,367 - Domestic credit: 61,079; 88,986; 147,840; 219,823; 224,305; 251,529; 292,863 - Claims on public enterprises: 6,231; 8,974; 26,752; 47,384; 39,735; 51,271; 64,858 - Claims on private sector: 54,847; 80,012; 121,088; 172,439; 184,570; 200,258; 228,006 - Broad money (levels): 79,847; 110,173; 153,735; 184,005; 215,082; 260,880; 292,281 - Money: 25,657; 33,492; 40,737; 50,870; 53,116; 67,609; 77,230 - Quasi-money: 54,190; 76,681; 112,999; 133,136; 161,966; 193,271; 215,050 ### External sector and balance of payments (selected indicators, 2005–11) - Trade balance (in million U.S. dollars): 17,058; 20,272; 24,318; 42,077; 24,476; 39,999; 57,859 - Exports (in million U.S. dollars): 26,122; 35,083; 44,142; 67,212; 46,928; 65,375; 86,751 - Crude oil and refined petroleum products: 14,122; 17,840; 21,083; 29,438; 18,384; 25,566; 27,993 - LNG and related exports: 8,738; 13,360; 18,710; 32,267; 23,947; 33,272; 50,907 - Other exports: 3,261; 3,883; 4,349; 5,507; 4,598; 6,538; 7,851 - Imports (in million U.S. dollars): -9,064; -14,811; -19,824; -25,135; -22,452; -25,376; -28,892 - Current account (in million U.S. dollars): 13,301; 15,295; 20,186; 32,197; 10,013; 21,922; 38,774 - As percent of GDP: 30.9; 25.3; 25.0; 29.1; 10.2; 17.3; 24.2 - Central bank reserves, gross (in million U.S. dollars): 4,572; 5,416; 9,753; 9,837; 18,352; 26,786; 30,706 - In months of imports of goods and services: 2.5; 2.4; 3.3; 3.9; 6.2; 8.1; 8.5 - Total external debt (excluding banks, in million U.S. dollars): 14,989; 19,486; 24,762; 33,452; 53,969; 69,539; 78,412 - In percent of GDP: 34.8; 32.2; 30.7; 30.2; 54.9; 54.8; 48.9 - Government external debt (in million U.S. dollars): 3,743; 3,333; 2,871; 3,867; 16,470; 17,434; 16,396 - In percent of GDP: 8.7; 5.5; 3.6; 3.5; 16.8; 13.7; 10.2 - Debt service (excluding banks, in percent of GDP): 4.8; 4.4; 4.2; 2.9; 3.3; 6.4; 2.9 - Balance of Payments (selected flows, 2005–11, in million U.S. dollars) - Current account: 13,301; 15,295; 20,186; 32,197; 10,013; 21,922; 38,774 - Exports: 26,122; 35,083; 44,142; 67,212; 46,928; 65,375; 86,751 - Hydrocarbon exports: 22,861; 31,200; 39,793; 61,705; 42,331; 58,837; 78,900 - Crude oil: 12,843; 16,299; 19,181; 26,270; 16,217; 20,723; 20,896 - LNG: 5,200; 8,471; 10,524; 17,640; 13,074; 21,042; 30,445 - Imports: -9,064; -14,811; -19,824; -25,135; -22,452; -25,376; -28,892 - Services (net): -924; -2,763; -983; -4,760; -6,288; -8,535; -8,482 - Income (net): 542; 2,341; 1,297; 1,681; -451; -1,369; -1,117 - Receipts: 1,302; 3,402; 3,740; 4,079; 1,672; 1,660; 2,015 - Payments: -760; -1,061; -2,443; -2,398; -2,123; -3,029; -3,132 - Transfers (net): -3,375; -4,555; -4,446; -6,801; -7,724; -8,173; -9,487 - Workers remittances: -3,805; -4,733; -3,827; -4,348; -8,848; -9,381; -10,696 - Financial account (net): -6,582; -9,563; -16,148; -28,757; -97; -4,315; -29,939 - Direct investment, net: 2,500; 3,500; 4,700; 3,725; 4,950; 3,742; 2,094 - Portfolio borrowing, net: 1,225; 234; 794; -137; 254; 1,066; 1,084 - Other investment (net): -5,182; -8,251; -12,361; -15,672; -2,803; -6,921; -21,148 - Overall balance (in million U.S. dollars): 1,196; 855; 4,136; 286; 8,120; 15,702; 6,667 ### Vulnerability and solvency indicators (2005–09; selected) - REER (CPI based - end of period): 7.0; 8.1; 3.1; 3.6; 13.5 - Total debt (in billion U.S. dollars, including commercial banks): 17.8; 26.3; 41.9; 57.1; 83.8 - Of which: LNG-related: 6.7; 10.9; 14.1; 17.1; 19.7 - Total debt (in percent of GDP): 41.5; 43.5; 51.8; 51.8; 85.2 - Debt service/exports of goods and services: 15.3; 14.8; 19.9; 27.6; 54.8 - Government gross domestic debt/GDP: 9.9; 6.9; 4.3; 4.7; 9.7 - Government net domestic debt/GDP 1/: 5.2; 3.3; 0.8; 1.2; 5.5 - Government external debt/GDP 2/: 8.1; 5.2; 3.8; 4.5; 17.0 - Total debt service/total revenue: 8.0; 7.2; 3.0; 2.6; 2.4 - Interest payments/total revenue: 2.9; 2.3; 1.6; 1.5; 2.1 - Hydrocarbon revenue/total revenue: 70.6; 64.4; 