Is Qatari consumer spending on the wane?

Amid global economic slowdown predictions warning policymakers and governments across the world  (mostly on the fear that it should not touch the proportions that we witnessed in 2008 to 2009, the financial community heard a voice of reassurance. This came  from Nouriel Roubini, New York University’s economics professor at the World Economic Forum meet at Davos, in January. Roubini, who earned the name of ‘Dr. Doom’ having predicted the 2008 to 2009 crisis, has been quoted by international media that he “is less pessimistic than one might expect given the recent turmoil in global stock markets and growing concerns about a United States (US) recession”. But he cautioned that unless there is an appropriate and rapid policy response, the situation could
get worse.

A look at the prevailing macroeconomic realities since the second quarter of 2015 at least for the major Asian economies does not give a promising picture, and policymakers do not seem to have any answers to what Roubini wants them to do urgently – appropriate and rapid policy response.

China, ranked as the second largest economy in the world by the International Monetary Fund (IMF) World Economic Outlook (October 2015) with a nominal gross domestic product (GDP) of USD1.1 trillion (QAR4.1 trillion), experienced a series of stock market crashes since July 2015. This continued through August, sustaining the momentum till December 2015, and was followed by a steep sell-off with the Shanghai Composite Index experiencing a fall of seven percent on January 7, 2016 and having to suspend trading.

 This was a precursor to a series of global market crashes. United States (US) stocks recorded a sharp fall with a recurring pattern seen across European and Asian markets. Qatari stocks witnessed a multi-year low on January 17 with the benchmark index recording its lowest level since April 2013, closing at 8527.75 points after decreasing 7.16 percent, or 657.37 points.

Along with the global stock market crash, the other worrying factor has been the consistent (and longest in duration) fall in hydrocarbon prices that has engaged policy-makers’ attention. Oil prices have seen the sharpest downturn since the 1990s, with the price of Brent crude falling to USD27.67 (QAR100) a barrel when the Iran sanction was lifted mid-January, its lowest since 2003, primarily because of a supply glut (because of the Organization of Petroleum Exporting Countries’ – OPEC – reluctance to cut oil production after no consensus was reached in the recently-held OPEC meet held at Doha) and not weak demand.

“Since retail projects are largely funded through the private sector, it is unlikely that we will see them being cancelled as a direct result of the deficit.” – Duncan Mackay, KPMG Qatar.

Many analysts have slashed their 2016 oil price forecasts, with Morgan Stanley analysts saying that oil in the USD20 (QAR72.8) is possible, if China devalues its currency further. Economists at the Royal Bank of Scotland say that oil could fall to USD16 (QAR58), while Standard Chartered predicts that prices could hit just USD10 (QAR36) a barrel.

As a result, earnings for energy companies that had been used to a price band of between USD90/barrel (QAR327.6/barrel) to USD100/barrel (QAR364/barrel) over the last decade have plunged, prompting more than 258,000 workers globally (according to the Texas-based industry analyst Graves & Co) to lose their jobs. All international energy players such as Total, Schlumberger, British Petroleum, Royal Dutch Shell, Chevron, ConocoPhillips and others have reported job cuts.  In Qatar, jobs cuts have been reported by Qatar Petroleum (QP) and RasGas.

 

Ramifications

These predictions have held true for Qatar in 2015 as well, in separate and, at that point, seemingly unrelated events. In January 2015, Shell and QP scrapped the proposed USD6.4 billion (QAR23.3 billion) Al Karaana petrochemical project which was closely followed, in terms of chronology, with leading energy players downsizing their manpower, though there are no concrete numbers that have been given by any of the companies officially.

Closely on the heels came the absorption of QP’s wholly-owned overseas investment subsidiary Qatar Petroleum International. Speaking to The Edge in March 2015, Calvin Cobbs, president of global energy consultancy Cobb & Associates, said, “It is the least severe form of business retrenchment in a period of ‘market difficulties’ to focus on achieving economies of scale both in company structure and project implementation, and is way less dramatic than the sorts of measures that we have seen being undertaken by some other producers in the Middle East.”

Beginning in early- to mid-2015, state-owned QP completed a restructuring programme, which involved termination of service contract of some non-Qatari staff and exiting non-core businesses, its chief executive Saad Sherida Al Kaabi said in a media briefing session at Doha. In early 2015, Doha News reported that, “unnamed industry sources told Reuters that the job cuts to the organisation’s 14,000-strong workforce could involve losing up to 30 percent of employees in some areas”.

 

Policy decisions

With the fall in oil prices, for over a year, the oil producing countries in the Gulf Cooperation Council (GCC) face shrinking revenues which has had an impact on government subsidies and has resulted in deficit budgets.

Qatar is set to post a deficit of QAR46.5 billion for its 2016 budget, with a revenue of QAR156 billion and expenditure of QAR202.5 billion which is 7.28 percent or QAR15.9 billion less than its last fiscal year. Expenditure has been cut in anticipation of the country’s first financial shortfall in 15 years.

Immediately preceding the budget announcement, Kahraama increased utility tariffs in October 2015, its first in more than 10 years. Built in the new pricing plan is the slab factor: as the consumption goes up, so does the tariff. For example, someone living in a residential flat must now pay QAR.08/kilowatt hour (kWh) for consuming up to 2000 kwh. Once that limit is exceeded, the rate goes up to QAR.09/kWh for the next 2000 kwh, then QAR.10/kWh and so on. Similarly, customers are charged more for cubic meter of water if they exceed a certain threshold.

