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MENAFN - The Peninsula - 01/01/2011

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(MENAFN - The Peninsula) The decade 2000-2010 that ended yesterday unquestionably belonged to Qatar as it managed its state finances very well and witnessed a budgetary surplus all through.

The country's vibrant LNG industry, which is the backbone of the national economy today, was a gamble - a calculated one at that - its planners took years ago and it has been paying rich dividends.

Almost entirely free of foreign debt, Qatar can now hope to keep its economy on a fast track and in high development mode.

Per capita income is leaping literally by the day, putting the country on the list of the richest in the world.

No wonder, then, that Qatar's physical size was ignored when the 2022 World Cup was awarded to it by FIFA on December 2, 2010 in Zurich.

But one thing the local media, in particular, has ignored amidst the excitement over the successful 2022 bid is the enormity of the challenge the world has handed Doha by awarding it the world's biggest football tournament.

Economists say it is not Qatar's ability to organise the event that will be put to test. The country came out with flying colours when it successfully hosted the 2006 Asian Games.

But the stakes weren't as high. What is being tested now with the 2022 bid victory is Qatar's ability to manage its cash flows in an economy which still largely remains reliant on as uncertain a sector as oil and gas.

Setting aside an astronomical 100bn for projects linked to the 2022 World Cup - a sum almost equivalent to the investment in its core hydrocarbon sector - over the next 10 to 12 years can be a daunting task, say economists.

And the money is to be kept aside in a gradual and steady manner from the state's cash flows, large portions of which would need to be diverted each year to meet other requirements as well.

Paying government employees their salaries, building schools or spending on defence requirements are just small examples of the state's expenditure.

Indian astrologers see the "ascendance" of Saturn in Qatar's "natal chart" and attribute it to the country's sudden gas-linked wealth.

They claim that since Saturn also "rules" real estate and knowledge, Qatar's efforts to build a knowledge-based economy and its successful real estate investments all over the world (a reference to the Qatar Investment Authority's buying spree) are all signs of "Saturnine influence".

The astrologers also claim that since Qatar has to invest nearly all the 100bn mostly in infrastructure (real estate) projects for the FIFA event, it wouldn't face any problems at all in achieving its goals and it would remain debt-free.

But economists who scoff at such talk see managing cash flows to prudently - and regularly - divert portions of it for various unavoidable needs of the state and yet save some for investment for the financial security of future generations, as a formidable challenge.

As a respected Qatari corporate figure put it in remarks to The Peninsula yesterday: "Frankly, if I were the economy and finance minister of Qatar, I wouldn't be able to sleep at all as I would keep thinking of dollars and dollars alone".

This is one job (finance minister's) no Qatari, howsoever qualified and ambitious he may be, would ever want at least until 2022, said the corporate figure.

His argument is that with oil and gas still being the backbone of the Qatari economy, the volatilities surrounding the sector can pose great challenges to the state's financial management skills, especially as billions of dollars are to be set aside over the long term for the FIFA fixture.

Much of the infrastructure would anyway need to be built as part of Qatar's development process, argue economists, but they say the FIFA bid victory would hasten the development process at an unimaginable pace.

"Most of the projects must be ready at least two to three years before the FIFA event," said the corporate source.

"And it must be borne in mind that we need to build two types of infrastructure - one exclusively for the 2022 event, the other as a matter of the routine development process to cater to the needs of the country's growing population," said the corporate figure.

It is expected that by 2022 the Qatari population would have crossed the 700,000-800,000-mark, while expatriates would total almost two million.

"We would need to generate more power and water, build more schools and hospitals, sewerage, parks and flyovers as well as government offices. Then, the state expenditure on salaries and other basic needs would have also almost trebled by 2022," he argues.

And separate cash flows would be needed for all these requirements, the 2022-linked projects included. "What if oil prices plummet in the global markets all of a sudden and the slowdown continues longer than expected? Are we prepared for such a situation"," asked the corporate source.

He and other pessimists among the local economists are quick to point to the pre-2000 days when Qatar witnessed budgetary deficits due to low crude rates in the international markets.

All the development plans of the state were put on hold and the situation was so alarming that government contractors were unable to meet their basic financial commitments since they were not able to access regular payments for state projects they were working on.

But then dawned the new decade - and a new era in Qatar's history - and due to rising oil prices the country witnessed one budgetary surplus after the other.

Foreign debt related to LNG and other energy projects was fully serviced and growing LNG exports greatly supplemented Qatar's revenue sources.

Talking of the dawn of the new decade (2011-2020), economists say they see even larger budget surpluses in the years to come. "We are going to achieve a budgetary surplus much more than the estimated figure of QR9.6bn in the current fiscal (2010-11)," said well-known writer and economist, Hashim Al Sayed.

