Growth Forecasts Revised Upwards

BMI View: We have raised our economic growth forecasts for Qatar and now project average annual real GDP growth of 5.7% between 2014 and the end of the decade, from 5.1% previously. Strong population growth and progress on the government's large-scale infrastructure programme will drive both construction activity and the sustained expansion of the services sector.

The Qatari economy is set to remain a regional outperformer over the coming years, marked by strong and broad-based growth in the non-hydrocarbons sector. We have raised our economic growth forecasts for the country, and now project average annual real GDP growth of 5.7% between 2014 and the end of the decade - compared with 5.1% previously. Both construction activity and the services sector will continue to expand at a rapid clip in the run-up to the FIFA 2022 World Cup, on the back of strong population growth and progress on the government's large-scale infrastructure programme. We caution, however, that Qatar's hosting of the World Cup is coming under increasing international scrutiny, due to persistent allegations of corruption over its bid for the event. This adds a tail risk to our outlook (see below).

Preliminary data released by the Qatar Statistics Authority (QSA) shows that the Qatari economy grew by 6.5% in real terms in 2013, up from 6.1% in 2012. This came above our forecast of 5.7%, owing to significant upward data revisions for the first three quarters of the year. As we expected, the contribution of the hydrocarbons sector to overall economic growth was broadly flat, a situation we see continuing over the coming years given maturing oil fields and a plateau in gas production. By contrast, the non-hydrocarbons sector grew by a rapid 11.4% in real terms, up from 10.1% in 2012, with activity expanding most markedly across the construction, manufacturing, transportation, services and hospitality sectors.

Remaining The GCC's Outperformer
Qatar - Real GDP Growth, % (left); by Sector (right)

BMI View: We have raised our economic growth forecasts for Qatar and now project average annual real GDP growth of 5.7% between 2014 and the end of the decade, from 5.1% previously. Strong population growth and progress on the government's large-scale infrastructure programme will drive both construction activity and the sustained expansion of the services sector.

The Qatari economy is set to remain a regional outperformer over the coming years, marked by strong and broad-based growth in the non-hydrocarbons sector. We have raised our economic growth forecasts for the country, and now project average annual real GDP growth of 5.7% between 2014 and the end of the decade - compared with 5.1% previously. Both construction activity and the services sector will continue to expand at a rapid clip in the run-up to the FIFA 2022 World Cup, on the back of strong population growth and progress on the government's large-scale infrastructure programme. We caution, however, that Qatar's hosting of the World Cup is coming under increasing international scrutiny, due to persistent allegations of corruption over its bid for the event. This adds a tail risk to our outlook (see below).

Remaining The GCC's Outperformer
Qatar - Real GDP Growth, % (left); by Sector (right)

Preliminary data released by the Qatar Statistics Authority (QSA) shows that the Qatari economy grew by 6.5% in real terms in 2013, up from 6.1% in 2012. This came above our forecast of 5.7%, owing to significant upward data revisions for the first three quarters of the year. As we expected, the contribution of the hydrocarbons sector to overall economic growth was broadly flat, a situation we see continuing over the coming years given maturing oil fields and a plateau in gas production. By contrast, the non-hydrocarbons sector grew by a rapid 11.4% in real terms, up from 10.1% in 2012, with activity expanding most markedly across the construction, manufacturing, transportation, services and hospitality sectors.

Services And Construction To Stay Ahead
Qatar - Contribution To Headline Growth, pp (2013)

We forecast real GDP growth of 5.7% and 6.1% in 2014 and 2015 respectively, up from our previous projections of 5.4% and 4.9%. This will be driven by the non-hydrocarbons economy: we expect a mild contraction in the hydrocarbons sector this year, weighing down on headline growth. Supporting this outlook, International Energy Agency (IEA) data show that Qatari crude output averaged 715,000 barrels per day (bbl/d) in the first four months of 2014, down by 3.1% on an annual basis. That said, production from the new Barzan gas development is due to come on-stream in two phases at the end of this year and in 2015, and should contribute to a mild uptick in hydrocarbons sector growth in Q414 and throughout next year.

Mild Decline In Oil Output
Qatar - Crude Production

The downside risks that we have previously flagged remain present, and include implementation risks in the construction sector and ongoing diplomatic tensions between Qatar and several countries in the Gulf Cooperation Council (GCC). To those issues can be added renewed international pressure over FIFA's decision to award the 2022 World Cup to Qatar. Several officials have expressed their support for a rerun of the vote, a move that would effectively strip Doha of the hosting rights. While we believe that such a drastic outcome is unlikely at this stage, the tensions add a key source of uncertainty to Qatar's long-term economic outlook.

Our baseline scenario assumes that the World Cup will go ahead in Qatar as planned. That said, we believe that capacity constraints within the construction sector will be felt more sharply as numerous large-scale infrastructure projects enter the construction phase (see 'Construction Momentum Builds, But Constraints Remain', May 27). Bottlenecks in the supply of building materials and labour are a perpetual threat, and major players within the construction industry have highlighted issues such as bureaucratic delays and cost overruns over the past few years. Were further problems in the implementation of the investment programme to materialise, construction activity (which now directly accounts for 11.9% of GDP) would be hit.

