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Arab boycott will end Qatar's spending spree

The world's top exporter of LNG recorded its first budget deficit in 15 years in 2016

atar has always been looking to outshine its neighbours and become the representative of the Arab world after profits from oil and gas swelled its coffers. The plans got bolder when it established a sovereign wealth fund in 2005, and went on a buying spree, mainly in the West. Qatar's investments in the Shard building, Harrods department store, Volkswagen, Barclays, and more, showed it had arrived. The country was creating a splash. Qatar's Ambassador to France in 2013 had reportedly said that the country planned to invest $11.17 billion in CAC 40 - France's benchmark stock market index. A good amount of this investment has been realised in last few years. Qatar's portfolio investments in CAC 40 companies reached ?8.4 billion in 2015, as per a report.
Qatar's bid for the 2022 FIFA World Cup was also part of its desire to be the first in the Arab world to achieve such a feat. Doha wanted the spotlight to showcase to the world its newfound wealth, its prowess at building infrastructure that can host a global event that had historically been held in more agreeable weather conditions. Confidence was sky high. The economy had been expanding at among the fastest rates in the world. It grew as much as 19 per cent in 2010, and in the decade to 2016, growth averaged 13 per cent. Pretty impressive, especially when economies in the region, albeit larger ones, managed low single-digit growth.
So, naturally, the plans were grandiose. Almost $200 billion was earmarked in the run up to the event to build nine stadiums, fan zones, hotels, etc. Of course, its sovereign wealth, estimated at $335billion, could be used at will to make investments. But the question is how far and at what cost can the construction work go on, given the fact that the non-oil sector depends heavily on government spending. How can Qatar compensate for the downturn elsewhere in the economy, especially when Saudi Arabia, UAE, Bahrain, and Egypt are no longer willing to support a nation that doesn't respect common guidelines?
Low oil prices have already taken a toll on state budgets in the Middle East. Qatar, which is the world's top exporter of liquefied natural gas, recorded its first budget deficit in 15 years in 2016. It was a $12-billion financing gap. The economy is already stretched by financing demands of the much talked about football event in 2022. The government is learnt to have spent, or probably continues to spend, almost $500 million a week on the world cup-related infrastructure. It is inevitable that the larger economy will feel the pinch, sooner than later. Qatar's finance minister had earlier claimed that this kind of spending would help accelerate the economy by more than three percentage points, much higher than peers in the region. But all that has changed. The country has already borrowed about $17 billion to ensure it can sustain the expenditure, according to a report in the Financial Times.
Worse seems to be on the horizon as the Saudi-led alliance have severed ties. Qatar, after all, is a small, import-dependent state. With land, air and sea routes blocked, it is forced to pay a premium for almost all its needs. Food supplies are coming from far-flung areas, such as Brazil, the Far East and Europe. Shipping lines have re-routed container traffic via Oman instead of the UAE, which not only is adding to the time, but costs. Maersk, the world's biggest container shipping line, has also said it will no longer transport goods in or out of Qatar. Qatar's LNG shipments are also likely to become more expensive as its super-tankers find new ports to refuel.
All arteries of trade and finance with Qatar have been blocked. Local banks in the UAE and Saudi Arabia have been ordered to stop dealing with Qatar. The all-encompassing approach will hit Doha where it hurts the most. The banking system, needless to say, could face serious repercussions with a severe liquidity crisis. Qatari banks will find it harder to obtain wholesale funding from other banks to sustain growth in their loan portfolios. Liquidity pressures could increase further if the government opts for further withdrawal of its deposits with domestic banks to finance the deficits - if it doesn't liquidate some of its overseas assets to fund its banks.
Notably, banks in Qatar attract a large sum of deposits from non-residents. As per a financial stability report published by the Central Bank of Qatar in 2015, the GCC asset exposure of the Qatari banking system stands at 26.9 per cent and 15.9 per cent elsewhere in the Mena region.
Reduced regional trade and demand will drag economic growth and corporate profitability of companies. Foreign investment will also be hampered. Stocks markets spiralled downward for the first week of the crisis, and even now remain nervous. The airline industry has taken a beating, and risks losing market share it worked so hard to gain. Qatar Airways had grown after positioning itself as a hub airline, connecting Asia and Europe via Doha. Now, that is at stake, as it is barred from using the airspace of UAE and Saudi Arabia. It has been cut off from 18 destinations already.
A nation that could have done well with other GCC countries now risks losing clout. Economic growth might slip to 1.2 per cent this year, and inflation more than double. A tighter financial environment and perhaps deposit flight, which could raise the cost of funds, and eventually make it hard to do business with the country.
- suneeti@khaleejtimes.com