The Qatar Economy: 2.0
2013 may well be regarded by future generations of Qataris as being the most pivotal in recent memory, not just because of the once-in-a-lifetime handover of power in late June from His Highness the Father Emir Sheikh Hamad bin Khalifa Al Thani to His Highness the Emir Sheikh Tamim bin Hamad Al Thani, but also because it may mark the key turning point from Qatar being a hydrocarbon resources-based economy to one with a broader and deeper self-sustaining capital base.
Given the recent announcement by the Qatar government that its spending will be higher than the budgeted USD58 billion (QAR211 billion) in 2013 to 2014, and may reach USD66 billion (QAR240 billion) this financial year in the run-up to the 2022 World Cup in Doha, and a world crude oil price that looks to be increasingly threatened by shale energy supplies, such diversification of the state’s capital base would be welcomed by the international investment community. However, the path from the old economy to the new one may not be all smooth.
Entering the emerging markets
Perhaps more than any other single factor – perennial fears over rising inflation, latent concerns over a housing bubble, or ongoing worries over the debt burden of the domestic banking system – the key driving force for change in Qatar’s national balance sheet may come from the announcement in June by Morgan Stanley Capital International (MSCI).
From next May the Qatar Stock Exchange (QSE) will be upgraded in classification from ‘Frontier Market’ to ‘Emerging Market’ status, along with the neighbouring United Arab Emirates (UAE). It is true that the actual likely size of fund inflows directly caused by the upgrade may only be modest compared to the markets’ size overall. Indeed, most local analysts are projecting roughly USD500 million (QAR1.82 billion) of inflows for Qatar and a similar amount for the UAE (the UAE currently has a capitalisation of about USD140 billion (QAR510 billion), and Qatar of around USD110 billion (QAR400 billion).
However, says Sachin Mohindra, portfolio manager with Invest AD SICAV GCC Focus Fund in Dubai, in broader terms, MSCI’s decision is a reflection of greater maturity in the markets that will lend legitimacy to them, and in the future should lead to global institutional investors taking larger, long-term positions. “More liquidity in the markets should draw more investors, thereby starting a virtuous cycle, and new institutional investment flows could find their way into these markets from emerging markets and global index trackers, even if one assumes a neutral weighting for the region,” he says.
“MSCI’s decision is a reflection of greater maturity in the Qatar stock market, that will lend legitimacy, and in the future lead to investors taking larger long-term positions.” – Sachin Mohindra, Invest AD SICAV GCC Focus Fund, Dubai.
Additionally, Mohindra underlines, Qatar may see an even bigger impact in the coming years because unlike the UAE, the Qatari market was not previously included in the FTSE Emerging Markets Index, which is tracked by some major passive investors. “The MSCI decision,” Mohindra adds, “is likely to lead to a similar move by FTSE and, with Qatar having been an underperformer compared to other regional markets over the last year and with many stocks now attractively valued, the MSCI decision could prove to be a catalyst for a long-term rally.”
New investors, new money
Apart from the IPOs already planned for Qatari firms towards the end of 2013, Mohindra also feels that many of the initial public offer (IPO) plans for a number of Qatari companies that have languished since the global financial crisis could also be brought back together with increased float plans from existing listed companies. Indeed, just days before the official MSCI announcement in June, the QE announced that some major companies had applied to increase the number of shares available to foreign investors.
The new limits are still not high - in many cases, they will be 25 percent of a company’s market capitalisation, up from 25 percent of its free float - but MSCI said it was satisfied by Qatar’s commitment to future change. “Greater market liquidity could also open up the dormant IPO market, and we may even see companies from neighbouring countries start to consider listing in the UAE and Qatar as a way of tapping global emerging market investors,” adds Mohindra.
There are expectations from local Doha-based brokers of new listings are from Barwa Bank, Doha Global Investment Company, and of four new Qatar Petroleum subsidiary companies going public, among others. According to Qatar Exchange, Doha Bank has recently changed its free float to 25 percent of the market capitalisation, but more may well come, as this compares to a free float for Masraf Al Rayan of 49 percent at present, and reports are that the Commercial Bank of Qatar and Qatar Islamic Bank have also positively responded to this new market paradigm and may well increase their free floats within the next quarter.
And, following the dearth in big-scale IPO activity across the Middle East as a whole since 2008 to 2009, a positive sign of things to come, according to a recent report by Ernst&Young, Dubai, was the standout USD1.3 billion (QAR4.7 billion) offering by Qtel’s Asiacell Communications during the first quarter of 2013.
Greater scrutiny, greater transparency
According to a July report issued by the Abu Dhabi Investment Company, the upgrade in MSCI status will mean that many Qatari companies may “need to step up their investor relations and demonstrate greater transparency,” given their new-found higher international investment profile. The need for such ostensibly explains the Qatar Financial Centre (QFC) recently introducing the Collective Investment Schemes Rules 2010 and the Private Placement Schemes Rules 2010 in an attempt to enhance the QFC’s reputation as a prime jurisdiction in which to establish investment funds, although the Qatar Financial Centre Regulatory Authority (QFCRA) regulates all funds formed in the QFC.
For investors, one key benefit of this new regulatory architecture is that a QFC fund is exempt from all Qatari taxes. In addition to this, the QFC has recently released a swathe of rules covering three areas of regulation – corporate governance, anti-money laundering and combating the financing of terrorism – in keeping with international regulatory standards for insurance and banking supervision. In terms of corporate governance, the new rules seek to strengthen regulations covering governance and risk management by requiring the governing body of a QFC-authorised firm to approve and establish a formal governance framework, risk management and internal controls framework, and remuneration policy. In addition, the new rules include a new controlled function for internal audit for QFC insurers, QFC banks, and QFC Islamic banks.
A new draft company law is also under discussion that seeks to boost the performance of the QSE through increasing the number of firms able to list on it, according to Dr. Sayid Al Sayfi, professor of Islamic finance at Qatar Faculty of Islamic Studies, in Doha: “It will encourage the creation of new companies and… investment in Qatar.”
However, he adds, some of the proposed articles need clarification: “Article (110) of the new draft law stresses that the chairman and members of the board or the directors of companies should refund the sums they had gained at the transactions they performed for their companies in which they have direct or indirect interest. The penalty should be stricter for such actions and should not be limited to just refunding the money.”
Attracting the greater interest of international equity investors, of course, should allow the Qataris to leverage this into internationalising its debt markets as well, says Sam Barden, CEO of SBI Fund Management in Dubai, and this could not come at a better time. Currently, as highlighted (that is to say politely warned) by the IMF in Q1 of this year (see box out), a large percentage of the Qatari government’s external debt, an estimated QAR87.7 billion, is maturing post-2017.
QAR87.7 billion - The estimated amount of Qatari government external debt to mature post-2017.
However, as long as Qatar’s balance sheet continues to grow, along with the running budget surpluses, debt rollover risk is unlikely and the government should be able to refinance its debt or meet maturities. However, if any of these factors falter, then Qatar’s sovereign standing in the global financial world will be re-assessed, and certainly not to its benefit.
Nevertheless, despite the risks and uncertainties, 2013 may yet be remembered as the year the course of Qatar was truly set towards economic diversification, and not just because one of the primary architects of Qatar Vision 2030, HH the Father Emir Sheikh Hamad bin Khalifa Al Thani abdicated in favour of his son HH the Emir Tamim bin Hamad Al Thani, and a new generation took over.