He sees the country's economic growth maintaining its upward curve.

Al Sayed's argument is simple: Since the current budget was based on an oil price of 55 a barrel, and the average crude rates in the global markets are expected to be much above that level in that period, a much higher budgetary surplus is imperative.

"We hope the oil rates to average at around 75 per barrel in 2010-11 (April 1, 2010 to March 31, 2011)," said an economist who is quite close to the top Qatari economic planners.

Qatar produces an estimated 820,000 barrels a day of oil (LNG prices are linked to those of oil) and even though the country's target is to enhance its crude production to a million barrels a day, OPEC's production quota restrictions for member states might prompt Doha to maintain its current production levels.

"The next OPEC meeting is in June 2011, and we don't at this stage expect a major review of the quota restrictions for member countries," a knowledgeable source told this newspaper.

But despite the quota-related woes, Qatar can hope to receive more revenues from oil and gas in 2011 since oil prices in the international markets are likely to average between 85 and 95 per barrel during the year.

One announcement made by Qatar that has been heartily welcomed by local economists is that it wouldn't tap debt markets to raise funds for the mega projects to host the FIFA event.

"The decision not to issue bonds or any debt instrument to raise funds is a very wise step," said Nasser Al Khaledi, CEO of Qatar-Oman Investment Company, a listed entity on Qatar Exchange (QE). "We must remain debt-free," he told this newspaper.

Qatar's sovereign wealth fund (the Qatar Investment Authority or QIA) is parking large chunks of the state's surpluses in safe and lucrative investments worldwide, with the size of the investments running into billions of dollars.

But experts say there is a need to diversify the investments more. As for tapping these investments in the event of any emergency, the experts warn that since they (investments) are a "strategic backbone" they cannot be disturbed in any way.

If at all, some returns could be utilised to fund the country's strategic economic diversification drive. "The QIA funds are for the financial security of the future generations of Qatar," said an expert not wanting his name in print.

True. Qatari planners are banking on QIA investments to try and reduce the dependence of the national economy on oil and gas by the year 2020, a little before the FIFA fixture.

Another major problem economists see raising its head during the run-up to the 2022 event is inflation, which has already left bitter memories with people for the havoc it wreaked on household budgets after the 2006 Asian Games.

Economists warn the current year (2011) could see more inflationary pressures, particularly as food prices are not expected to ease due to global shortages.

The price rise could be minimal, though, and is not expected to lead to as high an inflation rate as was caused by soaring rents during 2006-08. "If at all, the rental market might look up a bit in 2011 since supplies are abundant and no demolitions of old housing stocks are taking place, as was the case in the previous years," said the expert requesting anonymity.

He said after deflation in 2009, the prices (excluding rents) rose again in 2010 due to food and communications becoming expensive, and if that is any indication, costs could surge slightly this year as well.

"There is the need, therefore, for the state to keep inflation under check. This could also be one of the challenges before the government," he stressed.

The fears of inflation in 2011 are of no concern to at least one group of people - stock investors and speculators - as they see share values on the Qatari bourse going 20 to 30 percent up by the year-end due to expected buoyancy.

Their optimism stems from the initial encouraging reaction of Qatari stocks to the news of Qatar's successful 2022 bid early last December.

Not many were expecting this to happen initially since the bourse was indifferent to reports of the 2006 Asian Games bid win at the dawn of the last decade.

For many economists the worries about inflation do not end with food prices showing an upward curve worldwide.

With added liquidity gushing into the local economy with the launch of mega projects and continuing economic growth (which raises people's purchasing power), reining in inflation over the long term could be a big challenge.

Moreover, talk is gaining ground that the government might announce a moderate salary hike for its employees sooner rather than later. This might put added pressure on prices and the cost of living could go up.

"In any case we don't see a repeat of the nightmarish era of 2006-08," said an economist, with assurance.

The good news is the private sector might follow suit as far as the pay structure of its workforce is concerned, since economists say a number of regional and foreign companies might enter the Qatari market with an eye on mega projects and they could be expected to offer higher emoluments to their employees.

"Local companies should naturally follow suit to preempt the possibility of losing out in competition to their foreign rivals, and raise their workers' productivity and competence After all, at stake would be projects worth a staggering 100bn," said the economist.

In a nutshell, the picture that emerges with regard to Qatar's successful FIFA bid, the mega projects that are going be launched, and their overall impact on the common man, is encouraging.

"I think eventually it is going to be a win-win situation for everyone involved - the FIFA management, Qatar as a host nation, and us, the people here," the economist said on an optimistic note.

By Mobin Pandit


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