Research SABBNotes Notes SABB March 2008

Qatar: a gas-fired economy
High growth, high inflation, big ambitions.

Qatar has the fastest-growing economy in the Middle East The gas, construction and financial services industries continue to boom But rent, food and wage rises are fuelling double-digit inflation

Prosperity brings pressures
No GCC country has a faster-expanding economy than Qatar, with real GDP growth expected to achieve 14.3% in 2008 and 13.5% in 2009. Indeed, the rate has been close to 10% for seven years now, during which time the population of Qatar has risen to 950,000 – around 25% of whom are Qatari citizens, with the rest a mix of expatriates from various countries. Qatar’s economy is expected to remain buoyant, as Qatar’s liquefied natural gas (LNG) industry takes hold and additional oil capacity leads to increased export volumes. Output of associated natural gas condensates will also increase, along with other gas-based industrial ventures, particularly in petrochemicals. Further economic growth is being fuelled by an ongoing rise in domestic demand, mainly due to expansion in the construction and financial services industries. Government expenditure will continue to grow strongly in 2008, as capital programmes in education, health and transport give the economy a boost. This additional spending also triggers more private consumption, since 96% of Qatari workers are employed by the state. As far ahead as 2012, the economic outlook is very strong, with our forecast for real GDP growth projected to average over 11% per annum. Fiscally, Qatar will register another surplus in 2008, even on an oil-price assumption of just $45 per barrel. But success comes at a price. Due to sustained expansion, as well as demand outpacing supply, serious constraints on capacity have created inflationary pressures. The rise in inflation in 2007 was again due largely to escalating rents as a result of housing shortages, as well as high aggregate demand, and rising wages for both nationals and expatriates.

13 March 2008
Dr. John Sfakianakis Chief Economist Tel: +966 1 276 4602 Email: johnsfakianakis@sabb.com This and other publications can be downloaded from: www.sabb.com

Disclaimer These Notes should be read in conjunction with the concluding Disclosure appendix and Disclaimer, which form part of them.

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Research SABB Notes March 2008

Economic Growth 16 14 12 10 % 8 6 4 2 0 2003 2004 2005 Real GDP (left scale)
Source: Central Bank of Qatar, SABB estimates

100 80 60 40 20 0 2006 2007e Nominal GDP (right scale) 2008f 2009f

Although supply-side pressures could subside in 2008, inflation is still expected to reach 11.5%. In 2009, we expect the supply of housing to achieve a degree of equilibrium and more new infrastructure to come on stream. As a result, inflation is expected to fall into the high single digits. The introduction of a 10% cap on annual rent increases for a two-year period was not especially successful in mitigating rental inflation – and it was phased out in February 2008. Similarly, both Abu Dhabi and Dubai have been unable to control rent rises through capping schemes. But the underlying problem of real estate inflation in Qatar will be addressed when additional housing units come on to the market. The September 2007 price freeze on wheat flour and wheat products may even add to inflation, as price freezing could increase demand from consumers, yet discourage suppliers.
Inflation Basket

Stability and security
Given that inflation persists, the authorities in Qatar and across the GCC could attempt to lower demand pressures by restricting wage increases and phasing the implementation of large projects over the medium term. Qatar can afford to slow down project development as employment generation is not the key goal, so much as creating labour incentives for Qatari nationals in the private sector. But we still expect that, through 2010, Qatar will see construction projects totalling an estimated $82.5 bn – despite the measures it has taken to reduce building costs by waiving customs duty on the import of steel, cement and gravel from outside the GCC. As a result of the construction boom, GCC producers have been exporting building materials to Qatar in search of higher profit margins – which
Inflation and Money Supply

30 25 20 15 10 5 0 -5 -10

14 12 10 8 6 4 2 0

50 40 30 20 10 0 2003 2004 2005 2006 2007e 2008f 2009f %

Food, Clothing and Beverages Footwear and Tobacco

Rent, Fuel and Energy

Furniture, Medical Care Transport and Entertainment, Textiles and and Medical Communications Recreation Home Appliances Services and Culture

%

Inflation (left scale)
2003 2004 2005 2006

Money Supply (right scale)

Source: Statistics Department of Qatar

Source: Central Bank of Qatar, SABB estimates

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(USD bn)

Research SABB Notes March 2008

Exports, Imports and Current Account

90 80 70 60 50 40 30 20 10 0

2003

2004

2005

2006 2007e
Imports (left scale)

2008f

2009f

35 30 25 20 15 10 5 0

Exports (left scale)

Current Account (right scale)

In April 2003, the US Combat Air Operations Centre for the Middle East was moved from Prince Sultan Airbase in Saudi Arabia to Qatar’s Al Udeib Airbase, south of Doha. Al Udeib acts as a logistics hub for US operations in Afghanistan, as well as the key command centre for ongoing operations in Iraq. The Qatar facility is the world’s largest pre-positioning base for US military equipment.

