A Breakthrough Year For Qatar

Qatari banking and other sectors stand to gain from the restoration of business. The emirate’s efforts to raise self-sufficiency will also help.

The end in January of the three-and-a-half-year economic boycott of Qatar by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt was a welcomed development for Qatar and the other members of the Gulf Cooperation Council (GCC). All six states of the GCC—to which most of the blockading states belong—have faced unprecedented challenges over the past year due to the Covid-19 pandemic, the collapse of oil prices and attendant fiscal pressures. The revived economic relationship between the states is expected to boost Qatar’s economy as well as the wider region. The recent strengthening of the oil price is a further positive development.

“The lifting of the blockade has been good for overall sentiment, as any impediment to the flow of people and trade is detrimental to business,” says Joseph Abraham, group CEO of the Commercial Bank of Qatar (CBQ). “It also removes an element of uncertainty. This is good for external investor perceptions of the risk profile of both Qatar and the entire GCC.”

The boycott forced Qatar to become less dependent on other GCC economies and more economically diversified. To achieve balanced industrial development, the government offered incentives to encourage new businesses. It also increased its focus on developing and supporting targeted food, pharmaceuticals, environmental and knowledge-based industries.

“Qatar is one of the strongest economies in the GCC and has demonstrated resilience in terms of how it handled the blockade,” says Abraham. “Qatar’s fundamental strengths are its gas reserves and leading gas production position, low fiscal break-even point and strong fiscal buffers to support economic growth. The removal of the blockade also removes impediments to travelers from the GCC region and therefore further enhances the prospects for the World Cup in 2022,” which will be held in Qatar.

Infrastructure and energy remain the government’s focus, as its investment plans post-2022 include expansion of the North Field gas project and further development of the Hamad International Airport and Hamad Port.

The non-energy private sector economy strengthened in January, according to Purchasing Managers’ Index (PMI) survey data from the Qatar Financial Centre (QFC) and IHS Markit. Construction was the strongest performing sector, followed by manufacturing.

“The non-energy private sector of Qatar had a strong start to 2021,” announced Sheikha Alanoud bint Hamad Al-Thani, managing director of business development at the QFC Authority, “with the PMI rising sharply to 53.9,” the fourth-highest level ever recorded by the survey. “The upward momentum reflected the output and new orders components, which were both at the third-highest levels to date,” she said in the February statement. “Recent PMI data suggest that the non-energy sector is now recovering strongly.”

The lifting of restrictions on trade and travel should add impetus to the ongoing recovery in trade, tourism and logistics, all of which had contracted sharply in 2020, says Carla Slim, director and Middle East economist at Standard Chartered Bank.

“We’ve raised our 2021 GDP growth forecast on the reopening of air, sea and land borders between Qatar and Saudi Arabia, the UAE, Bahrain and Egypt,” she says. “We now expect Qatar’s economy to return to growth of 3% in 2021.” The bank had projected 2.1% prior to the January agreement.

Damage Done

Not all analysts are so positive. Some cite ingrained differences between countries in the region.

“We expect that the restoration of ties between Qatar and boycotting countries will improve political and economic cooperation within the GCC and wider region,” UAE-based Shokhrukh Temurov, associate, sovereign ratings at S&P Global Ratings told Gulf Business last month. “Damage done by the diplomatic rift to the GCC’s political cohesiveness, both real and perceived, is likely to remain. Underlying differences in member countries’ foreign policies will likely still weigh on their relations.”

While Qatar’s intraregional travel, tourism and real estate sectors will see some economic benefits from improved relations, Temurov says the impact on bilateral trade with other GCC states could be marginal. Intraregional trade was relatively limited even in the pre-boycott period, given the almost uniform concentration of GCC member states’ exports on hydrocarbons and the limited scope of agriculture and manufacturing in the region. As an example, in 2016, goods exports from Qatar to the GCC and Egypt accounted for only 11% of Qatar’s total exports; these fell to 3.5% end of 2019 according to S&P Global.

Some of the key benefits for Qatar of the reopening will stem from the free movement of goods, services and human capital across the region, says Junaid Ansari, Vice President of Investment Research at at Kuwait-based Kamco Invest.

“A lot of logistical issues due to the blockade, that led to higher costs to corporates, would be resolved,” Ansari says. “Reports suggested that Qatar had to find new routes for the export of LNG [liquid natural gas] to countries outside the region, due to the embargo, while cheap LNG imports within the region were also affected. At the government level, the region is expected to see greater economic integration, regional cooperation, and alignment of foreign policies aimed at resolving the Gulf’s geopolitical issues.”

Stabilization on the geopolitical front also sends a positive signal to international institutional investors, who prize stability and view the Gulf region as a homogeneous market. Standard Chartered’s Slim expects the end of the boycott will boost investor confidence in the entire region.

“Regionally, the boost to consumer and investor sentiment and lower perceived geopolitical risk may contribute positively to economic outcomes,” she says, particularly ahead of events such as Expo 2020, now set to be hosted in Dubai starting in October; and the 2022 FIFA World Cup in Doha.

Some GCC countries may be negatively impacted, however. The port of Muscat benefited from the rerouting of trade and transit when the dispute broke out, so its resolution could mean downside risks for Oman. Qatar’s economy weathered the boycott thanks in part to the government’s push for greater self-sufficiency. The lifting of the boycott could boost the emirate’s travel, tourism, hospitality, retail and real estate sectors: the ones most affected by Covid-19. But in the short term, much of that will depend on the success of the GCC’s vaccination drives, Abraham says.

Prioritizing Debt Repayment

Sectors that are heavily reliant on cross-border integration and thus can be expected to gain from the end of the boycott include airlines, banking, real estate and telecom. Qatar’s onshore and offshore US dollar-Qatari riyal spot rates converged in the immediate aftermath of the resolution, but further convergence may be limited going forward. Standard Chartered expects foreign exchange (FX) liquidity to improve owing to the easing of the rift as well as a forecast return to small fiscal and current-account surpluses this year.

But despite the buildup in Qatar Central Bank’s FX reserve position since its late-2017 lows, Standard Chartered thinks policymakers will prioritize debt repayments in 2021. That may lead to some FX reserve drawdown, rather than the central bank using reserves to push FX liquidity out to the banking sector.

“The end of the boycott is nevertheless a notable development for Qatari banks,” says Temurov. S&P expects that, over time, renewed relations will facilitate a return of GCC funding to Qatar in the context of rising external debt within the Qatari banking system.

Airlines, tourism and consumer-staple companies will be among the first sectors besides banks to benefit from the end of the regional crisis. Qatari banks’ funding and liquidity profiles will benefit, as Saudi deposits that were withdrawn after the boycott began will gradually filter back. The real estate sector in Dubai is significantly reliant on regional money, of which Qatar was a big provider. The free flow of funds will help to lift sentiments around key real estate markets in the region, Ansari argues. And consumer-staples providers outside Qatar will benefit by resumption of exports to the emirate.

Then there’s the World Cup, the fan base for which extends across the region—including its most populous state, Saudi Arabia. The success of the event hinges greatly on tourist spending by regional visitors. The lifting of the blockade should provide a big relief to Qatar on this front.