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Office of the Chief Economist

Economics Department

Samba Financial Group

P.O. Box 833, Riyadh 11421

Saudi Arabia

ChiefEconomist@samba.com

+9661-477-4770; Ext. 1820 (Riyadh)

+4420-7659-8200 (London)

This and can be

Downloaded from www.samba.com

GCC Chart Book: Update Executive Summary

Qatar Chart Book

Executive Summary

The Global Outlook for 2016 is one of muted growth following a bout of financial volatility at the beginning of the year. While US growth picks up pace, the Eurozone and Japanese economies continue to struggle with low growth and weak inflation. China’s growth will continue to slow but will officially remain above 6 percent. Global growth remains fragile and policy options increasingly unconventional, with this in mind we expect the global economy to expand by 2.8 percent in 2016, down slightly on 2015.

After a dramatic sell-off that pushed Brent below $30/b in January, oil

markets have recovered and were trading around $45/b in May. Evidence that non-OPEC - particularly US - supply is on the decline is helping to underpin recent price gains. But this is being countered by the large level of crude stocks – though there is emerging evidence that these stocks, at least in the US are beginning to decline. As long as demand holds up, current supply trends suggest that stocks will draw in the second half, and we project Brent will average $40/b this year, before rising in 2017.

LNG prices have continued to trend down in 2016 and the outlook

through 2017 remains bearish. Many companies made billions of dollars of investment in LNG during the boom years and this wave of supply is set to hit the market amidst a backdrop of modest demand growth. Qatar’s RasGas seems to have acknowledged this in the renegotiation of the long-term export contract with India, in which prices are around the $5mbtu level – this is a far cry from the circa $14mbtu levels seen in 2014. Despite the sizeable impact on revenues, Qatar’s LNG industry is well positioned to compete at lower prices.

Qatar’s budget for 2016 focuses on maintaining capital spending while consolidating expenditures elsewhere. This should support sustained growth of around 4 percent over the next two years. The authorities have stated that the budget deficit will be funded entirely through debt issuance rather than drawing down assets held at the QIA. Already the sovereign has raised $5 billion in external loans and is preparing to issue another $5 billion in Eurobonds.

Banking sector liquidity remains tight as rapid credit growth outstrips deposit growth (thanks to falling public sector deposits). Moves from the Central Bank to cut the repo rate or reduce reserve requirements are possible, whilst there is anecdotal evidence of banks raising capital via private placements.

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The Global Outlook for 2016 is one of modest growth following a bout of financial volatility at the beginning of the year. US growth should hold at 2 percent, but the Eurozone and Japan continue to struggle with low growth and weak inflation. China’s growth will continue to slow but will (officially) remain above 6 percent. Oil prices remain depressed due to large global stocks, though Brent crude has recovered to around $45/b in May thanks to a sustained fall in US shale production and emerging evidence that other non-OPEC supply is struggling. Global demand is also holding up. US shale output had proved resilient, with production continuing to rise long after prices went into freefall. However, this resilience is now waning, and total US production has fallen from 9.2mn b/d at the start of the year to 8.8mn b/d in May.

2013 2014 2015 2016f 2017f

World 3.0 3.1 3.0 2.8 3.0

US 2.2 2.4 2.4 2.0 2.5

Japan 1.5 -0.1 0.5 0.5 0.5

Euro area -0.4 0.9 1.5 1.4 1.6

China 7.7 7.3 6.8 6.2 6.0

Emerging Markets 4.0 4.0 3.3 3.2 3.7

Qatar 4.6 4.2 3.7 3.9 4.0

US 0.25 0.25 0.50 1.00 2.25

Japan 0.10 0.10 0.10 0.10 0.10

Euro area 0.25 0.15 0.05 0.00 0.00

Brent 107.0 100.0 58.0 40.0 60.0

Samba estimates and forecasts

Real GDP (percent change)

Official policy rate (end period)

Oil Price ($/b period average)

World Economic Outlook

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India’s LNG contract renegotiation

with Qatar is indicative of the new

low pricing reality even for oil-

indexed LNG.

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World …

MSCI EM

LNG prices have continued to trend down this year and the implied Asia spot price currently trades at around $4mbtu. Many companies made billions of dollars of investment in LNG capacity during the boom years. This wave of supply is coming online just at a time when global demand growth looks modest - leading to a massive oversupply of LNG. We expect prices to stay at $4-5mbtu for the remainder of the year – a long way from the $14mbtu average in 2014. Indeed, Qatar’s RasGas has recently renegotiated long-term contracts for LNG sales to India with the export price reportedly around $5mbtu. With this in mind we have adjusted Qatar’s total export revenues slightly lower to $60bn in 2016. This figure represents a 52 percent fall from the $126bn in 2014 – resulting in a current account deficit of $11bn or 6 percent of GDP, although we expect a return to surplus in 2017.

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The budget for 2016 foresees the first deficit in 15 years, coming in at 4.8 percent of GDP based on oil prices of $48/b (we anticipate a larger deficit of 5.8 percent based on our $40/b estimate). Budgeted expenditures total $55.6bn which represents a 7.3 percent cut from the last full-year budget. There is already evidence of fiscal consolidation: the subsidy on petrol has been cut with prices rising 30-35 percent in January whilst the price of gas and electricity has also increased. As well as subsidy reform there have been large scale redundancies across both the public and private sector. The Ministry of Finance announced that any deficits (we estimate 2016-17 deficits will total $18bn) would be funded entirely through debt issuance (both domestic and external) rather than drawing on external savings. This will lead to an increase in the government’s debt which, as a ratio to GDP is projected to approach 50 percent (in part due to lower nominal GDP). The Government has already issued $7.4bn worth of domestic bonds and Sukuks since September 2015 as well as a $5bn syndicated loan which was taken up by international banks. A sovereign $5bn Eurobond is also due shortly.