60.0; 56.7; 49.0 - Central bank net reserves (in million U.S. dollars): 4,555; 5,410; 9,546; 9,832; 18,352 - In months of imports: 2.5; 2.4; 3.2; 3.9; 6.2 - Crude oil exports/total exports (percent): 54.1; 50.9; 47.8; 43.8; 39.2 - Financial sector indicators: Foreign currency deposits/total deposits: 32.3; 34.9; 32.6; 26.6; 13.7 - Market assessment: Stock market index (end of period): 11,053; 7,133; 9,580; 6,886; 6,959 - Credit ratings (selected): Moody's investor services: A1; Aa2; Aa2; Aa2; Aa3; Standard and Poor's: A+/AA-/AA-/AA-/AA- ### Medium-term baseline scenario (2007–15, selected) - Nominal GDP (in million Qatari riyals, 2007–15): 293,933; 402,993; 357,860; 461,755; 584,121; 660,526; 711,807; 759,046; 816,120 - Real GDP (percent change): 26.8; 25.4; 8.6; 16.3; 20.0; 7.1; 3.9; 4.1; 4.3 - Hydrocarbon 1/: 23.3; 23.1; 7.7; 22.7; 29.5; 5.7; 0.0; 0.0; 0.0 - Nonhydrocarbon GDP: 30.6; 27.8; 9.6; 10.0; 9.5; 9.0; 9.0; 8.8; 8.8 - Crude oil production (thousand barrels per day): 839; 836; 792; 822; 802; 767; 717; 671; 598 - LNG production (million tons): 29.9; 31.5; 36.0; 50.0; 70.0; 77.9; 77.9; 77.9; 77.9 - Qatar oil export price (U.S. dollars per barrel): 70.09; 96.96; 62.67; 77.27; 79.88; 83.38; 85.98; 87.18; 88.9 - CPI period average: 13.8; 15.0; -4.9; -2.6; 3.0; 4.0; 4.0; 4.0; 4.0 - Central government finances (fiscal year basis, April–March, selected levels) - Total revenue: 117,865; 140,993; 169,095; 181,099; 210,865; 228,462; 238,392; 243,929; 251,688 - Hydrocarbon revenue: 70,748; 80,009; 82,807; 99,538; 116,038; 118,956; 117,861; 116,928; 116,555 - Other revenue: 47,117; 60,984; 86,288; 81,561; 94,827; 109,506; 120,531; 127,001; 135,133 - Total expenditure: 86,249; 99,294; 114,575; 133,113; 149,615; 161,754; 175,424; 191,755; 209,264 - Current: 52,316; 65,817; 75,334; 85,963; 93,003; 98,561; 106,155; 116,248; 127,286 - Capital: 33,933; 33,477; 39,241; 47,149; 56,612; 63,193; 69,269; 75,507; 81,978 - Overall balance: 31,616; 41,699; 54,520; 47,986; 61,249; 66,708; 62,968; 52,174; 42,424 - In percent of GDP: 9.8; 10.6; 14.2; 9.7; 10.2; 9.9; 8.7; 6.7; 5.1 - Nonhydrocarbon balance (levels): -39,132; -38,310; -28,287; -51,552; -54,788; -52,248; -54,893; -64,754; -74,131 - In percent of GDP: -12.2; -9.8; -7.4; -10.5; -9.1; -7.8; -7.6; -8.4; -8.9 - In percent of nonhydrocarbon GDP: -27.5; -20.3; -14.5; -24.4; -22.7; -18.9; -17.3; -17.8; -17.8 - Government net debt (levels): 14,697; 22,181; 86,292; 77,697; 76,805; 75,646; 76,389; 79,178; 81,895 - In percent of GDP: 5.0; 5.5; 24.1; 16.8; 13.1; 11.5; 10.7; 10.4; 10.0 - External sector (medium-term projections, selected) - Current account (in million U.S. dollars): 20,186; 32,197; 10,013; 21,922; 38,774; 40,991; 37,176; 35,207; 34,328 - Central bank reserves, net (in million U.S. dollars): 9,546; 9,832; 18,352; 26,786; 30,706; 34,176; 35,877; 36,857; 37,938 - In months of imports of goods and services: 3.2; 3.9; 6.2; 8.1; 8.5; 8.6; 8.3; 8.1; 8.2 - Total external debt (excluding banks, in million U.S. dollars): 24,762; 33,452; 53,969; 69,539; 78,412; 85,890; 92,668; 97,387; 100,025 - In percent of GDP: 30.7; 30.2; 54.9; 54.8; 47.3; 47.3; 47.4; 46.7; 44.6 - Saving-investment balance (percent of GDP, selected) - Gross investment: 33.2; 30.5; 35.7; 30.7; 27.9; 26.9; 26.9; 27.1; 27.1 - Nongovernment sectors: 23.1; 22.2; 25.1; 20.9; 18.6; 17.5; 17.4; 17.4; 17.3 - Gross national saving: 58.2; 59.6; 45.9; 47.9; 52.1; 49.4; 45.9; 44.0; 42.5 - Nongovernment sectors: 35.6; 39.1; 17.2; 23.5; 29.6; 27.4; 24.9; 24.9; 25.7 *Sources: Data provided by the authorities; and IMF staff estimates and projections.