When do deficits matter?

Oil price volatility might mean Qatar will likely witness another budget deficit more than a decade later.

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Deficits

Until the close of the last century, Qatar was the only country in the Arabian Gulf which posted budget deficits for years in a row. A small economy then, Qatar witnessed its last fiscal deficit in 1999-2000 (the financial year being 1 April, 1999 to 31 March, 2000) when world oil prices averaged a little more than USD 15 a barrel.

A country’s fiscal deficit, in simple terms, is the difference between its revenues and expenditure. A country which spends more than its receipts runs a budget deficit. This deficit can either be financed through borrowing or by printing currency, both of which can lead to inflation. The country can also finance the deficit from its savings (its cash or financial reserves), if available. Qatar is among the few countries in the world with ample reserves.

Cushioning the fall

Qatar began building up cash reserves a decade ago only as a cushion against future oil price volatilities – like the one in witness now. Qatar witnessed fiscal deficits prior to 2000-01 largely due to two factors: Low crude prices in the global market and low gas exports. In 2000-01, thanks to rising revenues from LNG exports, the country witnessed a budget surplus of QR 5.13 billion, or USD 1.4 billion.

That (2000-01) was also the year when oil prices began to look up from their historic lows of USD 10 to USD 15 a barrel in 1998-99. In 2000-01, oil prices averaged above USD 27 per barrel and ever since, Qatar hasn’t looked back and has been going from strength to strength, its economy multiplying in size many times over. The country’s GDP currently is well over USD 200 billion from USD 8 billion 20 years ago.

For several years until LNG production and exports kept growing, remaining the mainstay of Qatar’s economy, GDP growth was in double digits. The growth rate fell only after a moratorium on gas exploration led to a flattening out of production. Yet the growth was moderately high at 6.5 percent in 2014 and backed by surging non-hydrocarbons sectors – mainly construction and finance – it is projected to be 7 percent this year (2015).

While that is good news, what does not bode well for the country is this year it is forecast to post a budget deficit first time in 16 years, according to a QNB report. QNB expects the budget to be in the red to the extent of USD 3.91 billion, or 2.2 percent of the country’s GDP. The QNB report said the deficit could yawn up to 3.7 percent of GDP by 2017.

In an article on Qatar’s economy, the Oxford Business Group said in its 2015 Report that by regional standards, this represents little debt. “However, the authorities are likely to rein in spending to compensate, meaning that projects not related to FIFA 2022 World Cup may be cut,” the Group said. “The Sharq Crossing, for example, was widely reported to be shelved at the time of press.” Qatari planners have made it amply clear that whatever the global situation as regards oil prices, the country will go ahead with mega development projects linked to the 2022 event.

Qatar government budgetThe lows of low-oil regime

While these may be technicalities, experts say what is relevant is one must understand the implications of a low oil regime and of a deficit budget in an oil or gas-dominated economy. Since Qatar’s main income comes from gas, oil and petrochemicals, the energy sector remains vibrant and the other sectors of the economy remain largely dependent on it for buoyancy. Although Qatar’s income diversification effort is going on in full swing and positively impacting the economy, the contribution of the non-hydrocarbon sector to the GDP is yet to exceed that of the energy sector.

According to an analyst who spoke to BQ magazine on grounds of anonymity, a common consequence of a low oil price regime and state budget deficit for a layman to understand is that employers can (and do) resort to job cuts and a freeze could be introduced to salary increments and bonus payouts. Several expatriate employees in the energy sector who were in plush jobs have already been laid off recently, as part of recent restructuring programs.

However, some financial experts who spoke to BQ say there is a vast difference between the fiscal deficits Qatar witnessed before 2000-01 and now. “There was no Qatar Investment Authority (QIA) then, so Qatar had no cash reserves as a cushion to ride over financial difficulties due to low crude rates in world markets,” said one expert.“The situation is different now since the country has ample financial reserves.” Founded in 2005, Qatar’s sovereign wealth fund, the QIA, is presently said to have assets in excess of USD 170 billion. The QIA invests both in the domestic market and overseas. It owns Qatari Diar, for instance.

Qatar has been wise to plough large parts of its budget surpluses since 2000-01 into the QIA for it to invest and build up a corpus to help gradually do away with the state’s reliance on hydrocarbons and establish a knowledge-based economy.

Going around in circles

For record’s sake, Qatar had based its 1999-2000 budgets on an assumed oil price of USD 10 a barrel and at the time oil prices averaged slightly lower than this level in the global markets, although the previous (1998-99) budget was based on USD 13 per barrel. Both the budgets posted deficits. In 1999, due to low oil prices and budget deficits Qatar postponed several infrastructure projects and sought loans on high interest from international markets. The country’s foreign debt totaled USD 12 billion by 2000-end, from USD 3.7 billion in 1999 due to loans taken for LNG projects and issuance of bonds.

Based on an assumed oil price of USD 16.50, Qatar expected a budget surplus of QR 497 million in 2000-02. A QR 6.5 billion surplus was expected in 2002-03. In 2003-04, the budget was based on USD 17 a barrel of crude price. A deficit was initially forecast in 2003-04 but eventually a surplus was posted as oil prices averaged higher than the assumed level.

The 2004-05 budget was based on an oil rate of USD 19 per barrel. Interestingly, during 2005-06, Qatar’s GDP, or its economy, was only worth QR 121.47 billion and LNG exports which peaked at 77 million tons per annum (mtpa) in 2006, was 22 mtpa then. The 77 mtpa level remains unchanged to this day due to a moratorium on gas exploration. The budget (2005-06) was based on an oil rate of USD 36 per barrel.

Qatar posted surpluses post-2001 and based its successive budgets on assumed oil prices that were conservative. For example, when the budget was based on an assumed crude price of USD 55 a barrel in 2012-13, the price actually averaged USD 91.17. “This way, over the years, large surpluses were created, much of which were invested through the QIA,” said the expert. So, for Qatar, budget deficits are not difficult to manage since it has plentiful financial reserves and does not need to borrow or print currency notes as many countries facing deficits do, the expert added.

A deficit is most likely for last year as well as this year because Qatar has based its past and current budgets on assumed oil prices of USD 65 a barrel. To recall, the present budget (2014-15) ended on 31 March this year and has been extended until 31 December since the next budget year (2016) will follow the Gregorian calendar. World oil prices have averaged only a little over this level.

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