QATAR - The Economic Base.

With a population of less than 830,000 and a lot of oil and gas money pouring in, Qatar has bright prospects. Like its larger GCC neighbours, it is busily trying to use income surpluses to diversify into tourism and financial services. But the big economic boom in Qatar and other GCC states coincides with a rapid increase in the cost of new projects (see omt9QatrProsAug27-07) and in the cost of living in Qatar.

Qatar has one of the highest per capita incomes in the world. It has recorded steady growth in the past five years thanks to high-priced oil and gas, its main sources of income. With its economy tripling in size since 1998, Qatar is the star performer in the Middle East, outstripping its neighbours with a $160 bn projects blitz.

On April 2, Finance Minister and Acting Economy & Commerce Minister Yousef Hussain Kamal unveiled the largest budget in the state's history, with a generous allocation for infrastructure development and the expectation that Qatar's GDP will continue to increase over the next six years. The highlight of the 2007/08 budget is a 20% rise in government spending, which follows a 44% rise in the 2006/07 budget. Revenues are seen to rise 27% to QR 72.47 bn for 2007/08, from QR 56.9 bn for the previous year, based on strong growth and the outlook for the oil, gas and petrochemicals sectors.

The Finance Ministry raised the crude oil price assumption to $40/b for 2007/08 from $36/b last year, and just $27/b in fiscal 2005/06. That still represents a conservative position on Qatar's most important commodity indicator. Qatar National Bank (QNB) estimated the export price for Qatari crude in 2006/07 averaged $62.10/b, compared to $55.74 in 2005/06. Doha's will be able to raise LNG exports to 84.5m t/y by 2014. Other highlights include a tripling in the budget surplus from 2005 to QR6.74 bn in 2006.

Capital spending is up 14.4%. Infrastructure is to take QR10.03 bn, about 15% of the total. Another QR8 bn will go to education, up 41% from 2006. Healthcare and social services get QR4.8 bn, up 26% from 2006. New healthcare initiatives include projects at Hamad Medical Corp, Rumailah Hospital and al-Shamal Hospital.

Inflation, a bone of contention for Qataris, hit a historic high of 11.8% in 2006, a jump of three percentage points from the previous year. Much of it stemmed from continued pressure on the housing market, with rents rising by another 25% this year after a 26% spike in 2005. Food and beverage prices more than doubled, rising 7.3% last year compared to a 3.1% jump in 2005. Kamal has been at pains to reassure nervous locals about inflation, saying it would be countered through financial and monetary policies and expansion in diversified economic development plans during the coming years. But there is little the state can do to curb prices. Inflation may come down slightly next year but it will still be close to 10%.

Standard Chartered Bank has predicted GDP to rise another 14% in 2007 to QR220 bn. Yet the bank has factored in a 9% drop in the oil price to $60/b in 2007 from $66/b last year. Kamal March warned: "We are going to reach the plateau for the economy by 2012 because at that time we will [have] almost finished all the projects related to oil and gas and we do not have anything to add. That means we have to think what we will do beyond 2012. Still, we have [a] strategy for our goal after 2012. GDP [growth] should not be less than 7%".

One area plaguing Qatar's economic fortunes is its underperforming share market. The Doha Securities Market (DSM) suffered a yearly fall of 37.5% in 2006, with its southward drop continuing by a further 11.4% during the first quarter of 2007. Analysts in late March said the government's infrastructure drive and other projects will spill over into a better performance for the DSM. Yet with 27 out of the 32 firms listed on the exchange suffering a decline in their share value in 2006, market confidence in an otherwise booming economy remained shaky by late March. A Doha-based analyst then said: "The local market has probably suffered precisely because Qatar has become such an international destination. There is a big push for the big Qatari investment vehicles to concentrate on overseas investments, and the DSM has had to take a back seat as a result".

Kamal was more interested in the big picture for Qatar, creating a sustainable economy regardless of oil price. In April he said: "The budget I announced shows Qatar is always thinking long term. Our plans are for 2012 and beyond - in fact, we have to plan for as far away as 2025".

Doha on July 16 decided to unify its financial regulatory system, thus broadening the international standards championed by the Qatar Financial Centre (QFC) across the emirate. The yet unnamed unified regulator, scheduled to start work in early 2008, will consist of the Central Bank's Banking Supervision Department, the newly formed regulator of Doha's stock market and the QFC, which has since 2005 attracted about 50 international companies. Local banks, brokerages, insurance and asset management firms will have to come into line with a tighter regulatory structure by about 2010.

The move is unusual for a region traditionally slow to adopt greater transparency, underlining Doha's political determination to raise standards so financial firms can compete on the global stage. The new regulator will lead to the rewriting of outdated commercial and financial legal codes which are a concern for many foreign firms doing business in the GCC area. The FT on July 17 quoted Phillip Thorpe, CEO of the Qatar Financial Centre Regulatory Authority (QFCRA), as saying Qatar had taken a reform-minded step which many other regional states would find difficult to follow, adding: "The process will be difficult for some firms and I am sure we will have to deal with some cultural issues - but there is the political will to make it happen. As long as we make time to explain what we want to do, and get across the benefits, I think we will get there". Thorpe has some practical experience in the matter, having played a part in the formation of the UK's Financial Services Authority, which in the late 1990s merged 10 regulatory bodies and 2,500 employees.

Qatar has 25 banks, insurance firms and brokerages, most of which are enjoying stellar profits amid the oil boom in the Gulf, making change easier to effect. And tighter regulations standards are already arriving through self-regulation and the introduction of Basle II standards in the banking sector. The QFC, formed in 2005, has lured international names as many of the banks expanding into the region to harness surplus petrodollars have realised they need to put people on the ground across the Gulf, not just in Dubai or Bahrain. Banks such as Deutsche Bank and Goldman Sachs are opening offices in Doha, hoping to win their share of planned projects worth $100-130 bn and to manage the wealth of the country, which has one of the world's largest per capita GDPs.

Dubai International Financial Centre (DIFC) hosts non-retail financial services firms at its financial district, which is regulated by the largely western-staffed Dubai Financial Services Authority (DFSA). But the DFSA has no say over financial services firms and markets based outside the DIFC in the UAE, which are regulated by the Abu Dhabi-based UAE Central Bank and securities regulator. Bahrain, which has lost financial business to the emerging centre in Dubai, has for the past 30 years had an established single-regulatory authority in the Gulf, which it promotes as one of its main advantages when competing to lure new firms.

Qatar is one of the contenders to host the 20th World Petroleum Congress (WPC) in 2011 and if successful would bring one of the industry's most prestigious events to the Middle East for the first time. The UK and Turkey are also bidding for the honours to host the event which is held every three years and attracts thousands of delegates. Members of WPC national committees will vote at a council meeting in Uruguay late this year. Qatar's national committee sees the strength of its bid lies in the fact that Doha has such a wealth of experience in hosting large-scale events, conferences and exhibitions, most recently demonstrated with the highly successful 15th Asian Games. By 2011 the infrastructure in Doha would have been improved even further with the addition of an extra 5,000 5-and 4-star hotel rooms, a world class exhibition centre which would be one of the largest and most modern in the region and delegates would arrive at Doha's new international airport.