* ### APPENDIX I. MEDIUM-TERM PROSPECTS IN QATAR’S LNG SECTOR ### APPENDIX I. MEDIUM-TERM PROSPECTS IN QATAR’S LNG SECTOR ### I. Qatar’s LNG Strategy - Qatar is leading the massive worldwide increase in LNG production and “accounts for the bulk of the increase, which is likely to alter the LNG market.” - Market structure and contract arrangements: - About one-third of global gas consumption is priced on a spot basis. - One-fifth is indexed to crude oil. - Around 40 percent is subject to direct price regulation. - The remaining is sold at subsidized prices (IEA 2009). - Regional contract differences: - Asian and European contracts tend to be indexed to oil prices. - The more integrated U.S. market follows the spot price (gas-to-gas competition). - Price and diversion dynamics: - Low U.S. gas prices were $4–6 per million British Thermal Unit (MBTU). - Qatar was able to redirect production originally destined for the U.S. toward Asian, European and Latin American markets at higher prices of $10–12 per MBTU due to diversion clauses in the contracts. - Industry structure and actors (as described): - Qatar holds the third largest reserves of natural gas, concentrated in the North Gas field. - Qatar Petroleum (QP) plays a dominant role in upstream and downstream production. - Strategy focused on “mega-projects” and vertical integration including downstream industries (fertilizer, gas-to-liquid projects) in partnership with ExxonMobil, Shell, Total, ConocoPhillips. - Qatar Gas Transport Company Ltd. (Nakilat) handles Qatari LNG shipping. ### II. Developments in Shale Gas - Scale and recent evolution: - Nonconventional gas resources account for less than 5 percent of global natural gas reserves, but 12 percent of global production. - In the past decade, shale gas emerged as a major new source in the U.S., accounting for about 46 percent of total U.S. production (Energy Information Agency, 2010). - The U.S. became the largest gas producer in 2009 and accounts for three quarters of global nonconventional output. - A recent report estimates U.S. recoverable reserves at 650 trillion cubic feet, equivalent to about 30 years of 2009 consumption. - Technology and geography: - Two factors made shale gas production economically viable: advances in horizontal drilling and hydraulic fracturing. - Countries exploring shale resources include Canada, India, China, Australia, Germany, Hungary, Poland and the United Kingdom. - Economic impacts and obstacles: - Increase in shale gas production in the U.S., combined with global contraction of demand, depressed global gas prices in 2009. - Potential obstacles: high variability of production rates between plays and wells; physical access to resources; requirement of large volumes of water; environmental regulations related to contamination of water resources with fracture fluids; lack of adequate capacity in the vicinity of shale gas plays may deter investments. - At 2007 cost, M.I.T. (2010) estimates break-even price for exploitation of shale gas in the range of $4 to 8 per million cubic feet. ### III. Impact on Qatar — Risks, Scenarios, and Macro Sensitivities - Structural risk: - “The downside risk to the medium-term economic outlook of Qatar is tilted toward lower gas prices vis-à-vis a contraction of demand for gas.” - Projected global gas supply glut and reduced U.S. import need could shift conventional gas pricing and trading away from oil-linked long-term contracts toward spot pricing. - Scenario design for hydrocarbon price shocks (as analyzed): - Baseline: gas prices anchored to the WEO projection of oil prices in the medium term. - Scenario 1: a -30 percent shock takes place in 2011, then the growth rate of the WEO oil price projections is retained. - Scenario 2: two -30 percent shocks are compounded over the first two years. - Macroeconomic scenario outcomes (key figures preserved): - External current account: - Baseline average medium-term external current account surplus: 20 percent of GDP per year during 2011–15. - Under the first scenario (one-time -30 percent shock): average medium-term external current account surplus declines sharply to 5.8 percent of GDP per year. - Under two consecutive -30 percent shocks: the current account shows deficits as