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A Steady Hand Will mayhem in two of the world’s largest economies have its repercussions in Qatar?
Last
summer, private research firm Dun and Bradstreet and the Qatar Financial Centre Authority (QFCA) released their Business Optimism Index (BOI) for Q3 2011. The BOI surveys a random sample of businesses in Qatar, asking respondents for predictions on sales volumes, net profits, and other indicators. According to the survey, players in the hydrocarbon industry remain optimistic about growth. “These findings show the continued strength of the oil and gas sector, forecasted by the IMF to grow 29.5% in 2011,” said Yousuf Al-Jaida, Director of Banking & Asset Management at QFCA. Qatar’s non-hydrocarbon sector, on the other hand, is less optimistic. “These findings reflect the expected quarterly retrenchment for the non-hydrocarbon sector, primarily due to the current global economic uncertainties.” Indeed, the global economy has given business owners much to consider this summer. Some of the world’s largest economies are in the midst dealing with enormous public debt burdens. Political gridlock, meanwhile, is making hard financial choices more difficult. In the euro zone, this past summer has brought the return of Greece’s sovereign debt issue. The fiscal situation there led to fears of a Greek default, an event that could seriously affect other heavily indebted euro zone economies like Spain, Ireland, and Italy. Only after weeks of strikes, protests and political wrangling did Athens pass the austerity measures required for the QR 53.13 billion (€109 billion) IMF and EU loan package. This emergency loan came just over a year after a similar IMF and EU loan last summer. In the US as well, sovereign debt issues have been seriously affecting the economy. In August, credit rating agency Standard & Poor’s downgraded the country’s debt rating from AAA to AA+, citing concerns over a $14.59 trillion public debt burden and political differences dividing the government. Tumult in the world’s two largest economies can help explain the mood of caution among some business-owners here. Indeed, the situation in the US is particularly important to Qatar because of the State’s currency policy, which has the exchange rate fixed at QR3.64 per dollar. In order to maintain this peg, the Qatar Central Bank (QCB) adjusts interest rates in step with the US Fed. At the moment, US interest rates are at a record low. The Fed announced on August 9 that economic conditions are ‘likely to
warrant exceptionally low levels for the federal funds rate at least through mid-2013’. On August 11, the QCB announced it would decrease its overnight lending rate from 5% to 4.5% and deposit rate from 1% to 0.75%. “The timing of the cut is also likely to have been supported by the US intention to keep its federal funds target rate at exceptionally low levels,” according to a statement by EFG Hermes. Lower interest rates could encourage economic activity in debt-laden America. In Qatar – where the government had continual surpluses – lower rates could stoke inflationary pressure. Another factor that has the potential to push up prices is the significant level of government spending. In March, Doha announced a QR139.9 billion budget, an increase of 25% compared to the previous fiscal year. A combination of lower interest rates and higher government spending has caused inflation to spike in the past. In 2008 – while soaring oil prices enriched the State – US interest rates were held low. In that year Qatar’s CPI rose by 15%, according to the IMF. Does this mean Qatar is again destined for soaring inflation? Not quite. Despite the constraints that go along with the dollar peg, the QCB has a number of tools it can use to keep inflation in check. These include adjustments to reserve requirements, loandeposit ratios and the Qatar Money Rate (a monetary tool allowing banks to borrow from and deposit with QCB at pre-specified interest rates overnight). Another important tool is bond issuance, which allows the bank to remove excess money supply from the market. This seems to be the current course of action. In early August, the QCB announced it would issue QR4 billion ($1.1 billion) in treasury bills. “The objective of this is to manage liquidity and also to build our sovereign yield curve,” Abdullah bin Saud AlThani, QCB Governor told Bloomberg last week. Indications are that inflation has remained under control this year. June 2011 living costs rose by 1.8% year-on-year, according to the Qatar Statistics Authority. The IMF estimates that CPI will rise a modest 3% this year, nothing close to the increases seen in 2008. Although global economic conditions do serve as a cautionary tale, the foundations of Qatari growth – continual hydrocarbon exports, significant government investment, and above all steady monetary policies – seem to be holding strong
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By Oliver Cornock The author is the Regional Editor of Oxford Business Group
34 Qatar Today
september 2011