(USD bn)

Source: IMF, SABB estimates

(USD bn)

has led to shortages and market distortion in their own countries. A case in point is Saudi clinker exports to Qatar, which created price and quantity distortions in the Saudi clinker market during 2007. As is common across the GCC, recession in the US economy should not adversely affect Qatar’s expected growth in 2008. High oil prices will help the GCC remain decoupled, although we do believe that Qatar will retain its currency peg to the US Dollar in the period leading up to GCC monetary union. Regarding the exchange rate level, we do not expect a change in 2008, despite forwardrate signals to the contrary. Qatari exports are substantially dependent on hydrocarbons, which makes the case for revaluation less convincing at this juncture. The need for a continuing focus on the US Dollar will be lessened by diversification away from hydrocarbons, by shifts in the relative strengths of currencies, by changing trends in the placement of financial assets, and by the wider geo-political and security situation across the GCC. In 2006, hydrocarbons accounted for 89% of total exports and 64% of total export revenues. Downside risks to the robust growth scenario for 2008 include lower oil and gas prices and/or a deterioration of geo-political conditions in the Gulf. Qatar enjoys a solid defence partnership with the US, which serves to support the country’s sovereignty in the face of regional security worries.

Growing markets for cleaner fuels
With 14% of all known reserves, Qatar is the third most gas-rich nation, after Russia and Iran, and is the world’s largest exporter of LNG. Indeed, most of the natural gas Qatar produces is exported in the form of LNG – the majority currently destined for China, India, Korea and Japan. Through 2012, Qatar will invest more than $90 bn in the gas sector, which will result in a tripling of LNG exports. The LNG programme is driven by several joint-venture projects, involving Qatar Petroleum and a variety of major foreign energy firms, headed by Qatar Liquefied Gas Company (Qatargas) and the Ras Laffan Liquefied Natural Gas Company (RasGas). Meanwhile, oil-production capacity is expected to reach 1.1 mbpd by 2010, after investments worth $5.5 bn in the Al-Shaheen field. Qatar’s crude oil exports are mainly directed to Asia (97% in 2006), but the country’s reliance on crude oil exports is expected to decline after oil production peaks around 2010 and exports of condensates continue
Projected Oil and Gas Exports

100 80 60 40 20 0

(USD bn)

2007

2008

2009

2010

2011

2012

Crude oil

LNG

Condensates

Propane and butane

Others

Source: Qatar Petroleum, SABB estimates

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Research SABB Notes March 2008

Qatar's Contracted LNG Exports (mtpa)
Destination (Supplier) Japan (Qatargas 1) Korea (RasGas) India (RasGas II) Italy (RasGas II) Spain (Qatargas 1) Spain (Qatargas 1) Spain (RasGas II) Belgium (RasGas II) Belgium (RasGas II) Taiwan (RasGas II) UK (Qatargas II) France/UK/USA (Qatargas II) USA (Qatargas 3) Total SPAs Heads of Agreement USA (RasGas 3) USA (Qatargas 4) Japan (Qatargas 4) Total HoAs Grand Total
Source: Qatargas, RasGas and QNB

2002 6.3 4.9 1.2 12.4 12.4

2003 6.3 4.9 1.1 0.1 12.4 12.4

2004 6.3 6.8 2.5 1.3 0.8 17.7 0.4 18.1

2005 6.3 8.8 3.8 2.2 0.7 0.6 22.4 0.7 23.1

2006 6.4 8.8 5.0 2.6 0.5 0.8 24.1 0.7 24.8

2007 6.6 8.8 5.0 2.9 0.8 2.6 1.5 28.2 0.7 28.9

2008 6.6 8.9 5.0 3.5 2.9 0.8 3.4 2.1 1.2 4.5 38.9 1.0 1.0 39.9

2009 6.6 7.0 5.6 4.7 2.9 0.8 3.4 2.1 2.5 7.7 7.7 3.5 54.5 8.1 8.1 62.6

2010 6.6 7.0 7.5 4.7 2.9 0.8 3.4 2.1 3.0 7.9 7.9 7.5 61.3 10.8 5.3 16.1 77.4

2011 6.7 7.0 7.5 4.7 2.9 0.8 3.4 2.1 3.0 7.6 7.6 7.7 61.0 10.2 5.3 0.9 16.4 77.4

2012 6.7 7.0 7.5 4.7 2.1 0.8 3.4 2.1 3.0 8.0 8.0 7.7 61.0 10.2 5.3 0.9 16.4 77.4

Sales and Purchase Agreements

to rise sharply, along with increased production of low-sulphur diesels through GTL technology. We estimate that by 2012, crude oil will comprise only 24% of hydrocarbon exports, whereas LNG and condensates will account for 54%.
Anticipated Investment Projects in the Hydrocarbon Sector, 2007–2012

