Qatar’s fiscal balances may not be affected by GCC dispute

Gulf rift not to weigh on Qatar fiscal balances. Qatar’s fiscal balances may not be majorly impacted if the diplomatic stir and trade disruptions remain for less than a month since 80% of the government revenues comes from hydrocarbons and has “ample” financial resources and fiscal buffers, according to the Institute of International Finance (IIF), an US economic think-tank.

The Capital City of Qatar, DOHA

If trade disruption is prolonged and alternative trade routes emerge, this could cause exporters, particularly in the UAE and Saudi Arabia to be “adversely” impacted; while the existing price controls in Qatar could be a mitigating factor for price pressures, the IIF said in a research note.

“With 80% of government revenues derived from oil and gas and dividends from state hydrocarbon companies, we do not expect major impact on fiscal balances if the cut in diplomatic relations and trade links remain for less than a month,” it said, presenting two scenarios based on baseline and pessimistic approach.
Assuming hydrocarbon exports are not disrupted, the IIF projected a fiscal deficit of about 7% of GDP (gross domestic product) this year (under baseline) compared to 8.8% in 2016. On a pessimistic scenario, if disruptions prolong for more than six months, it said lower than expected non-hydrocarbon revenue could widen the fiscal deficit to 7.8% of GDP in 2017.
The external current account deficit could remain at around 2% of GDP as the sharp fall in travel and transport related service receipts due to the prolonged travel bans by neighbours with airspace closures would likely be offset by some decline in imports in line with the pace of slower activity and difficulties in finding quick alternative supply channels, it said, adding the deterioration in the external balance could also be mitigated by cuts in official grants.
Although, lower oil and gas prices could weaken the external current account and fiscal balances, the IIF said “the impact on economic activity would be mitigated by the ample financial resources and fiscal buffers.”
Trade restrictions are unlikely to impact tariff revenues “significantly” since imports from the GCC (Gulf Cooperation Council) are duty-free, while a rise in imports from outside the GCC would make these goods subject to a 5% effective tariff, IIF said.  Highlighting that the economic impact of the recent developments would depend on how soon a settlement is reached, it said under the baseline scenario, Qatar’s real growth is expected to be 2.4% this year against 2.2% in 2016 but may slow down to 1.1% in 2017 on a pessimistic case.
On the inflation front, the IIF is of the view that it could average 1.2% this year on a baseline scenario and 2.6% on pessimistic note compared to 2.7% in 2016.