July 25, 2018 – This post was written by Charlie Cope, MENA Research Intern
Nearing the 13-month mark since its initial imposition, the outlook for the blockade imposed on Qatar by Saudi Arabia, United Arab Emirates, Bahrain, and Egypt remains uncertain. While the blockade limits Qatar’s growth outlook, it has not generated such unfavorable economic conditions for the country as one might have anticipated a year ago. Judging by the complete lack of progress in the situation so far, and the indiscernible line between support or opposition coming from the US, it is tough to see an end to this crisis any time soon. MNCs need to anticipate lower demand growth and prepare long-term supply chain and talent management solutions to continue to serve the market.
Economic Impact Has Been Partially Mitigated
Initially, multinationals, particularly those with large trans-border volumes of traffic, struggled with the blockade. Many were forced to downsize and look to alternative sources of inputs, with their previous Gulf country trading partners now withholding their resources. While the blockade has undoubtedly had detrimental effects on the Qatari economy, figures suggest a relatively stable outlook:
- Net foreign assets at Qatar’s central bank continue to increase and have reached US $24.5 billion in May, up substantially from US $13.9 billion in November 2017. With a rising gas production outlook for the rest of 2018, foreign exchange reserves should be bolstered. These will help maintain the Riyal’s peg to the US dollar.
- 2017 GDP eased, but the non-oil sector managed to avoid a recession. In Q1 2018, non-oil sector grew 3.3%, building and construction activity rose 34.1%, and service sectors also performed well.
- Consumer inflation in Qatar has also remained relatively low, averaging 0.5% in the year to May.
Furthermore, likely to mitigate the negative effects of the blockade, the Qatari government:
- Stepped up spending on public sector salaries and wages, and on capital expenditures.
- Moved forward with legislation to allow foreigners to own 100% of businesses in all economic sectors
Lastly, as proof of Qatar’s resilience to the blockade, Moody’s upgraded Qatar’s long-term issuer ratings from negative to stable, affirming the long-term issuer and foreign-currency senior unsecured debt ratings at Aa3.
Economy Will Remain Stable Despite Ongoing Blockade
The economy is on track to improve from last year:
- High oil prices, rising hydrocarbon production and increasing liquified natural gas (LNG) exports support the budget. Exports of LNG from Qatar to major markets are largely unimpacted due to Qatar’s access to international waters via the Strait of Hormuz, which circumvents Saudi, Emirate or Bahraini national waters. LNG production is likely to rise by 30% to 100 million tons a year within the next five to seven years after lifting the moratorium on gas development in 2017. Thus, the government budget is likely to be broadly balanced or, in the medium-term, in surplus, leading to a gradual decline in government debt from just under 50% of GDP in 2017 towards 40% of GDP early next decade.
- However, the growth and investment potential are still limited by the isolation resulting from the blockade. Yet, business activity is gradually adjusting, especially with expansion of direct trade links that have already helped recover imports in Q4 2017. In May 2018 business conditions in the non-hydrocarbon private sector improved for the tenth consecutive month, according to the Purchasing Managers Index. Furthermore, despite slowing down from pre-blockade levels, lending growth has been close to 3% in Q1 2018, suggesting growth in consumer and business spending.
As a reaction to the blockade, companies have begun importing to Qatar from Turkey or directly from their home market, as well as shipping to Qatar via Kuwait and Oman. Over time, these alternative channels can and likely will solidify, thereby reducing Qatar’s past dependence on Saudi Arabia and the UAE.
The Saudi-led trade embargo will continue to weigh down economic growth; the country will find it difficult to attract non-World Cup related investments until the blockade is resolved, and consumer confidence has been significantly dampened. With economic fundamentals remaining stable alongside the government’s infrastructure investment push in preparation for the 2022 World Cup, the economic outlook looks far from dire.
Suggested actions for MNCs
With lowered but seemingly recovering economic conditions, companies must ensure their post-blockade supply chain and talent management strategies can become permanent solutions to serving the Qatari market. With the demand a bit depressed, it is recommended that MNCs:
- Focus on demand generation through more aggressive marketing
- Favor more inelastic or niche products in their portfolio
- Ensure distributors identify the most profitable categories of customers to focus sales efforts on
- Invest in deepening government relations to tap into the slightly more careful public spending and make sure sales team and distributor skill sets are up to scratch in pitching in line with government priorities