BMI View: Uncertainty over Qatar's hosting of the FIFA 2022 World Cup is increasing. Although our baseline scenario assumes that the event will go ahead in Qatar as planned, we analyse the impact that a cancellation would have on the country's economy.
Qatar's hosting of the FIFA 2022 World Cup has become more uncertain since the start of June 2014, posing a clear downside risk to the country's long-term economic trajectory. Following allegations by a British newspaper that payments were made to football officials in return for support for Qatar's bid to stage the event, several high-ranking FIFA figures have expressed support for a rerun of the vote - a move that would effectively strip Doha of the hosting rights. Although our baseline scenario assumes that the World Cup will go ahead in Qatar as planned, we look here at the impact of a cancellation on the Qatari economy.
Qatar's Bid Under Persistent Fire
International support towards Qatar's hosting of the World Cup had already begun to wane since the start of 2013, as doubts re-emerged over the country's ability to hold the tournament during the hot summer season. FIFA's head Sepp Blatter stated in September 2013 that awarding the World Cup to Qatar might have been a "mistake", and the organisation has set up a taskforce to look at alternative dates in the winter season. The poor conditions faced by migrant workers in Qatar and the government's reluctance to reform its controversial labour sponsorship system have added another source of controversy (see 'Slow 'Kafala' Reform To Harm Diversification Ambitions', May 15).
While these issues have already damaged Qatar's credibility as the host nation for 2022, the corruption allegations could prove to be the terminal blow. On June 5, European football chief Michel Platini - himself once a prominent supporter of Qatar's bid - became the most senior figure to call for a revote in the event that corruption is proven. The allegations are currently being investigated by an independent prosecutor, Michael Garcia, who is due to file his final report to FIFA in July 2014. Garcia's ethics committee has no power to change the site of the event, and such an outcome would require approval from FIFA's executive committee.
MOUNTING PRESSURE FOR A NEW VOTE
| Official || Date || Comments |
| Sepp Blatter (FIFA Head) || May 17 || "Of course it's [awarding Qatar the World Cup despite the searing summer climate] an error. You know, everyone makes mistakes in life." |
| Jim Boyce (FIFA Vice-President) || June 1 || "I would have no problem if the recommendation was for a re-vote." |
| Michel Platini (UEFA President) || June 5 || "If corruption is proven, it will take a new vote and sanctions." |
| Source: Reuters, BMI |
Equities: Volatility Over The Summer
Although we cannot predict with any certainty whether a revote will take place, negative news flow on Qatar is set to add volatility to Qatari equities in the coming months. We already exited our bullish view on the Qatar Exchange on May 30, when the index reached a historical peak (see 'Closing Bullish Qatar Equities View', May 30). As of time of writing on June 6, the index has since lost 3.4% of its value.
| Gains Ending After MSCI Inclusion |
|Qatar - Qatar Exchange|
We believe that the index is poised for a continued correction and higher volatility over the summer, given high valuations, a lack of catalysts that would take the market higher, and the regular fall in turnover during Ramadan. That said, we would look to get back into Qatari equities towards the middle of Q314, by which point more clarity will have emerged on the World Cup issue.
Economy Would Lose Momentum
Losing the rights to the World Cup would certainly have a negative impact on Qatar's economic growth trajectory over the coming years. At present, our baseline scenario sees average annual real GDP growth of 5.8% between 2014 and 2022, largely revolving around the performance of the non-hydrocarbon sector. 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. Bolstered by demand for migrant workers in preparation for the World Cup, the resident population reached a record high of 2.17mn in May 2014. Only approximately 225,000 are native Qataris.
Without the World Cup, growth would be hit on three fronts: the direct impact of slower construction activity; weaker momentum in other sectors associated with the event, such as retail, hospitality, and transportation; and the more intangible costs resulting from damage to Qatar's international reputation.
| Most Exposed: Construction, Transport And Hospitality |
|Qatar - Contribution To Headline Growth, pp (2013)|
However, such a scenario would hardly be the end of the road for Qatar's impressive growth story. Government spending on infrastructure would decline, paving the way for higher fiscal surpluses (as it stands, the fiscal outlook is already strong). The government could easily intervene to rescue the Qatari firms or areas of the economy most affected by a cancellation of the World Cup, such as the real estate sector - limiting the fallout. With sectors such as manufacturing and banking resting on strong foundations, we would expect real GDP growth to remain above the 4.0% margin over the decade.