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Moody's S&P Fitch

Saudi Arabia AA3 Aa- AA

Oman A1 A NR

Qatar Aa2 AA NR

UAE Aa2 NR NR

Bahrain Baa2 BBB BBB

Kuwait Aa2 AA AA

Rating Agencies

The capacity of the domestic banking sector to absorb government debt was tested after the September and November bond and sukuk issuances, prompting a large spike in the interbank rate. Liquidity in the banking system is still tight - interbank rates are around 1.5 percent vs 1.2 percent in September 2015 despite the QCB not raising policy rates in line with the Fed. Aggregate credit growth stood at 14 percent year on year in February compared with deposit growth of just 4 percent (with public sector deposits falling by 20 percent) pushing the Loan-to-deposit ratio to 120 percent. In the circumstances, banks are reportedly seeking to raise funds through private placements. There is also the possibility of the Central Bank cutting the repo rate and/or reserve ratio to help to assuage short-term financing pressures. The recent and pending government recourse to external borrowing partly reflects a desire not to exacerbate domestic liquidity constraints, and is projected to push government external debt up to $27.9bn (16 percent of GDP) this year. In this context, Moody’s decision to maintain Qatar’s Aa2 rating (albeit on negative watch) is helpful - the CDS has since moved slightly lower.

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Qatar: Main Economic Indicators

2013 2014 2015e 2016f 2017f

Nominal GDP ($ bn) 201.9 210.1 188.5 186.8 213.5

GDP per capita ($) 100948 95504 78526 74725 81474

Real GDP (% change) 6.3 4.0 4.2 3.9 4.0

Hydrocarbon GDP 0.1 -1.5 0.4 0.3 0.1

Non-hydrocarbon GDP 11.4 10.6 8.3 7.9 8.0

Nominal GDP (% change) 6.6 4.1 -10.3 -0.9 14.3

CPI inflation (% change) 3.1 3.0 1.5 2.5 3.0

Hydrocarbon exports ($ bn) 128.5 118.4 72.0 51.2 64.6

C/A balance ($ bn) 62.5 49.3 13.8 -11.8 5.6

(% GDP) 30.9 23.5 7.3 -6.3 2.6

External debt ($ bn) 167.6 164.0 155.0 165.0 167.0

(% GDP) 83.0 78.1 82.2 88.3 78.2

Fiscal balance (QR bn) 117.0 73.4 12.4 -39.6 -30.4

(% GDP) 14.4 9.6 1.8 -5.8 -3.9

Crude oil prod ('000 b/d) 697 670 660 610 600

Nat gas prod ('000 boe/d) 2885 2870 3050 3120 3170

Qatar sovereign bond yields have trended down this year after a sharp spike upwards at the beginning of the year. Likewise the 12 month forward Riyal rate has come down slightly from January levels but still remains elevated by historical standards. The stock market is down 5.9 percent year-to-date thanks largely to the generalised emerging market equity sell-off at the start of the year which buffeted all of the GCC bourses.

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GDP grew by a healthy 4 percent year on year in the fourth quarter of 2015, bringing full year growth to 3.7 percent. We expect growth to plateau at around 4 percent through to 2017 as the non-hydrocarbon sector continues to drive growth whilst the hydrocarbon sector remains flat. Inflation remained unchanged at 3.3 percent in March following a sustained rise after its re-basing in April 2015. Although increases in the price of fuel and utility bills are partly responsible, there has also been a surge in the ‘recreation and culture component’ – up 11.2 percent year on year.

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Qatar: Main Economic Indicators

2013 2014 2015 2016f 2017f

Nominal GDP ($ bn) 201.9 210.1 188.5 186.8 213.5

GDP per capita ($) 100948 95504 78526 74725 81474

Real GDP (% change) 4.6 4.2 3.7 3.9 4.0

Hydrocarbon GDP 0.1 -1.5 0.0 0.3 0.1

Non-hydrocarbon GDP 11.4 10.6 8.0 7.9 8.0

Nominal GDP (% change) 6.6 4.1 -10.3 -0.9 14.3

CPI inflation (% change) 3.1 3.0 1.5 3.0 3.1

Hydrocarbon exports ($ bn) 128.5 118.4 72.0 51.2 64.6

C/A balance ($ bn) 62.5 49.3 13.8 -11.8 5.6

(% GDP) 30.9 23.5 7.3 -6.3 2.6

Total Government debt ($ bn) 70.4 64.2 76.0 81.0 86.0

(% GDP) 35.0 30.9 45.7 48.4 47.3

Fiscal balance (QR bn) 117.0 73.4 12.4 -39.6 -30.4

(% GDP) 14.4 9.6 1.8 -5.8 -3.9

Crude oil prod ('000 b/d) 697 670 660 630 610

Nat gas prod ('000 boe/d) 2885 2870 3050 3120 3170

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James Reeve Deputy Chief Economist James.Reeve@samba.com Andrew Gilmour Deputy Chief Economist Andrew.Gilmour@samba.com Thomas Simmons Economist Thomas.Simmons@samba.com

Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and

should not be treated as a substitute for specific advice and due diligence concerning individual situations;

2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or

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