The creation of a GCC-wide gas grid originating in Qatar remains a distinct possibility – and Saudi Arabia would be one of the main beneficiaries. The Dolphin undersea natural gas pipeline project is now operational and connects the gas networks

Total cost (USD bn) Gas Qatargas 2 (LNG) Qatargas 3 (LNG) Qatargas 4 (LNG) Rasgas, North Field development (LNG) Dolphin gas project Pearl GTL Oryx GTL Oil New Ras Laffan refinery Al Shaheen field EPSA Al Shaheen refining project Petrochemicals Qatofin Complex with Honam Petrochemical Qafco QChem2 Qapco ExxonMobil petrochemicals Shell petrochemicals GE petrochemicals
Source: Qatar Petroleum, SABB estimates

Expected completion 2008 (Q2) 2009 (Q2) 2010 (Q4) 2008–2009 2011 2007 2008 2009

90.5 13.8 8.3 8.3 34.8 3.9 19.6 1.8 8.2 0.8 5.2 2.2 32.1 1.4 4.2 15.4 2.3 0.6 3.7 3.6 2.2

2008 2010–2011 2010 2008 2009–2010 2012

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Research SABB Notes March 2008

of Oman, the UAE and Qatar. The second phase of the project involves increased volumes of piped gas to the UAE, whilst gas from Qatar to other GCC destinations is a possibility for the future – which could help solve the region’s gas supply problems in an environment of ever-increasing demand from the power-generation and other industries. Currently, Qatar remains contracted to supply 2 mn cu ft/d to the UAE, despite calls for an increase to 3.2 mn cu ft/d. By around 2010, we would expect the Government to have ended the moratorium (introduced in 2005) on new greenfield gas projects – paving the way for new LNG and, possibly, GTL schemes. However, the state-owned Qatar Petroleum has repeatedly expressed its commitment to ensuring the careful management of the North Field’s gas reserves. Looking ahead, Qatar’s profile in the international gas market is set to rise further as the global demand for cleaner forms of energy grows – with Qatari LNG, a relatively clean fuel, likely to become increasingly popular. Moreover, Qatar’s role as an additional exporter to Europe is likely to improve Europe’s energy security by diversifying its supply to reduce dependence on Russia. As a feedstock for industrial development, natural gas is an economically sound alternative to the crude oil and fuel oil on which many plants still rely. Qatar’s construction of a 1.2 mn t/y aluminium plant is well under way – at an estimated total cost of $6 bn – and it is expected to commence partial operations in 2009, becoming fully operational the following year.

Infrastructure and real estate
Infrastructure projects will continue to be a blessing that creates domestic demand, as well as a curse that adds strain to the economy. The New Doha International Airport, for example, which will have the capacity to handle 50 million passengers by 2015, is currently in its first phase of development and will receive $2 bn of investment by 2009. Qatar also continues to expand its capacity to generate power and 2008 will see the completion of IPP-2, adding 2,000 MW of power at a cost of $2 bn. By 2010, Qatar hotel-room availability in the luxury sector is set to exceed 8,500 rooms. Meanwhile, the country’s house-building programme has gathered significant momentum since the change in property legislation in 2004 which, for the first time, allowed foreign nationals to buy one or more houses for 99 years, renewable for a similar period, in selected housing projects. Saudi investments in the real estate sector currently amount to an estimated $1.1 bn and rising. Construction on the first of these, the $2.7 bn Pearl-Qatar project, began in 2004 – and on completion in 2009, it will offer luxury accommodation for 40,000 international residents, as well as schools, shops, restaurants and several marinas. Work on a larger project has also started: the $6 bn Lusail development will eventually house around 200,000 people. Finally, work on Al Khor multiresidential scheme is also under way, with an estimated total project cost of $5 bn.

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Research SABB Notes March 2008

Sovereign wealth
The Qatar Investment Authority (QIA) was established in 2000, under the control of the Qatari Government. It has invested assets of $65 bn – predicted to rise to $105 bn by 2010. Besides the recent investment in Credit Suisse (less than 3%), QIA has acquired a near-10% holding in the Nordic Exchange OMX, almost 24% of the London Stock Exchange and 5% in

Singapore’s Raffles Medical Group. It also made a joint-investment with Dubai International Capital to secure a 3.12% stake in EADS. In the UK, investments include the acquisition of four leading chains of nursing homes for approximately $5 bn. Within its own country, QIA has a 50% shareholding in the Qatar National Bank and owns 50% of Qatar Telecom. We expect that QIA will continue to diversify its investments throughout the region and the world, as well as within Qatar itself.