Construction Sector Will Be Immediately Impacted
Construction has become one of the main growth drivers of the Qatari economy in recent years, contributing 1.5 percentage points (pp) to headline real GDP growth in 2013. A revote of the World Cup would force the cancellation of most of the projects directly linked with the event - and would trigger a downward revision of our construction growth forecasts. However, we believe that much of the transport and energy infrastructure pipeline would remain intact, given that these projects are underpinned by the Vision 2030 investment programme. As a result, the Qatari construction industry would remain an outperformer in the MENA region.
| Contribution To Growth Would Decline Without The World Cup |
|Qatar - Contribution Of Construction Sector To Real GDP Growth|
Multiple projects in Qatar's construction pipeline are specifically to cater for the World Cup and will certainly be cancelled or majorly scaled back should the event be moved elsewhere. Most obviously at risk are the planned stadia; enabling works at the Al Wakrah stadium have begun and an upgrade to the Al Rayyan stadium's capacity may continue, but there will be no need for the nine new stadia that Qatar was planning to build. Although not the most construction intensive or expensive area of Qatar's construction industry, the stadia were a factor in our bullish residential and non-residential building industry forecast.
We highlight the real estate sector as the one most at risk if Qatar were to be stripped of the World Cup. According to our Key Projects Database, the total value of planned and under-construction residential and non-residential projects is USD56bn. Owing to the event playing a huge role in positioning Qatar, and Doha in particular, as a destination to rival Dubai and Abu Dhabi we believe some of these projects could be shelved. Given the risks to the sector, we highlight that real estate developers such as Barwa Real Estate Group are particularly exposed to losing the World Cup.
It is estimated that 90,000 additional hotel rooms would be required in Qatar to cater for the projected influx of 400,000 supporters during the World Cup. In May 2013, a USD5.5bn island project was announced specifically to cater to this market; Oryx Island will play host to five temporary hotels for 25,000 tourists during the World Cup. Overall, the Qatar Tourism Authority (QTA) has indicated that it plans to invest USD20bn on tourism infrastructure in preparation for World Cup. While some of this investment may be fulfilled as Qatar aims to boost its tourism industry, the USD20bn figure will certainly be considerably reduced.
In general, the potential damage to Qatar's reputation would have major ramifications across the residential and non-residential sector. Investors would likely shy away or hold off from major developments such as the Lusail City project, as demand for these would stymie without the spotlight provided by the World Cup. We currently forecast that in the run up to 2022, the residential and non-residential construction sector will experience a boom as investors take advantage of improved infrastructure, prepare for the arrival of World Cup supporters and capitalise on the global attention Qatar will be receiving. However, this ramp up in activity will not occur should the World Cup hosting rights be rescinded, and as such there is considerable downside risk to our forecasts from 2018 onwards.
| Residential/Non-Residential Would Be Most Impacted |
|Qatar - Construction Sector Baseline Forecasts|
In the transportation sector, we note that the scope of projects - in particular the Doha metro - may be scaled back and their timeline for completion extended. For example, Al Sadd Stadium, Al Rayyan Stadium, Lusail Stadium, Al Khor Stadium and Sport City Stadium were all set to have stations on the Doha metro. While development in these areas may still continue, the necessity to connect them to the network will be less pressing.
Major infrastructure projects in Qatar are heavily reliant on international companies, including Al Habtoor Leighton Group (HLG), Hyundai Engineering & Construction, and Vinci. That said, we expect the impact of a World Cup cancellation on these companies to be fairly minor. Work on most of the World Cup stadia has not yet progressed very far, limiting the losses; moreover, companies will be protected by the terms of their contracts.
Longer-Term Economic Diversification Plans Will Also Be Hit
The regime hopes to use the World Cup to present the country as a regional hub of culture, sports, education, and finance. As with Dubai, the authorities have invested heavily to turn Qatar into a brand, with the aim of diversifying the economy away from hydrocarbon production and into new knowledge-based sectors. Beyond the World Cup, Qatar is also planning the construction of multiple museums and an 'Education City' on the outskirts of Doha, and has made a bid to host the 2024 Olympics.
Yet this emphasis on soft power and reputation-dependent industries means that any damage to Qatar's image could have long-term implications on the success of the government's economic diversification strategy, a risk we have previously highlighted (see ''Brand Qatar' Facing Its First Crisis', November 21, 2013). The loss of the World Cup would be a high-profile failure that could spark cynicism towards Qatari brands (most notably television network Al Jazeera and national carrier Qatar Airways), or reluctance to offer Doha the opportunity to host further international events. Dubai would be the primary beneficiary of its neighbour' troubles, as it competes directly with Doha in most fields.