The blockade is behind us, the future is LNG

  • Qatar has recovered from the blockade with key economic and market indicators all close to or even above pre-crisis levels. The focus is now on the LNG expansion which gets underway in the 2020s.
  • We expect Qatar to record growth of 2.0% in 2018 driven by 5.0% growth in the non-hydrocarbon sector, with construction and manufacturing contributing the bulk of this growth.
  • In 2019, the drag on the overall economy from the blockade should fade as financial conditions and confidence recover, helping trade, investment and consumption.
  • However, there will be some drags on growth in 2019 as the government is likely to remain conservative on spending (we expect oil prices to average $65 next year), the infrastructure programme has peaked and lower growth in manufacturing is likely. Overall in 2019, we expect growth of 2.2% with growth of 4.8% in the non-hydrocarbon sector.
  • Nonetheless, the future remains bright for Qatar as a massive expansion of LNG production by about 40% will drive investment and consumption starting from 2020. The rest of the economy will be further supported by reforms to the investment and business environment.

Download the pdf at the following link: 20180611 – MENA Advisors – How will Qatar’s multi-billion dollar LNG expansion impact the economy

Qatar has recovered from the blockade

Key indicators point to an economy that has largely recovered from the blockade. Most key economic and market metrics are close to or better than their pre-blockade levels (see charts below). While an end to the blockade would provide a small boost, the economy will remain resilient even were it to continue. Domestic trends, such as the infrastructure buildout, new LNG projects and reforms to investment and business environment legislation are of far greater economic significance.

blockade impact

Growth in 2018

We expect Qatar to record growth of 2.0% in 2018 driven by 5.0% growth in the non-hydrocarbon sector as a result of a strong performance in manufacturing and construction.

Manufacturing accelerated to around 6.5% in 2018 (from 2.2% in 2017) as a result of higher production from Laffan refinery, an expansion in light industry, as part of the self-sufficiency drive that followed the blockade, and base effects following the shutdown of the Pearl GTL facility for part of 2017. The main drivers of growth in manufacturing are unlikely to persist and we expect growth in the sector to slow for a few years, until major new petrochemical facilities are built some time in the mid- to late-2020s.

The construction sector was an important driver of growth in 2018, expanding by around 14.7%. However, this sector is in a secular slowdown (growth was recently revised to well over 20% for 2017) as the infrastructure programme has past its peak.

The rest of the non-hydrocarbon sector, excluding manufacturing and construction, remained sluggish at an estimated 1.2%, partly due to the dampening effects of the blockade on some sectors such as trade, but also due to more secular trends including a slowdown in population growth, to 2% in 2018, from 4% in 2017, related to the peaking in the infrastructure program, the blockade and continued fiscal consolidation.

2019 Outlook

In 2019, growth is likely to pick up marginally as the drag on the overall economy from the blockade fades and confidence recovers, helping trade, investment and consumption. The non-hydrocarbon sectors, excluding construction and manufacturing, should receive a boost to growth with sectors such as retail, entertainment, travel and tourism accelerating.

gdp table

The banking sector has proven its resilience in the last few years by weathering the twin shocks of a crash in oil prices followed by the deposit flight that followed the blockade. The non-resident deposit base of the banks has been rebuilt nearly back to pre-crisis levels, demonstrating confidence in the banks’ stability. As a result, banks have again started to ramp up lending to the domestic private sector (see chart below). This easing in financial conditions should further support GDP growth over the next year.

private credit

However, the slowdown in the construction sector is likely to continue as we are now past the peak of the infrastructure investment programme. Government expenditure is likely to remain restrained due to lower oil prices (see below) and continued efforts to keep a lid on spending. The budget should be announced soon and we expect small increases in current spending to be offset by lower capital expenditure. Finally, as discussed above, the manufacturing sector was an important driver of growth in 2018 due to a number of one-off factors. These are not expected to persist into 2019. Therefore, we expect a marginal slowdown in growth in the non-hydrocarbon sector to around 4.8%.

