Free zones have long been at the centre of the economic development debate. The Gulf has several: for example, the Dubai International Financial Centre and, in Qatar, the Qatar Science and Technology Park. But the Qatar Financial Centre (QFC) has a different approach as an onshore centre. Shashank Srivastava, CEO of the Qatar Financial Centre Authority, is clear as to why that is the most suitable strategy for the QFC.
“A free zone is by definition only for export purposes. If you set up in that zone you cannot do business domestically, it’s only for export, it has nothing to do with your local economy,” says Srivastava. And his opinion matters, given that he is the CEO of the Qatar Financial Centre Authority (QFCA).
The Indian national, who joined the QFCA in 2006, is keen to make his point. He doesn’t refer to Dubai’s DIFC, which has attracted many of the global finance industry’s biggest players, but it’s clear that Srivastava is drawing a comparison.
“It doesn’t impact your local economy; the companies export from there, they make money that you don’t even tax, so I don’t see an impact on the local economy except that you are creating real estate and selling it,” Srivastava says.
Not everyone agrees with the QFCA chief’s views, however. According to Joe Maalouf, chairman of the Qatar chapter of the Middle East Investor Relations Society and head of investor relations at Al Khaliji Bank, free zones create several advantages, including increased production, efficiency, consumer satisfaction and exports, plus the creation of jobs, stronger economic growth and foreign exchange gains.
The main disadvantages, according to Maalouf, are potential money-laundering, customs fraud and the reduction of government revenue.
“If we compare advantages and disadvantages, I believe that free trade zones are ultimately one of the fairest ways for developing world economies so that they can begin to compete on global scale,” says Maalouf. “I believe that a lot of opportunities in Qatar still need to be identified and grabbed for the benefit of the country and of its citizens, and then a free zone will be a plus at a later stage.”
But if you ask around, it’s hard to find one company in Qatar that is not hoping to see a free zone in Doha.
“You can ask those same companies how they do business in Malaysia and in other countries in which you need a 51 percent local partner,” Srivastava argues. “If they are saying this about Qatar, how do they do business in Malaysia, in Thailand, in Vietnam, in Tunisia, and in Africa? It’s not a strange thing around the world, companies are aware of it, lawyers are aware of it, senior managers are aware of it, so it’s a philosophy of economic development.”
Qatar’s development is currently based on building a knowledge-based economy to reduce its dependence on hydrocarbons. The outlay for education has been upped by fifteen percent in 2013, with the education sector now constituting 3.8 percent of the country’s GDP. While the government may herald this shift in the economy, hydrocarbons are still, clearly, of critical importance.
According to the Qatar Statistics Authority’s 2012 report, the oil and gas sector contributed 51.7 percent and 58.3 percent of Qatar’s total nominal GDP in 2010 and 2011, respectively. The country plays host to the world’s third-largest gas reserves after Russia and Iran. Qatar’s economy has been growing rapidly from a GDP of only $23bn in 2003 to $172bn in 2011, according to the World Bank — a 700 percent increase in less than ten years.
In 2013, overall growth is expected to stand at 4.5 percent, with the non-hydrocarbon sector maintaining momentum through 2013, according to research released by the General Secretariat for Development Planning (GSDP). Other data also confirm the healthy state of the Qatari economy; annual GDP per capita hit $100,000 in 2012, with an unemployment rate at just 0.6 percent.
“Qatar doesn’t need to go down that [free zone] road; it has an economy based on real assets, based on long-term revenues, so it’s very stable,” Srivastava says. “If you have that, what impact does a free zone have on the development of your economy?”
Hydrocarbons, a young population, the rise of the middle class and infrastructure development; according to Srivastava, these are all solid trends that are occurring in Qatar right now.
“That economic activity, that trend, gives rise to further economic activity and business opportunities, and that attracts capital,” he points out.
Besides the strong fundamentals of the Qatari economy, the country is also lucky to be in a privileged geographic position that ties it closely to some of the world’s most exciting emerging markets.
