A game of two halves for Qatar

Qatar might be in the midst of a massive development boom, but banks, investors and construction companies are finding out that making money is a difficult proposition.

Ball rolling: Qatar has begun a US$200 billion development drive in preparation for hosting the 2022 Fifa World Cup. Fadi Al-Assaad / Reuters
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As Qatar approaches the second anniversary of winning the rights to host the 2022 Fifa World Cup, Doha is already a hive of activity.

Cement mixers crawl along gridlocked streets as companies redeploy staff en masse and a US$200 billion (Dh734.56bn) development drive grinds forward. There may be a decade to go but there is little time to waste as a metro line, a new airport and even new cities are built from scratch.

Yet making money from this construction frenzy is proving difficult, say banks, investors and construction firms.

"As an opportunity it's slightly overhyped," said one banker, who did not wish to be named. "When you have a whole bunch of international banks jumping on it, you get a bit of crowding out."

A rush of overseas capital towards debts issued by Qatar's government or government-related companies - viewed as havens - helped Qatar National Bond (QNB) tap bond markets with a $1bn six-year bond this month with a coupon of 2.125 per cent.

The bank trumpeted the fact that it had secured the lowest rate of interest among any financial institution in the region's history.

But within a week, it was revealed that Qatar's consumer price index had risen at an annualised rate of 2.7 per cent last month, up from 2 per cent in September. The rate of price increases was the highest since September last year and above the IMF forecast of 2 per cent.

Crucially, the spike means the bond is returning a negative yield in real terms for those using local inflation as a benchmark, essentially meaning bond investors are paying QNB to borrow its money.

For equity market investors, who have seen the QE Index slump 3.8 per cent during the year to date, the sense of diminished returns is also prevalent.

"Qatar has been the fastest-growing economy in the world over the past five years," said Mark Krombas, the vice president and head of Mena equities at Qatar Insurance Company. "But ultimately, what we're seeing is a realisation that returns in Qatar are going to go from super-normal to normal."

Among those companies directly involved with preparations for the World Cup, generating returns has also been difficult.

The country's fixed deadline for completion of its projects had previously convinced some investors that construction firms should be able to extract any price they wanted from Qatar's government. But the high level of competition means contractors whose businesses are struggling amid sluggish global growth will be forced to accept a lower price to strike deals, said Franco Danesi, the head of special situations at the investment bank QInvest.

"Because there's not much going on elsewhere, people want to come here to make sure they're awarded projects," he said. "The fall in margins may be substantial."

Atkins, a British engineering group that is a major player in Qatar's 2022 preparations, has reported falling operating margins across the Middle East during the six months until the end of September in its latest trading update and has attempted to diversify its Qatar operations into telecommunications infrastructure. "Our Middle East business has had a difficult first half," the company said. "We experienced delays in capital projects and programmes coming to market, coupled with protracted negotiations on variations to major contracts in the region."

One company that is increasing returns from Qatar has done so by effectively eating into the government's main source of wealth - receipts from sales of its huge natural gas reserves.

Italy's Edison, a unit of France's EdF, renegotiated a 25-year supply contract with RasGas, generating estimated savings for the firm of €598 million (Dh2.79bn) in the first nine months of this year.

It is a concern the country's government is clearly alive to.

Qatar's growth over the past decade has been astonishing by any standard but it was predicated upon the inviolable deals struck with international partners, said Yousef Hussain Kamal, the minister of economy and finance, in a speech in Doha on Monday.

"These contracts are above all laws," he said. "Here, I have given security for every investor signing with the state of Qatar and I encourage these investors because the contract they will be signing with the government will be the law."

Other gas companies are also attempting to renegotiate contracts to delink gas prices, currently depressed as a result of increased Qatari supply, from oil contracts that serve as a basis for pricing.

Tokyo Gas has criticised the linking of liquefied natural gas contracts to oil prices, saying it was inflating Japan's import bill as the country switched away from nuclear power after the Fukushima earthquake last year.