Qatar-2010 Article IV Consultation Concluding Statement of the IMF Mission
November 8, 2010
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 has weathered the global financial crisis exceptionally well, reflecting the quick and strong policy response by the authorities. Growth has rebounded, and is projected to accelerate to 20 percent in 2011, while inflation will remain subdued. Continuing public investment in infrastructure will keep growth high in the medium term and support nonhydrocarbon growth. Improving productivity will be key to greater self-sustaining long-term growth in the nonhydrocarbon sectors. While the current expansive fiscal policy remains appropriate and monetary policy should remain geared towards supporting credit growth, aggregate demand should be carefully monitored in order to avoid the emergence of inflationary pressures. The central bank will have to rely increasingly on macroprudential instruments to manage the credit cycle and to counter potential surges in capital inflows. Establishing a debt management office and setting up a macro-fiscal unit will constitute important institutional reforms to support policy making. Further improvements in statistics will be essential, which will also require greater coordination between various agencies.
1. This statement presents the preliminary assessment of the 2010 Article IV mission to Qatar. The mission met with H.E. Yousef Kamal, Minister of Economy and Finance, H.E. Abdulla Bin Saoud Al-Thani, the Governor of Qatar Central Bank, senior government officials, as well as representatives of the financial sector and non-financial private sector. The mission thanks the Qatari authorities for their warm hospitality and open and constructive policy discussions, and wishes the government and people of Qatar all the best in their future endeavors.
Current Economic Developments
2. Real GDP growth in 2010 is projected to rebound to 16 percent, up from 8.6 percent in 2009. The nonhydrocarbon sector is expected to grow by 10 percent. A doubling of natural gas capacity, timely intervention in the banking system, and ongoing large public investments have kept Qatar on a high growth path. While average consumer prices are projected to decline by 2.6 percent, reflecting declining rents, core inflation (excluding food and rents) will average 2.5 percent.1 The overall fiscal and current account balances are projected to record surpluses of 9.7 percent of GDP and 17.3 percent of GDP, respectively.
3. The banking system is profitable and well capitalized. Profitability was 20 percent higher in the first three quarters of 2010, compared to the same period of 2009. Banks are well capitalized with a capital adequacy ratio of 17.4 percent, low nonperforming loans ratio of 1.9 percent, and a provisioning coverage of 85 percent at end August 2010.
4. Qatar has taken advantage of an improved external financing environment to raise external funds. The government issued several tranches of bonds in 2009 to create a sovereign benchmark yield curve aimed at facilitating issuances by government-owned corporates and commercial banks. As a result, the external borrowings of the sovereign and corporates doubled to $70 billion between 2008 and 2010. Qatar’s sovereign and guaranteed external debt is mostly long term and the debt servicing profile does not indicate potential refinancing difficulties in the foreseeable future.
Outlook and Risks:
5. The economic outlook for 2011 remains strong. A further increase in LNG capacity and activity in the nonhydrocarbon sectors will boost growth and further increase fiscal and external surpluses. Real GDP growth is projected at 20 percent, as a further LNG capacity of 15.6 million tons is added. Continued growth in the manufacturing sector, a pickup in construction sector, and sustained activity in financial and government services, transportation and communication would drive the nonhydrocarbon sector growth of 9.5 percent. Nonetheless, inflation will remain subdued at 3.0 percent, as rents are expected to remain low. The fiscal and external balances are projected to post surpluses of $13 billion and $39 billion, respectively.
6. Continued government investment will keep growth high beyond 2011. While the self-imposed moratorium on increasing gas production after 2012 will lead to a sharp tapering of growth in the hydrocarbon sector, government investments will support an average growth in nonhydrocarbon sectors of 9 percent during 2012–15. Headline inflation is projected at 4 percent over the medium term, as rents stabilize due to a gradual narrowing of the current excess capacity in real estate. Non-rent inflation, however, could resurge as the recovery in international commodity prices affecting Qatar’s import basket and growth in domestic demand continue. The fiscal and external balances are projected to remain in surplus through 2015.
7. The banking system is resilient to credit and market risks based on the mission’s stress tests. The mission compliments the authorities for publishing their first Financial Stability Review. Their analysis of the banking system risks and the candid presentation of the results demonstrate a clear commitment to monitor potential risks. The mission encourages the authorities to pursue this on an ongoing basis and widen the scope of the stress tests to cover cross border, contagion and concentration risks.
8. A fall in natural gas prices poses the main risk to the outlook. The tail risk of a collapse in hydrocarbon prices would also have adverse implications for hydrocarbon revenues, and could result in an uncertain outlook for investment, and consequently Qatar’s nonhydrocarbon growth prospects. Additionally, shocks in the global financial environment might affect Qatar’s access to, and pricing of, international funding.
9. Although bank credit to the private sector seems to have slowed down, the outlook for credit looks positive, given the large ongoing government led investments and the strong measures taken by the authorities to strengthen the capital of banks. Continued growth in the nonoil sector will provide additional demand for credit. The commencement of operations of the central bank’s credit bureau will increase transparency, promote information sharing among banks, and help reduce investor risk aversion.