“The destination of capital is changing because in Europe and in the US, there aren’t many opportunities for growth,” Srivastava adds. “So capital will naturally have to go where there is growth — and growth is in the emerging markets. If you are going to invest in emerging markets, the question is, do you do it from London? From New York? From Geneva or Paris? Or do you do it from a location that is closer to where emerging markets are? Clearly you see that trend, that capital is going to emerging markets and it needs to be managed from places that are close to emerging markets. And Doha is one of them.”
This trend could guarantee a flow of foreign capital to Doha even without having a free zone. According to Srivastava, there is another trend that is attracting more companies to open in Doha: investors want to be closer to where asset managers are in order to have closer oversight. After the Lehman Brothers experience, being closer to whoever is managing your money is now seen as being of paramount importance.
“You need to be very well aware of what your asset managers are up to…therefore you want to have a very close relationship with them; the investors are closer to where we are, so there is better oversight, and better relationship management from the investors’ side,” says Srivastava.
These two trends — managing the capital invested in emerging markets from a closer location and being closer to asset managers — appear to be turning Doha into a more attractive financial centre.
“That is the reason why you have structures as QFC, which allows for that to happen. It gives you a regulatory framework, it gives you a legal framework for companies to set up and work on those two trends, to manage money in emerging markets as well as being closer to investors,” says Srivastava.
“Capital typically doesn’t know boundaries, it moves around the world; the question is where does it get managed from? For that you need certain things for it to be conducive, for people to do business and that’s what we create,” he adds.
In order to see the Qatari market moving from frontier-market status to the more mature emerging-markets tier on the MSCI index, a reform of foreign ownership limits must be introduced. According to a QFC 2013 market survey, “most… respondents believed that Qatar would remain as a frontier market, until it reforms foreign ownership limits”. If the country wins emerging-markets status, that would create a far more diversified investor base for the Qatar Exchange.
The International Monetary Fund (IMF) has recommended developing a well-diversified domestic and foreign institutional investor base that can help diversify financial intermediation to capital markets by increasing the demand for long-term financial assets. Srivastava is optimistic about this, but he also adds that for a foreign ownership limits reform to happen, several other things have to be introduced beforehand.
“I would expect it to happen at the right time; the economies in the GCC region are on the path towards liberalisation, more openness, they are all committed to WTO [World Trade Organisation] requirements, so directionally it is moving in that direction, so yes, at some point I would expect that you would see foreign ownership limits being addressed,” he says.
But when is “the right time”?
“Essentially it depends on your capital market; if the capital market is not large, relaxing foreign ownership limits will have a massive volatility impact on your stock market. You need to have a market of a certain size to be able to absorb inflows and outflows,” he explains.
In addition to the equity markets, Qatar is also hard at work developing its debt market. The central bank launched quarterly issues of riyal-denominated bonds in March, allowing the country to have a tool to soak up huge amounts of liquidity in the local banking sector.
“You cannot have a developed debt market unless you have a yield curve in the country, and none of the GCC countries have a local currency yield curve,” Srivastava says.
But the QFCA boss believes that Qatar is definitely headed in the right direction.
“As long as you know that directionally it’s an open economy and you are moving towards that and you are committed to developing an open economy, it will happen, and as you can see in Qatar, it’s happening,” he says. “Qatar is the first country and Qatar Central Bank is the first central bank in our part of the world that has committed to creating a yield curve, and it has already started issuing short duration debt instruments in the local market,” he adds.
The next stage is creating a derivatives market, and Qatar Exchange seems to be willing to create a debt market and subsequently a derivatives market, even if it’s hard to predict when it will happen. There is still a lot of work to do, but Srivastava doesn’t seem worried. When asked about the main challenges ahead, Srivastava looks relaxed.
“We are faced more with opportunities, and we are trying to respond to those opportunities, in time, rapidly and effectively, which is a good problem to have,” he says.
The next steps on his agenda are reforming the legal environment for holding companies, special-purpose companies and family offices. Srivastava has already started doing his homework, but refining regulations is a never-ending task.
“Laws, regulations, taxes are never fixed; they always evolve, as the economy evolves, as sectors evolve, they are always a work in progress,” says Srivastava.
The world is betting on Qatar: knowing that the country is moving towards an open economy, more foreign companies and investors are being encouraged to keep an eye on the nation’s development, but the time to come up with substantial results is not unlimited.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.