Qatar sharply increased basic salaries and pensions for its public sector (by 60 per cent) and military employees and retirees (by 50-120 per cent depending on rank), effective from this September. We now expect total government spending to increase by 23.5 per cent this year.
A fiscal surplus of 9.0 per cent of GDP is still expected, and it may be noted that the fiscal position is stronger than the data suggest, with much of the gas revenue bypassing the budget. We expect Qatar's budget breakeven oil price to rise to $47 per barrel (from our earlier estimate of $39). Qatar can increase spending with ease, but there is the risk of moral hazard in the raising of expectations of future sharp wage increases. Pressure has increased on the salaries of Qataris in government-linked corporates, which have in the past followed public sector wage increases.
Our forecast for system-wide private sector credit growth increased to 20 per cent for 2011 following the announcement of the wage increases, up from 17 per cent. There remains room to reduce the benchmark lending interest rate, still currently high for corporate loans, yet Qatar Central Bank (QCB) is likely to look to ensure that the new liquidity doesn't lead to speculative activity or a build-up in inflationary pressure. Some increase in consumer-linked inflation is likely as retailers increase their prices. Yet inflation should remain in low single digits, at 2.0 per cent for the year.
We also maintain our real non-oil growth forecast for 2011, at 12.7 per cent, with an increase in sentiment and private expenditure on the back of the spending measures, though a large proportion of resulting consumption is likely to be directed towards imports.
Nominal GDP growth averaged 35.0 per cent in the first half of 2011. We expect some deceleration in hydrocarbon earnings in the second half, with weaker energy prices and gas production rises (two major gas trains having come on stream at end-2010).
The public spending hike appears not so much a direct response to any deterioration in political stability as much as catching up with wealth redistribution, although the two are linked. Nor do we expect a change in overall policy following the minor government reshuffle in September, although a strengthening of Qatar's foreign policy role may be seen.
Qatar has been playing a more prominent role in Mena regional policy recently. In the reshuffle, Ahmad bin Abdullah Al Mahmoud, previously the long-standing foreign minister, was appointed a second deputy prime minister. Also of note is that Crown Prince Tamim bin Hamad Al Thani is playing a more visible role; he announced both the government reshuffle and wage increase.