The postal services of state-owned QPost also hiked their costs effective January 1, 2016. Shipping charges have gone up depending on the weight of the item and the destination.

Oil prices have seen the sharpest downturn since the 1990s, with the price of Brent crude falling to USD27.67 (QAR100) a barrel when the Iran sanction was lifted mid-January, its lowest since 2003, and a supply glut.

Following the QPost hike, mid-January, Qatar cut fuel subsidies (following the United Arab Emirates, Saudi Arabia and Bahrain) and hiked petrol prices by 30 percent. The surprise price rise was announced by Woqod, the state fuel company, just hours before it came into effect.

With all of the above contributing to rising costs, projections on salary raises by human resource consultants Mercer put the figure for Qatar at 4.9 percent, a figure below five percent for the first time in five years. According to another report by Korn Ferry Hay Group, salaries in the Gulf region are forecast to see a lower average real increase of 2.3 percent.

The annual consumer prices in Qatar, according to Trading Economics, the data aggregator, rose 2.70 percent in December 2015, following a 1.9 percent rise in November. It is the highest figure since December 2014, mainly driven by cost of housing and utilities (+3.4 percent) and food and beverages (+0.7 percent).

 

Retail slowdown

Against this backdrop of macroeconomic uncertainty on multiple fronts and increase in the cost of living and lower prospects of salary raises, there has been a general feeling of insecurity, largely at the expatriate employee level, which has impacted the volume of consumer spending and has hit the retail market sentiments.

In the context of their luxury brand Mosafer soft-launching a store at New York, Ashraf Abu Issa, chairman of Abu Issa Holding told The Edge that the high-end luxury retail market does not report sluggish sentiments, adding, “We are expanding into South Africa and Turkey in the near future. Travel and tourism’s contribution to world gross domestic product (GDP) grew for the fifth consecutive year in 2014, rising to a total of 9.8 percent of world GDP (USD7.6 trillion/QAR27.7 trillion). It is a thriving industry and is insignificantly impacted by slowing markets.”

“According to the Deloitte’s Global Powers of Retailing 2016, the eight retailers representing the Africa/Middle East generated composite growth of 19.4 percent, which is 4.5 times greater than the Top 250 as a whole,” Abbas Ali Mirza, audit partner, Deloitte Middle East, commenting on the findings of their report.

Mirza adds that since the past year, oil prices have plummeted which has resulted in disinflationary pressures in many countries thereby boosting consumer spending in major markets. “For the world’s leading retailers, the weakness of oil process has mostly been good news,” he stressed, though most of the mid-market retail players The Edge approached showed reticence on how their business has been doing since the second quarter of 2015 and this silence is reflective of a trend. Secondary data analysis, however, does not show, as yet, a gloomy retail sector, with organised retail supply, an indicator that space is in demand, increasing by 53,000 square metre (sqm) from 590,000 sqm to 643,000 sqm in 2015, according to Mark Proudley, director of DTZ Qatar.

Proudley adds, “Appetite for new accommodation remains positive from retailers and a number of the new premium malls (Doha Festival City and Mall of Qatar) scheduled to open over the next 12 months are claiming to have leased in excess of 75 percent of their available space.”

Drawing a causal connection between recent job redundancies and cuts in government spending and if these will impact the retail markets, Proudley says, “The obvious and easy answer would be yes based on the fact that there are fewer high earners in the country spending money.”

DTZ anticipates that population increase  – currently at 2.42 million, up eight percent over the 12 months to December 2015 – is  being driven by lower-income population, which is reflected by greater availability of housing within prime residential schemes.

Commenting on whether the government budget deficit in any way impacts the retail sector and its fortunes, Duncan Mackay, partner at KPMG Qatar, reasons that while government cuts are affecting some hydrocarbon and infrastructure budgets, and some large projects have been cancelled,  “since retail projects are largely funded through the private sector, it is unlikely that we will see them being cancelled as a direct result of the deficit”.

Mackay continues that the impact could however come if consumer spending declines as a result of lay-offs and wage freezes, as residents increasingly find ways to ‘tighten their belts’, a sentiment that Gaby Salomé, general manager, Al Mana Interiors, agrees with, singling out fashion and electronics as two consumer sub-segments that had the slowest uptake in recent times.

Salome cites macroeconomic factors that have led consumers to be more careful with their expenditure and disagrees that the recent job redundancies have impacted consumer spending. “The lay-offs were expected but they have been more drastic than anticipated and it has impacted spending habits but it is certainly not the only reason,” adding that the year-end promotional offers did contribute to a positive turnaround, an advantage that organised retail has over neighbourhood small shops which have reportedly been facing declining volumes and high rentals.

Mackay of KPMG, suggesting a way forward for the retail consumer goods industry, mentions that KPMG’s 2015 Global Consumer Executive Top of Mind Survey titled, To stand still is fall behind, has identified the six most prominent issues facing retailers and which they must address to ensure profitable growth: consumer trust; omni-channel approach; data security; sustainability and corporate social responsibility; consumer knowledge. “For Qatar’s retail sector to flourish, it too must address these challenges and we are increasingly seeing clients turn to us for assistance in these areas,” Mackay concludes.