GCC investors sensitive to global cues; Qatar’s medium term outlook brightening

As some of the major economies of the emerging world are vulnerable to joining the developed world’s growth slowdown, Qatar, along with the region, has reason to be cautious about 2019. Growth in the US, China and Europe is weakening and the extraordinary Brexit situation has meant uncertainty in the UK has rarely been greater; there are many reasons to believe 2019 may not be a great year.

In an interview with The Peninsula, Akber Khan, Senior Director, Asset Management at Al Rayan Investment, said there are a number of dark clouds investors see on the horizon given so much uncertainty. Relatively speaking, however there are some bright spots in the region and Qatar would be included here. At a time when the market debates on whether the global economic expansion is aged, late-cycle or at the end of its cycle, investors should now be more selective and prudent while investing.

The current global economic cycle has been running for nearly ten years making it among the longer cycles on record but growth has finally begun to falter across several key geographies. Europe is in an increasingly difficult situation with manufacturing declining, particularly in the car industry. This has a material impact on global activity and a multitude of supply chains.

The world’s second largest economy, China, while still registering mid-single digit growth, is cooling and authorities are struggling to find ways to reverse this. Trump’s tariff war with China is adding to uncertainty and causing investment decisions to be delayed. Major emerging economies such as India and Brazil, are also not immune to the global environment.

The US economy has been the standout performer for several years but the strongest growth seems very much behind us. Job growth is decelerating, financial conditions have been tightened and fiscal stimulus from recent tax cuts has waned.

Khan added, it is easy to simply paint a gloomy picture but this does not show the entire story. After seven rate increases by the US Federal Reserve over the last two years, it is increasingly likely for the next move to be downwards, in late 2019 or early 2020. The Federal Reserve is expected to refrain from raising interest rates, according to projections of its officials.

Stable – or falling – US interest rates have two important implications for the world: the steady appreciation of the US Dollar would likely be capped (or the Dollar may even begin to weaken), and other central bankers can begin to bring down their interest rates. As US interest rates climbed steadily during 2017 and 2018, most emerging economies were forced to raise rates to avoid capital outflows. It appears they will soon have room to reduce rates and stimulate their economies.

So where does this leave the Gulf? Decelerating global demand is not positive for industrial production nor commodity prices. The price of Brent crude is critical for this region and 2018 ended on a sour note with Brent falling to $50 per barrel. It has since bounced 25 percent, taking it back to $67-68.

Khan said Opec’s Saudi-led partnership with Russia is working overtime to reduce oil production and therefore inventories, especially in the US. They have done well, particularly in light of steadily growing oil output from the US shale industry which is now at nearly 9 million barrels a day. At present, the US shale industry’s production is constrained because of bottlenecks in infrastructure which transports the oil to industrial users across the US. Expectations are for these restrictions to ease over the next 24 months or so, allowing shale producers to expand oil output further.

Unfortunately, $67 oil is far from sufficient for government spending in many parts of the Gulf. In most of the region, the real economy is hurting, consumer confidence is fragile, and business confidence is weak. Looking at equity markets paints a very different picture given billions of dollars of further buying by passive and active foreign investors is expected in Qatar, Kuwait and Saudi Arabia in the year ahead. Qatar was one of the best performing equity markets in the world in 2018 and so far in 2019, Kuwait and Saudi Arabia are in the top-10.

Qatar is in a unique situation where government spending on certain parts of the economy will remain elevated for the next few years, partly because of FIFA 2022.While this is a welcome boost, other companies are struggling, particularly in sectors such as contracting, real estate, retail and hospitality. Further out, during 2024 and 2025, Qatar’s LNG production will grow from 77 to 110 million tones per year cementing its position as the world’s largest exporter of LNG.

The more 40 percent increase in gas production will be a significant boost to state revenues and is expected around the time global LNG demand is set to overtake supply. In the meantime, Qatar Petroleum has plans to build a new petrochemical refinery in Qatar; the ethylene cracker is expected to be one of world’s largestand should be operational early next decade.

If successful, another major initiative which will have significant implications for Qatar’s economy is the Free Zone Authority (FZA). A number of regional and global trading and manufacturing companies are in discussions with the FZA to set up facilities to address demand domestically and wider afield. By their nature, these projects take longer to materialize. But as they do this, they will serve as important multipliers for economic activity, logistics and jobs, and add to the diversification of the economy.


Source from: The Peninsula