Posted on March 25, 2017

Qatar's budget deficit would narrow to 1.1 percent of GDP in 2017 as higher hydrocarbon prices increase government earnings and measures to diversify state revenue are implemented, BMI Research has said in its latest report.

The Qatari government will cover its modest budget shortfall through domestic debt issuance, as costs of borrowing remain lower than the level of investment income lost by drawing down reserves, and in order to avoid pressure on domestic liquidity, the report said. "We expect the fiscal balance to swing back into surplus in 2018 as energy prices strengthen and a region-wide VAT is introduced, facilitating a gradual reduction of public debt," BMI Research said.

More than 80 percent of Qatar's revenues, which comes from hydrocarbon earnings including investment income, would increase in the quarters ahead as prices strengthen on the back of the OPEC and non-OPEC production cut deal, the report said. "Our oil & gas team forecasts Brent to average $57 per barrel in 2017 and $60 per barrel in 2018, significantly higher than the $45 per barrel average recorded in 2016 and assumed in Doha's budget for this year," the report said.

Furthermore, the report said, measures such as the establishment of a $10 airport tax in August 2016, the planned introduction of excises on tobacco and sugary drinks in 2017 and the GCC-wide 5 percent VAT roll-out in 2018 will generate additional income. "As such, we forecast state revenue to come in at QR251.5 billion ($69.1 billion) in 2017, far exceeding the government's QR170.1 billion target for the year and at QR298.1 billion ($81.9bn) in 2018," BMI Research said.

On the expenditure side, the report said, fiscal consolidation efforts would affect current spending to a limited extent. "The Qatari government is working to improve operational efficiency, lower the public sector wage bill and rationalise subsidies, but we do not expect it to enact cuts that would significantly affect the lives of Qatari citizens," the report said.

Capital spending will remain elevated in the years ahead, driven by projects linked to the FIFA World Cup 2022 and Qatar National Vision 2030. Despite the recent shelving of some 'nonessential' projects and plans to introduce a new framework enabling the private sector to take on a greater share of infrastructure funding, BMI Research expected capital expenditure by Qatar's government to increase by around 5 percent annually in both 2017 and 2018.

The government would continue to finance its budget shortfall by issuing debt, the report said adding that the government would avoid tapping its sovereign wealth fund the move would reduce state revenues and limit domestic liquidity pressures. A return to international debt markets by Qatar in 2017 following its $9bn eurobond issue last May appears unlikely given the small size of the forecast deficit, the report said. "We expect the government to focus on borrowing from the domestic banking sector in the quarters ahead. It has already issued QR15bn ($4.1bn) in domestic debt this year," the report said.

"We believe Qatar's fiscal balance will swing back into surplus in 2018 as VAT is introduced and energy prices continue to strengthen, facilitating a gradual reduction in debt levels, which currently stand at around 53 percent of GDP," the report said.

source: Qatar Tribune