Qatar Macro and Equity Market: Diversification Away From Oil Is Bearing Fruits

 

In a report published in the fourth quarter of 2014, Qatar stated its main purpose of becoming, by 2030, an advanced economy, capable of providing a high and sustainable standard of living to all its citizens. Achieving this objective is contingent on the country’s ability to create a balance between an oil-based economy and a knowledge-based economy – the ability to establish a diversified economy that gradually reduces its dependence on hydrocarbon industries and enhances the role of the private sector. The Qatar National Vision 2030 is the engine that will guide the Qatari economy, assisting it to diversify, increase competition, attract more investments, and stimulate growth.

Qatar Macro and Equity Market: Diversification Away From Oil Is Bearing Fruits
Qatar Macro and Equity Market: Diversification Away From Oil Is Bearing Fruits

On a regional level, the Emir Sheikh Tamim bin Hamad Al Thani and the Turkish President Recep Tayyip Erdogan signed an agreement to setup a supreme strategic committee to bolster cooperation in key fields, such as politics, economy, commerce, investment, education, culture, science, technology, energy, agriculture and communications. Moreover, Saudi Arabia brokered a regional summit in November, in which Qatar joined its Gulf neighbors in Supporting Egypt under Sisi.

Qatar’s ongoing rapid process of economic diversification away from its traditional role as a hydrocarbon exporter towards a manufacturing and services hub, helped its real GDP, to grow by 6% year-on-year (y-o-y) in the third quarter (Q3) of 2014. Real Gross Value Added (GVA) of the non-oil sector, with a 62.73% share of GDP, posted a 12% yearly growth in Q3 boosted by double-digit upsurges witnessed in electricity, construction, trading, transport & communication, financial sectors and domestic services. Major infrastructure projects, notably the new metro in Doha, real estate projects, as well as new roads, highways and the further expansion of the new Hamad International Airport, resulted in an 18.5% y-o-y development in construction activity, making it the fastest growing sector. On the other hand, the GVA of the oil and gas sector dropped by 2.8% y-o-y caused by the receding crude oil production and some maintenance shutdowns in Gas plants.

As for inflation, it remained on its uptrend due to the rapid population growth that is driving rental prices up. Inflation stood at 2.7% y-o-y in December 2014, where price increases were observed in all CPI components except “Food, Beverages and Tobacco” that decreased by 0.4%. “Rentals, Fuel & Energy” recorded a 7.3% jump, primarily due to hikes in rentals of residential buildings. Worth mentioning that starting January 2015, monthly CPI would be calculated using new weights with 2013 as the base year.

On the suppliers’ side, the Producer Price Index (PPI), measuring the average selling prices producers receive for their output, tumbled by 18.3% y-o-y in November mainly due to lower prices of crude petroleum and natural gas.

Due to the decline in global demand for oil, the price of the Qatari Land Crude Oil (QLCO) and that of the Qatari Marine Crude Oil (QMCO) shed from $97.0/barrel and $95.0/barrel end of September to $76.2/barrel and $74.4/barrel end of November.

Therefore, the “Mining” group showed a 19.8% yearly plummet. The “Electricity & Water” component of the PPI also dropped by 2.9% caused by the 3.8% and 1.5% price falls seen in electricity and water.

Looking at the country’s external position, Qatar’s trade balance, in Q4 2014, shrank by 21.88% y-o-y to $219.89B, stemming from lower exports and higher imports. Declining oil prices pushed down the value of hydrocarbon exports, the largest component of total exports, by 10.32%, bringing about a 13.51% y-o-y decline in exports to $28.19B during October-December 2014. On the other hand, imports increased by 16.38% y-o-y to $8.30B, where motor cars and other passenger vehicles were the top imported commodities, rising by a yearly 10.07%. Qatar’s trade balance is expected to improve as Qatar is on track to become the world’s leading exporter of the industrial gas, helium, pushing the US to the second position.

On the fiscal front, Qatar’s budget surplus is expected to narrow from 10.8% of GDP in 2014, to 8% in 2015. Revenue growth is projected to moderate due to the impact of lower energy prices on hydrocarbon revenues (representing 55% of total state revenues). However, receipts from corporate taxes and income from investments are expected to increase. On the expenditure side, development spending that contains disbursements on public infrastructure projects is forecasted to accelerate reaching 10% of GDP. The Minister of Finance allocated $24B, the biggest infrastructure allocation in the country’s history, to key infrastructure projects. Over the next five years, Qatar is expected to spend $182B on infrastructure, to complete Hamad International Airport, the New Doha Port Project, the rail and metro projects, and the roads program.

Looking at the monetary sector, total assets at commercial banks rose by 10.41% since 2013 to $271.29B, by December 2014. The private sector continued to push total credit up by a yearly 13% to $175.56B at year end. Private sector credit surged 20.33% y-o-y, while public sector credit dropped 2.58% mainly due to the increased reluctance of banks to lend for long-term projects. Total deposits showed a 9.61% growth to $162.29B, due to the 14.10% rise in resident private sector deposits outperforming the 0.87% drop in public deposits.

Falling oil prices impacted investor’s sentiment negatively, where the Doha Stock Market Index (DSMI) tumbled 10.51% q-o-q to 12,285.78 points end of 2014. Trade during the last quarter of 2014 occurred at a lower volume of 880.56M shares worth $12.45B compared to 1.02B shares worth $12.04B during Q3. Moreover, index compiler MSCI raised Qatar’s weight in its emerging markets index, foreshadowing fresh foreign funds inflow. In addition, a venture, or junior stock market for small and medium-sized enterprises is expected to be operational early in 2015. The capital market regulator reduced the minimum capital requirement for SMEs wanting to be listed on the upcoming venture market from $1.35M to $540,000.

 

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