By Ruth Lux
Political risk analyst Ruth Lux on why Qatar has already scored a hat-trick of achievements despite ongoing controversy
Controversy has surrounded Qatar’s successful bid to host the World Cup in 2022. Initially criticism was levelled against hosting the World Cup in Qatar given the extreme temperatures and the impact this could have on players.
In November 2013 Amnesty International released a report revealing the exploitation of migrant construction workers from Asia, enlisted to build the vast projects developed in association with Qatar winning the World Cup bid.
And earlier this month, the Sunday Times newspaper in the UK claimed that Mohamed bin Hammam, Qatar’s former FIFA vice-president, secured support for Qatar’s bid, by allegedly paying over $5 million in bribes. Pressure has mounted on FIFA to fully examine these allegations, however, in all likelihood these allegations will have more of an impact on FIFA than Qatar and Qatar’s economic diversification programme remains on course.
World Cup sponsors including Adidas, Sony, Coca Cola and Visa are exerting pressure on FIFA to examine these corruption allegations. FIFA is conducting an examination due to be released in July 2014 and findings from the resulting report will determine whether a re-vote is necessary.
Initial projections estimated that Qatar would spend between $60-100 billion on infrastructure projects over the coming years and some estimates project that up to $200 billion may be spent on infrastructure projects by 2020. Should Qatar lose the right to host the World Cup overall GDP growth will likely diminish. However, this is not the full story.
Under the terms of Qatar’s Urban Development Masterplan a number of the projects already in development would have proceeded with or without the World Cup. Much is being made of how detrimental it will be to Qatar’s reputation and economy if a re-vote is requested. However, the economic argument is being over-played.
Despite Qatar’s main stock exchange witnessing a loss of approximately $5 billion in the days immediately following the release of the Sunday Times report, it has since stabilised. Economic diversification is a priority for Qatar and as well as making economic sense in the short term, in the long term it is likely to be a necessity for the emirate state.
The FIFA World Cup 2022 has provided an important catalyst for investment in non-oil sectors. Qatar is the highest per capita income country in the world with the lowest unemployment. Its’ oil reserves are in excess of 57 billion barrels, however, following the price fluctuations of oil in 1982-1986, the Qatari government has engaged in developing a policy of economic diversification.
Qatar initiated a privatisation programme in 1998 and following the opening up of the national stock market to foreign investors in 2005, foreign investment has been forthcoming. In 2012, foreign investment in Qatar totalled $324million. Qatar is the largest global exporter of liquefied natural gas.
Nonetheless, in the first quarter of 2013, the oil and gas sector in Qatar only grew by 0.8 percent. Gas expansion levelled off thereby reducing the annual economic growth from 16 percent in 2006-2011 to 5.5 percent last year. The stability of Qatar’s market share in liquefied natural gas is secured due to the twenty and thirty year contracts it has in place.
Qatar’s investment in diversifying the non-oil sector signifies that in spite of this limited growth its economy continues to expand. Tom Keatinge, former investment banker at JP Morgan and associate fellow at Royal United Services Institute attests to the importance of Qatar’s economic diversification programme: ‘If one looks at other commodity-based economies, it is clear that diversification of revenue is critical.
Relying solely on commodity revenue typically also means relying on ever-higher prices; and that may not always be the case, particularly as new oil/gas reserves come online around the world. Countries such as Saudi Arabia and Russia have struggled to achieve economic growth as they have failed to diversify their economies away from hydro-carbons.’
Real estate, financial services and business are the largest contributors to Qatar’s GDP following the oil and gas sector. The oil and gas sector continues to contribute approximately 45 percent to GDP, however, it is intended that in the coming years 60 percent of the country’s economic growth will stem from services whilst 15 percent will stem from telecommunications and transportation.
FIFA’S report due to be released in July holds significant reputational risk for brand Qatar. Inevitably Qatar’s treatment of foreign workers will attract attention and its integrity will be called into question. Reportedly, between 4 June and 8 August last year, at least 44 workers died in accidents in the workplace and some reports reference the existence of forced labour in a number of World Cup infrastructure projects.
Such claims may be the tip of the iceberg and investigations into the corruption claims surrounding Qatar’s successful bid could result in further reports of this variety. Tom Keatinge adds: ‘Although the corruption scandal is primarily about FIFA, Qatar’s reputation for integrity will certainly be damaged.
Does that mean investors will shy away from the country or those seeking Qatar’s investment in their countries will change their minds? No. But the reputational damage created by these allegations will certainly lead to greater scrutiny.’
The FIFA World Cup 2022 has provided an important catalyst for investment in non-oil sectors and has precipitated a number of infrastructure and construction projects. Whether Qatar loses the opportunity to host the World Cup or not, it has successfully attracted a significant amount of foreign investment and construction of the Lusail cities, airports, new ports, metro, hospital and stadium are in progress.
Brand Qatar has ambitions to compete with its Gulf neighbours and to become a regional hub in its own right. With this in mind, development of its investment legacy appears to be in full flow. In part, winning the World Cup bid set the scale of development as well as the time-lines. However, the results of the July report are unlikely to impact investment in infrastructure and capital projects over the coming decade.
Investors will not be scared off by the corruption scandal, content in the knowledge that Qatar is able, if necessary, to bail out any of its sectors facing difficulty. Qatar may not be the favourites but despite the reputational risk of losing the World Cup, may already have scored a hat-trick. It has attracted foreign investment, assisted economic diversification away from the oil and gas sector and boosted its profile amongst its Gulf neighbours.
Ruth Lux is Managing Director of political risk consultancy Strategic Analysis. Researcher David Sousa also contributed to this article.
The hat-trick should have included substantial improvement of how labors, maids and taxi drivers are treated, paid and respected.
If they had address these issues, they would have been the first in the GCC and would have gained the world's respect... until then the reputation of this region will apply to them, with the difference that the World Cup only focus on Qatar leaving all the neighbors alone with their own abuses.