Qatar also remains enmeshed in a foreign policy dispute with its immediate GCC neighbours, Saudi Arabia, Bahrain and the UAE (see 'Highly Public Breakdown In GCC Unity', March 5). Although each side has played down the quarrel, recent comments by Gulf officials suggest that the diplomatic rift remains unresolved. A tail risk would be the imposition of economic sanctions on Qatar or the abandonment of joint infrastructure projects. However, our baseline view sees the inter-GCC dispute remaining primarily a political issue.

Expenditure Breakdown

Private Consumption Outlook: We project private consumption growth to remain elevated over the coming years, averaging 11.0% in real annual terms between 2014 and 2016 - compared with 6.2% between 2009 and 2012. The country's fast-rising resident population, on the back of high demand for foreign workers in preparation for the 2022 FIFA World Cup, will help to fuel growth in the retail, business services, real estate and trade and hospitality sectors. Latest QSA data show that the total population reached a new high of 2.17mn in May 2014 - the fourth consecutive month-on-month increase and up by 10.7% annually.

Migrant Influx Shows No Signs Of Ending
Qatar - Total Population, mn

The end-May opening of the Hamad International Airport (HIA) to passengers will also give a boost to economic activity. HIA can accommodate a capacity of 30mn passengers, a significant upgrade from 12mn at the older Doha International Airport. This will help to support logistical services, the continued expansion of national carrier Qatar Airways, and the growth of the transport sector (which currently directly accounts for 6.9% of GDP). Doha air passenger traffic grew by 9.9% y-o-y in 2013 to reach 23.3mn passengers, ahead of Abu Dhabi and Bahrain. Hotel occupancy rates remain relatively elevated despite a surge in new hotels over the past few years - although average room rates have been declining.

New Hotel Builds Not Hurting Occupancy Rates
Qatar - Hotel Occupancy Rates In Manama

In line with our bright private consumption outlook, both consumers and non-hydrocarbons businesses continue to express optimism over economic conditions. A quarterly survey conducted by Qatar University in March and April 2014 shows high rates of consumer confidence and consumer expectations, both among native Qataris and expatriate workers. The latest Dun & Bradstreet (D&B) survey of business optimism shows that expectations for sales volumes, new orders and profitability remained elevated in the run-up to the second quarter of the year.

Non-Hydrocarbons Sector Businesses Still Confident
Qatar - D&B Business Optimism Index

Government Consumption Outlook: The government services sector was the highest net contributor to the economy in 2013 for the second consecutive year, adding 1.6 percentage points (pp) to headline growth. We expect the expansionary fiscal policy stance adopted by the Qatari government to continue this fiscal year, as Emir Tamim bin Hamad Al Thani seeks to accelerate momentum on the country's large infrastructure investment programme while keeping public sector wage increases elevated.

Qatar's budget for the 2014/15 fiscal year (running from April to March) is the largest in the country's history in nominal terms, planning for total expenditure of USD59.0bn, equivalent to 29.0% of GDP. We forecast real government consumption growth of 11.0% in 2014 and 10.0% in 2015.

Steady Support To The Economy
Qatar - Real Growth In Government Services, % chg y-o-y

Fixed Investment Outlook: We retain a highly positive outlook towards Qatar's fixed investment prospects, with capital formation set to be driven principally by the government's infrastructure spending plans. We forecast gross fixed capital formation growth of 10.6% this year, rising to 11.0% in 2015.

Despite the aforementioned implementation delays on Qatar's infrastructure projects, the construction sector grew by 13.6% in real terms last year, the highest rate since 2008 and adding 1.5pp to headline growth. Our Infrastructure research team projects real growth of 11.8% for 2014, with potential for the industry to perform even better than expected. The construction sector displayed the strongest optimism among all non-hydrocarbons sectors in the D&B Q214 survey - marked by higher expectations for selling prices, net profits and hiring.

Reaching A Three-Year High
Qatar - D&B Business Optimism Index (construction sector)

Several major infrastructure projects are entering the construction phase this year: tunnelling work on the Doha metro is expected to begin in Q314, which will connect the 21 stations currently under construction. The enabling works at the site of the first FIFIA World Cup stadium, named Al Wakrah, have begun and numerous billion dollar road projects will also enter the construction phase. With projects under construction worth USD75bn, according to our Infrastructure Key Projects Database, Qatar's construction industry will continue to post solid growth rates over the coming years.

Net Exports Outlook: As with most GCC countries, we expect imports to grow at a sustained pace over the coming years. Demand will be driven by the rapid growth of the population, substantial demand from the construction sector for raw materials, machinery and capital goods, and a limited manufacturing base. We forecast imports to grow by 10.0% and 8.6% in real terms in 2014 and 2015 respectively, compared with average growth of 6.3% over 2009-2012.

Export growth will be subdued in comparison owing to the limited growth potential of the hydrocarbons sector. We forecast export growth of just 1.0% and 1.2% for 2014 and 2015, down from an average of 14.3% over 2009-2012.

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