10. The main challenges for monetary policy will be to support credit growth without fuelling inflationary pressures or short-term capital inflows. The central bank is closely monitoring liquidity in the financial system and has a range of instruments, including certificates of deposit and reserve requirements, to manage it. Although the central bank already reduced policy interest rates by 50 basis points recently, there remains further scope to reduce rates in view of the existing high spreads compared to U.S. rates Given the pegged exchange rate regime, the central bank will have to rely increasingly on macroprudential instruments to manage the credit cycle and to counter potential surges in capital flows, which it is ready to use when the situation warrants.
11. The current expansionary fiscal stance remains appropriate, but aggregate demand should be carefully monitored in order to ward off inflation going back to the high levels experienced before the crisis. Although spending has increased substantially, fiscal buffers remain and fiscal sustainability is not at issue in the medium term.
12. Preserving the policy of saving a share of hydrocarbon wealth is key to maintaining macroeconomic stability and intergenerational equity. The policy of saving a share of the hydrocarbon wealth through the sovereign wealth fund has served Qatar well. Apart from acting as a tool for sterilization, it created savings for a large countercyclical response to the crisis. Fiscal policy will need to continue to maintain a careful balance between spending on infrastructure to sustain non-inflationary growth, and saving and investing part of hydrocarbon surpluses abroad in order to generate sufficient income to finance future budgets. Achieving their objective of fully financing the budget from 2020 onwards with income from its sovereign wealth fund assets would require fiscal consolidation beyond 2011, combined with structural reforms. A careful reappraisal of future projects of government owned companies, particularly in the real estate sector, rationalizing energy subsidies, and diversifying the revenue base would therefore be appropriate.
13. In the context of the Government’s National Development Strategy, the mission encourages the authorities to strengthen its public financial management framework, and to conduct a review of the efficiency of spending, particularly in view of the large capital expenditure program. The creation of a macro-fiscal unit in the Ministry of Economy and Finance would help develop a medium-term budget framework.
14. The rising sovereign and government-owned enterprises’ debt levels underscore the need for setting up a more systematic medium-term debt strategy and an institutional framework for debt management. The mission notes that the authorities have made some initial advances in preparing a framework for setting up a debt office along with efforts to collate and disseminate debt statistics.
15. The exchange rate is broadly aligned with fundamentals. The dollar peg has served as an effective nominal anchor. Nevertheless, it will be important to enhance the technical, institutional, and operational capacity, in case an alternative exchange rate regime becomes desirable in the context of the GCC monetary union. In this context, the mission welcomes the authorities’ intention to develop the domestic bond market. This entails addressing regulatory and market infrastructure, fostering demand for instruments, and building the supply of securities.
16. The mission underscores the importance of reducing moral hazard and fostering a sound risk management culture in the banking system. The authorities supported the banking system in 2009 through two rounds of capitalization, and purchases of local equity and real estate assets from banks. The lessons learnt from the crisis highlight the importance of building capacity in banks to assess risks, greater information sharing among them, and improving corporate governance and transparency.
17. The mission sees merit of complementing regulatory reforms at the national level with the implementation of global regulatory reforms. The central bank plans to implement Basel III proposals early. Almost all banks are above the minimum threshold for common equity requirement of 4.5 percent, and all banks have Tier 1 capital over the prescribed 6 percent under Basel III. The commitment to establish a single regulator for the financial system under the umbrella of the central bank is an appropriate response to addressing regulatory and supervisory gaps and strengthening financial sector reforms.
Enhancing Productivity to Sustain Long-term Growth
18. Improving productivity is key to greater self-sustaining long-term growth in the nonhydrocarbon sectors. Since Qatar’s constant hydrocarbon production after 2012 would limit their overall capacity to finance investments; it will be crucial to improve productivity. Qatar’s main challenge will be to move from attracting low skilled temporary workers to highly skilled workers in the long term and provide the institutional framework to encourage investment in innovation. Meanwhile, ensuring the efficiency of expenditure will also contribute to improving productivity. The government believes that private participation in the delivery of economic and social infrastructure can induce substantial efficiency gains in the way these services are delivered and can provide the market with the quality and affordable services it needs to remain globally competitive. As part of this strategy, a recently issued Government decree established a Public Private Partnership (PPP) Department within the Ministry of Business and Trade.
19. While progress has been made in improving data quality, and coverage, there is scope to improve timeliness, quality, and periodicity of all strands of economic data. The mission underlines the need for greater coordination among the various ministries, the central bank, Qatar Statistical Authority and the General Secretariat for Development Planning in this regard.
1 There are measurement issues in the CPI. The sharp decline in rental inflation is overestimated to some extent as the monthly survey of rental prices is mainly confined to new contracts or those currently available for occupancy. As a result, the magnitude of decline in the overall CPI may actually be smaller than what is evident from the data.