Qatar: Macro Data and Forecasts
2003 GDP Nominal GDP (USD bn) Real GDP (%) Expenditure on GDP (% real change) Private consumption Government consumption Gross fixed investment Population and income Population (mn) GDP per capita (nominal) USD Recorded unemployment (average %) Fiscal indicators (% of GDP) Central Government revenue Central Government expenditure Central Government balance Net public debt Prices and financial indicators Exchange rate QR : USD (end-period) Consumer prices (end-period %) Broad Money supply M3 Lending interest rate (average %) Current account (USD bn) Goods exports Of which: Crude oil LNG and related exports Goods imports Current account balance External debt (USD bn) Debt stock Debt service paid Principal repayments Interest International reserves (USD bn) Total international reserves Net foreign assets (USD mn) QCB
e: SABB estimate, f: SABB forecast

2004 32.1 6.5 33.6 -3.7 3.1 0.7 45.850 2 47.9 31.4 16.5 27.9 3.64 7.1 20.8 4.9 20.7 9.7 6.5 8.3 7.1 15.6 1.9 1.6 0.4 3.4 3.359

2005 42.4 9 28.3 12.5 51.0 0.8 53.192 1.5 42.4 31.2 9.2 19.5 3.64 8.9 42.9 6.4 27.4 14.1 8.7 13.3 14.2 22.4 2.8 1.8 0.8 4.6 4.555

2006 52 9.6 16.0 10.0 12.5 0.85 61.173 0.9 42.3 33.6 9.7 15 3.64 12.8 39.6 7.3 38.8 17.8 13.3 21.3 16.4 28.6 3.1 1.8 1.3 5.4 5.410

2007e 63.8 13.8 14.5 8.5 12.7 0.9 70.884 0.7 44.1 34 7.5 12.7 3.64 12 43.3 7.7 50.3 22.7 18.2 26.7 22.3 33.1 3.8 1.9 1.7 10.2 6.496

2008f 74.1 14.3 12.5 8.2 10.1 0.95 78.157 0.6 43.2 34.9 8.3 11.2 3.64 11.5 35.1 7.7 65.6 26.1 20.8 36.4 27.5 39.5 4.1 2.1 1.6 11.9 7.398

2009f 89.4 13.5 10.0 8.1 8.8 1.2 74.569 0.5 38.8 32.2 6.6 9.8 3.64 9.8 29.7 8.1 79.3 24.8 19.9 48.1 30.2 44.6 4.8 2.6 1.7 12.4 8.102

23.2 6.5 6.4 -1.1 84.3 0.7 33.141 2.5 35.4 31.5 3.9 41.3 3.64 2.5 5 4.7 14.7 7.5 4.6 6.7 5.9 13.4 3.9 3.4 0.4 3.0 2.873

Source: IMF, International Financial Statistics, Qatar Central Bank (QCB), SABB estimates and forecasts

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Research SABB Notes March 2008

Notes

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Research SABB Notes March 2008

Disclosure appendix
Analyst certification
The following analyst, who is primarily responsible for this report, certifies that the opinion(s) on the subject security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal views and that no part of their compensation, was, is or will be directly related to the specific recommendations or views contained in this research report: Dr. John Sfakianakis. This report is designed for, and should only be utilised by, institutional investors. Furthermore, SABB believes an investor’s decision to make an investment should depend on individual circumstances such as the investor’s existing holdings and other considerations.

Additional disclosures
1 This report is dated as at 13 March 2008 2 All market data included in this report are dated as at close 11 March 2008, unless otherwise indicated in this report. 3 SABB has procedures to identify and manage any potential conflicts of interest that arise in connection with its Research –––business. A Chinese Wall is in place between the Investment Banking and Research businesses to ensure that any confidential –––and/or price-sensitive information is handled in an appropriate manner.

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Research SABB Notes March 2008

Disclaimer
This report is prepared for information only. Where the information contained in this report is obtained from outside sources, SABB believes that information to be reliable. However, SABB does not guarantee its completeness or accuracy. The opinions expressed are subject to change without notice and SABB expressly disclaims any and all liability for the information contained in this report. The report only contains general information. It should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. The specific investment objectives, personal situation and particular needs of any person have not been taken into consideration. Accordingly, you should not rely on the report as investment advice. Neither SABB nor any of its affiliates, their directors, officers and employees will be liable or have any responsibility of any kind for any loss or damage that may be incurred as a result of the information contained in this report.

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