Posted on December 13, 2018

In the run up to the OPEC+ meeting in Vienna, Qatar announced it will be leaving the cartel next year after almost 60 years of membership as relations with its neighbours has soured. This decision should not have much of an impact on oil prices as Qatar only produces around 600’000 barrels per day of crude – less than 2% of OPEC’s total output. Furthermore, as can be seen in the chart below, the emirate’s decision was certainly made easier by the lower breakeven oil prices it currently enjoys. Breakeven oil price is the price at which the current account and/or the government budget would balance. While higher oil prices would obviously be positive for Qatar, one can see that it is the country which needs it the least.

In any case, it is difficult to distinguish between the effects of the GCC boycott on Qatar and of the energy prices volatility on the economy of the independent emirate. Comparing the year-on-year (YoY) growth rate change in each of the fourth quarters, we get the following figures: +5.8% in 2014, +4% in 2015, +1.7% in 2016, and +3% in 2017. The GDP growth was +2.5% YoY in Q2 2018.

The boycott has mainly impacted the transportation and tourism sectors in Qatar. Tourist arrivals from GCC countries amounted to nearly 50% of the total in 2016 but more recently, as of October 2018, this has dropped significantly to 11.2%. Total visitors number went from 2’182’760 over the January-October 2016 period to 1’476’728 in the same period of 2018 – a fall of one third. On its side, national carrier Qatar Airways has announced it is boosting its connections to Iranian cities, despite US sanctions, in a move to (partially) compensate the blocking from flying to 18 destinations in the Middle East. The government has set its sights on the cultivation of a well-diversified economy, but the effect of the boycott from its GCC neighbours is undoubtedly delaying progress.

Qatar and Kuwait macroeconomic 2 [].jpg

However, under our forecast the WTI oil price will average USD 65 per barrel this year, and we anticipate a slightly lower average price for 2019. Therefore, Qatar should run current account surpluses, allowing for the growth of central bank reserves and preserving the peg of the Qatari riyal to the USD. Having pegged its currency to the USD1 , Qatar cannot afford to run current account deficits persistently as it does not have the benefit of “international seigniorage” enjoyed by the US (the US current account deficit is 2.2% of its GDP).

According to the IMF2 ,“The current account surplus is projected at about 7% of GDP in 2019. QCB’s foreign exchange reserves are expected to increase further, reaching about USD 36 billion in 2019”. Clearly this will not allow the central bank to follow an independent monetary policy as stated by the impossible trinity under a fixed exchange rate regime. Thus, following any further rate hikes from the US Fed, the QCB should add other repo rate hikes to the 25bps decided in December 2017. The current repo rate is set at 2.5%, while the Over Night Deposit Rate is at 2.25%, which has increased three times for a total of 75bps since the start of 2018.

In 2017, Qatar’s external debt as a proportion of GDP was 88%, falling from 111% at the end of 2016 according to data from the IMF. Ironically, a part of this improvement stems from the GCC boycott of Qatar: the stock of banking sector foreign liabilities diminished by 18% of 2017 GDP, due mostly to withdrawals of non-resident bank deposits in Qatar and non-renewal of foreign bank lines (both largely from GCC-based entities). This ratio is forecast to stabilise more or less around this level at the beginning of 2019. It is important to note that less external debt means less potential claims on the country's external reserve assets.

All in all, the country’s positioning is not that worrying. Although the growth outlook is not outstanding, the diversification of its economy away from the energy sector is still evolving in a positive manner.Qatar and Kuwait macroeconomic 3 [].jpg

Kuwait Macroeconomic Update

Like its oil producing peers, Kuwait is trying to build a more diversified economy but is also willing to favour its national workforce. As such its expat numbers may diminish by 1.5 million over the next seven years, as recently reported (as a reminder the population of Kuwait amounts to 4.2 million). This “demographic management” will not go without impacting growth. After all, growth is the combination of population growth and productivity. It seems almost impossible to achieve the replacement of such a large number of foreign workers with Kuwaiti ones in a timescale less than a generation.

A much simpler reform, namely the implementation of a 5% value-added tax (VAT) was also planned in 2019. It has been delayed until 2021. This will represent a lack of revenues for the Kuwaiti government against a framework of a generous welfare state including fuel, electricity, and water subsidies and the large economic role of the public sector. Clearly this loss of non-oil revenues will be compounded by the recent fall in oil prices. It illustrates that the rhythm of reforms has  somewhat stalled.

That being said, the country still has one of the lowest fiscal breakeven oil prices, and the ratio of public debt-to-GDP is around 20%. Forex reserves amounted to USD 34.2 billion as of September 2018, whereas external debt totalled USD 59.6 billion, or 50% of GDP. We note that the recent strength in USD and the US Fed’s tightening is less of a worry for the Kuwaiti central bank, as the Kuwait Dinar is pegged to a basket of currencies and not to the USD alone. “Effective 20 May 2007 (…), the KD exchange rate was repegged to an undisclosed weighted basket of international currencies of Kuwait's major trade and financial partner countries. Reverting to the exchange rate policy followed prior to 2003 aims at protecting the purchasing power of the national currency and containing inflationary pressures affecting the local economy”3. Hence, the central bank left its discount rate unchanged at 3% on 27 September 2018 despite the US fed funds hike decided two days earlier. Since the start of the year, it has increased its reference rate by 25 basis points only, whereas the US Fed has hiked three times for a total of 75 basis points.

Not hiking in Kuwait is aimed notably at preserving a non-inflationary growth of the non-oil sectors, knowing that real GDP expanded by 1.4% quarter-on-quarter in Q2 2018, after a contraction of 1.1% in Q1 2018 and a 2017 year which was negative in terms of real growth. Like Qatar, the growth outlook is now positive, but not outstanding.

1. Until 1966, Qatar used the Indian rupee as currency, in the form of Gulf rupees.
2. See IMF Press Release No. 18/422 following staff visit to Qatar, November 14, 2018.
3. See Central Bank of Kuwait website.