QATAR: Is Qatar taking on too much?

Tornado towerThe country is set to spend billions on foreign aid, hotels and build-out for the World Cup. Orlando Crowcroft asks if Qatar can afford it.

When the sovereign wealth fund of Qatar, the Qatar Investment Authority, said it would launch a $12 billion investment vehicle called Doha Global Investment and float it on the local exchange this year, it was hardly out of character for a country known for extravagant investments.

Rarely a day passes when Qatar’s sovereign wealth fund is not in the news for its high-profile acquisitions. The launch in February of Doha Global Investment, which has since had its initial public offering (IPO) postponed, suggests there are more to come. Ahmad Mohamed Al-Sayed, chief executive officer at Qatar Holding, a unit of the Qatar Investment Authority, says the new vehicle will have a broad remit, investing in bonds, equities and property.

On the surface, the move is an effort to give Qatari nationals a share in the sovereign wealth fund’s investments, which have yielded returns as high as 17% in the past 12 months for Qatar Holding. Al-Sayed says the new vehicle, which promises a dividend of 5% in its first year, will “give the Qatari private sector the opportunity to enjoy the access that Qatar Holding [enjoys]”.

“By floating this fund as an IPO, the idea is to spread the love,” says Farouk Soussa, chief economist for the Middle East at Citi.

Analysts were pleased by a number of aspects of the announcement, not least that it was made in an uncharacteristically public manner for a Gulf sovereign wealth fund. At a time when the global economy is still struggling, Europe and the US might hope that Doha Global Investment turns its eyes westward. There is certainly precedent. Qatar already owns high-profile assets from Paris Saint-Germain football club to London’s tallest tower, the Shard.

But could there be more to Qatar’s latest venture than a desire to bring local investors into the fold? The country’s commitments over the next two decades are vast, with $5 billion pledged in aid to Egypt – amounting to 8% of Qatari government expenditure in 2013 – and billions more set aside for the FIFA 2022 World Cup. The cost of the tournament has been put at $90 billion by the IMF, which earlier this year urged the Qataris to exercise greater fiscal discipline.

“Qatari sovereign assets have their limits. This is not Saudi Arabia, the UAE or even Kuwait,” says Said Hirsh, a former economist at Capital Economics, now an independent analyst. “For Qatar to realise its ambitions, it may well need more funding than its sovereign assets, hence tapping another source of funding through its local equity market.”

The prospect of the richest country in the world, with GDP per national of more than $700,000, running out of cash may seem unthinkable, but, according to research by Citi, it is a possibility. In a March report on the Qatari economy, Soussa suggests a potential fall in oil and natural gas prices combined with spiralling government expenditure could put pressure on the country’s finances.

The research reveals that while a surge in liquefied natural gas (LNG) production and rising oil prices increased government revenue 22% a year between 2005 and 2012, expenditure has risen by 23% a year. With commitments to Egypt and the World Cup, expenditure will continue to rise in the decade ahead, but LNG and oil prices may not.

Meanwhile, when Qatar reached its LNG capacity target of 77 million tonnes a year in 2011, the government declared a moratorium on further gas production until at least 2015.

The country’s biggest competitor in this business, Australia, is due to bring eight new LNG facilities online in the next five years, pushing its export capacity higher than Qatar’s.

Citi’s research suggests these factors, coupled with a potential fall in oil prices, could cause Qatari revenue growth to drop to 4% a year in the next four years, leading to a budget deficit of 2.3% by 2017.

“Qatar is performing well but has high operational costs. The risk is that if those revenues fall, [it could] end up being very significantly in the red,” says Soussa. “It’s a fabulously wealthy country, but just like individuals who are big spenders, no matter how rich they are, if they run into hard times then they have to cut back. That will happen to Qatar eventually.”

Although estimates of the size of the Qatar Investment Authority vary – Citi says $163 billion and the IMF says $175 billion – there is no doubt its assets are a cushion against a drop in LNG or oil prices. As a hypothetical example, a budget deficit of 10% of GDP in 2013 would require $18 billion of government funding. Qatar could cover its costs for about nine years with sovereign wealth assets without turning to the capital markets.

But taking money from the Qatar Investment Authority to pay for domestic and international spending would be contrary to the agreed role of a sovereign wealth fund: to protect wealth for future generations. It would also put pressure on the fund’s investment performance. Citi’s estimate of $163 billion assumes the fund, which does not reveal overall performance data, has made an average return of 8% a year. If it has only made 5%, it will be worth about $104 billion.

Meanwhile, in traditional Gulf sovereign wealth fund style, little is known about the majority of the fund’s investments. This includes what proportion is held in liquid instruments such as equities and what is in real estate. The recent furore over Qatar’s $3 billion Chelsea Barracks project in London illustrates that property can be an erratic asset class. As the many vacancies at London’s Shard show, property investment is often dependent on external factors, such as tenancy rates.

But secrecy does not always conceal bad performance. For every Harrods, Chelsea Barracks and Shard investment, there are likely to be dozens of lower profile properties generating solid income for the fund. Indeed, Nicholas Maclean, managing director at property consultancy CBRE Middle East, says criticism of Qatar’s property investment strategy has been unfair.

“They have a sensible decision-making process and they go through a similar level of due diligence as any other institutional investor. A large proportion of what they invest in is vanilla income-producing assets around the world,” he says.

Sameer Abdi, a partner at Ernst & Young in Doha, agrees that much criticism of the sovereign fund’s performance is unfounded, given that 95% of the fund’s property assets are unknown. As for the cost of infrastructure spending in Qatar, Abdi believes estimates ranging from $90 billion to more than $120 billion are inflated.

Even if the price tag is that high, Qatar can afford it, if not through tapping sovereign wealth resources then by going to the international capital markets. The markets have always been good to Qatar, and the recent news that Qatar Holding is to seek a credit rating suggests that will remain the case. The country issued $5.5 billion in bonds in 2009 in its first international foray and has issued more each year except 2012. It now has $21.4 billion outstanding and bonds maturing in 2014 and 2015.

“The infrastructure spend that Qatar is committing to, it can more than easily fund. If it needs to get external funding, given the rating that Qatar enjoys, it has access to external funding,” said Abdi.

Citi’s Soussa, meanwhile, says his bearish attitude to Qatar’s finances is merely a call for caution amid the optimism that dominates coverage of the ambitious Gulf state – a lesson he learned from the crash in Dubai five years ago. Qatar’s sources of revenue may be far more secure, but a lack of transparency means that most forecasts, bullish or otherwise, are based on assumptions.

“What would happen if oil prices were to fall to $50 a barrel? In that event, Qatar looks extremely exposed. It has got assets to cover any deficits that come up, but we don’t know anything about these assets at all,” he says.

“If we learned one thing from the Dubai crisis it was not to make these kind of assumptions. When things go wrong, all of a sudden the rot is revealed.”

©2013 funds global MENA

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