The hydrocarbon sector remains in a secular low-level decline. Existing LNG facilities are operating at full capacity and production is declining at maturing oil fields. This decline is likely to persist until the new LNG facilities are completed in the mid-2020s resulting in a dramatic and rapid increase in hydrocarbon output. The sector is expected to contract by around 0.5% in 2019.

As a result, overall growth in the economy should be around 2.2% in 2019.

Oil forecast

Oil prices have been high in 2018, averaging $71 per barrel, due to OPEC-led production controls and supply outages in countries such as Venezuela as well as uncertainty around demand from the US and China. Overall the market was slightly oversupplied by around 700k barrels per day (b/d), but persistent uncertainty and risks kept prices elevated. The sharp drop in prices since November came after the US waived Iranian sanctions for certain large consumers, despite Saudi Arabia and Russia already raising production to offset the expected impact of the sanctions on supply, leading to a flood of oil onto the market. In addition, US shale production has continued to creep up throughout the year.

Looking forward to 2019, while we expect a partial recovery from the recent lows, the annual average is likely to be less than 2018, at around $65/b. This is because the excess supply in the market is likely to grow further to about 800k b/d. The recently agreed OPEC+ cuts of around 1.2m b/d, even if extended for full year 2019, would be more than offset by the expected increase in production by the US and other non-OPEC+ producers. Meanwhile, demand is forecast to grow by around 1.4m b/d which is subject to downside risks should global growth slow by more than expected. Our forecast of $65 is also broadly in line with the breakeven price of US shale oil producers, the current marginal producer in the market.

2020s: hitting replay on the 2000s

The real Qatar story will begin in 2020. Already the largest LNG producer in the world, Qatar plans to expand production by around 40% by 2025. Gas and the condensates associated with it will then comprise nearly 90% of Qatar’s energy output, compared with just 10% for crude oil, which was the rationale for Qatar leaving OPEC in December. The $40bn+ investment related to this plan will begin to come through in a serious way from 2020 as new jobs for engineers, oil services companies and construction workers drive up aggregate demand. This is likely to lead to increased demand for a range of services in the non-hydrocarbon sector from retail to education and health.

Once production comes on stream from these LNG facilities around 2025, as well as downstream petrochemical facilities that utilise their by-products, the economy will receive another leg up for growth. In the peak years as the new capacity comes on stream, real growth could return to double-digit levels for the first time since 2011. The revenue from increased gas production is likely to lead to considerably higher public and private aggregate incomes.

We flesh out these drivers in a more detailed report How will Qatar’s multi-billion dollar LNG expansion impact the economy?, but do bear in mind that this only considers the original three LNG trains and 30% increase in production expected at the time. Plans for a fourth train were confirmed in September. Furthermore, the outlook for the global LNG market has continued to improve. Strong demand growth from China and other Asian countries looking to reduce their pollution levels has been combined with issues on some major projects on the supply side. As a result, the global LNG market is now expected to erode the current excess supply by the early 2020s instead of the mid-2020s. This is well timed with the expiration of a number of Qatar’s original long-term supply agreements and it should be a good environment for Qatar to renegotiate these agreements and forge new ones for future decades.

Reforms

The blockade has prompted Qatar to push forward on a number of reforms that should be supportive of longer-term development and growth. As relations with their neighbours have deteriorated, Qatar has looked to strengthen investment and trade with the wider international community. A number of steps to improve the business environment have been taken, most notably relaxing visa requirements and permitting foreign investors to own 100% of new companies (this law still requires sign off from the Emir and may be subject to restrictions in some sectors). In the stock market, a number of companies have increased foreign ownership limits. An ongoing push to revitalise economic zones and attract foreign investors is also positive.

Bottom Line

In short, Qatar has had a challenging couple of years with the blockade, but it is now through the worst of it, as demonstrated by the fact that it had one of the best performing global stock markets this year. Although Qatar is not out of the woods yet, by the early 2020s, the well timed expansion of Qatar’s LNG production is likely to provide a considerable boost to growth and incomes throughout that decade.