early as 2012 and the average medium-term current account surplus turns into a deficit of 6 percent of GDP a year. - Cash flow to the state: - Baseline average flow of cash to the state: some $70 billion per year. - Under the first scenario: cash flow shrinks by 30 percent to $49 billion per year. - Under two consecutive declines: cash flow shrinks by 47 percent to $37 billion per year. - Broader implications: - Considerable increase in LNG production, increase in LNG tankers, and U.S. shale production growth are likely to affect conventional gas producers relying on oil-indexed long-term contracts and pipeline transportation. - Countries in Asia (including China and India), Europe and Latin America have absorbed volumes vacated by U.S. imports, particularly for LNG. - The effect of shale gas supply on the U.S. market is linked to the recent “decoupling” of natural gas prices; energy equivalence parity implies natural gas price per MBTU should be a sixth of the oil price per barrel, but divergences emerged after late 2005. *Prepared by Reda Cherif and A. Prasad.* ### APPENDIX III. WHY SHOULD QATAR FOCUS ON PRODUCTIVITY GAINS? ### APPENDIX III. WHY SHOULD QATAR FOCUS ON PRODUCTIVITY GAINS? ### Overview - Hydrocarbon production is projected to reach a plateau in 2012, emphasizing the importance of productivity gains to achieve sustainable non-hydrocarbon growth in the medium term. - A growth accounting analysis shows that Qatar’s productivity growth was on average negative over 2000–07, emphasizing the need for structural reforms to improve the efficiency of spending. - The main challenge is managing the transition from an economic model based on short term unskilled workers mainly employed in construction to longer term skilled workers employed in innovative firms. ### I. Sectoral growth profile - Hydrocarbon GDP grew at an average rate of about 11 percent between 1990 and 2009. - Public spending grew at an average rate of about 9 percent between 1990 and 2009. - Non-hydrocarbon GDP grew at an average rate of 9.5 percent between 1990 and 2009. - Population reached 1.6 million at end-August 2010, recording an average 7.5 percent growth rate during this period. - Composition and employment: - The services sector dominates the nonhydrocarbon economy. - Building and construction constitutes 13 percent of the non-hydrocarbon sector (2009) but is the main employer and one of the fastest growing sectors. - Projections: - Beyond 2012 the non-hydrocarbon sector will drive real GDP growth as hydrocarbon production plateaus because of a self-imposed moratorium on exploration in the North field. - Policy linkage: - Diversification and productivity are interlinked: sustained entry into new industries requires productivity gains; increasing productivity in the tradable sector counteracts Dutch disease by allowing competition with the non-tradable sector for resources. ### II. Growth accounting — methodology and data - Production function and decomposition: - Benchmark Cobb-Douglas technology: Y = A K^α (L h)^(1-α) (as in Hall and Jones, 1999). - Output growth decomposed into contributions from capital, labor (quantity and quality), and TFP (A) as the residual. - Data sources and construction: - Output, capital stock, and number of workers from Penn World Tables version 6.3 (PWT63). - Educational attainment from Barro and Lee (2010). - y measured as real GDP per worker in PPP terms. - Capital stock computed via the perpetual inventory equation using investment series; I0 is investment in the first year available and g is the geometric average growth rate of investment between the first year available and 1970. - For GCC countries initial capital in 1950 is assumed to be zero and the growth rate of investment is assumed to be 10 percent. - Human capital measure: - Following Hall and Jones (1999), h computed via s and Φ(s) with: - Φ(s)=0.134*s if s≤4 - Φ(s)=0.134*4 +0.101*(s-4) if 4