These are heady days in the Middle East and the euphoria could last for some time given the stratospheric prices of gas and oil. In fact, the flood of incoming cash is providing a fillip to the initiatives of a number of Arab countries to push the development of services that will reduce dependence on hydrocarbons and transform their economies.
In an interview with The Asset, Stuart Pearce, managing director of the Qatar Financial Centre (QFC) talks about the challenges in building a financial hub to compete with other centres, such as Dubai. He discusses Qatar’s attempt to build a more solid regulatory platform for financial services.
The decision of the Qatari government to formulate unified regulations for its financial markets is being closely tracked in the Middle East and has evoked strong interest, especially from financial institutions building their presence around the region. According to Pearce, this move will be instrumental in transforming Qatar into a vibrant hub for business and finance.
The law to establish a new body is ready to be issued and its board will be peopled by highly respected individuals from the regulatory field, who will supervise the Qatari financial markets.
The move towards a single regulatory platform will help to differentiate Qatar from nearby United Arab Emirates, where multiple regulatory platforms are the norm. Investors coming into Dubai, for instance, often need to deal with several regulators including the Central bank, the Securities and Commodities Authority and in order to establish themselves at the Dubai International Financial Centre (DIFC), they have to deal with regulators such as the Dubai Financial Services Authority (DFSA).
Pearce explains that Qatar has three regulatory bodies today but the plan is to merge them all together under one body called the Qatar Financial Regulatory Authority (QFRA), whose operations will be based on international standards.
Under the plan, the Qatar Financial Centre Regulatory Authority (QFCRA) will be merged with the regulatory department of the Central Bank and the Qatar Financial Market Authority (QFMA), which currently supervises the securities market. “Just like a regulatory supermarket, they will now come together to supervise the banks and all the other regulated financial institutions.”
Pearce says that as a new body, QFRA will enjoy a legal and regulatory structure that is unique in the Middle East. Its members will include QFCRA board members, including Andrew Sheng, former chairman of Hong Kong’s Securities and Futures Commission; Lord Harry Wolf, who heads the court system and William Blair, who runs the regulatory tribunal. “What we are attempting to do here is bring together a very interesting collection of people and let them supervise our markets.”
Qatar investment Authority
One of the key players in Qatar’s rapidly changing economic scene is its sovereign fund, the Qatar Investment Authority (QIA). A research report from Standard Chartered Bank, quoted by Bloomberg says that the US$60 billion sovereign wealth fund, which is backed by the Qatar government, is expected to double in size by 2010 with up to 40% of its investments in Asia and the rest in Europe and the US.
The group has aggressively invested in international exchanges, having invested in a 9.98% stake in the Nordic and Baltic exchange OMX and having built up a 23.5% holding in the London Stock Exchange (LSE), after buying 3.5% of NASDAQ’s shares to add to its existing 20% stake. QIA's other investments include a 100% ownership of Four Seasons Healthcare in the UK; a 5.1% stake in the French company Lagardere; a 97.3% holding of BLC Bank in Lebanon and a 5% share in the Singapore-based Raffles Medical Group. It was a co-investor in Dubai International Capital's July 2007 purchase of a 3.12% stake in European Aeronautic, Defence & Space Co (EADS). According to Standard Chartered, QIA is one of the world's most guarded sovereign funds along with those in the UAE, Kuwait, China, Qatar, Brunei, Venezuela, Taiwan and China.
Institutional constraints
Qatar’s move towards an integrated regulatory body has been welcomed by the international community even as the disappointment over how Qatar runs itself continues. The rating agency, Standard & Poor’s, for instance, says the decision to create a single regulator for the country’s financial markets shows how rapidly the situation is changing in some sections of the country.
Standard & Poor’s nonetheless says there are still significant institutional constraints that make the country much less competitive than it should be. In a report released in March, the rating agency notes that while the country has embraced reforms, decision-making remains concentrated to only a few in the country and this has contributed in a significant way to capacity constraints and lack of transparency.
The agency notes that despite the ambitious plan to develop the country’s hydrocarbon and non-hydrocarbon resources, the country still lacks executives and managers who can handle the administration of public institutions that will steer that ambition. The country remains weak when it comes to accountability, transparency and oversight policy as compared to most AA-rated sovereigns, according to the agency.
The agency has also cited issues pertaining to transparency of the macroeconomic statistics that Qatar publishes and the absence of published data about most government external assets. Hence, there are clearly huge institutional weaknesses in the economy.
There are a variety of reasons, all very compelling, why Hong Kong and Singapore now thrive as financial centres at the expense of their other Asian rivals. Their unique attractions are something that Middle Eastern states such as Qatar hope to emulate.
Other states such as Abu Dhabi, Bahrain, and Riyadh, are keen to narrow the regulatory and infrastructure disparity and have launched their own strategies to attract investors. They realize that the success of Hong Kong and Singapore is not just about how much financial resources they earmarked for building their magnificent infrastructure or how successfully they lured the highest number of financial institutions to locate themselves in their jurisdictions. There were other elements that clearly contributed to the success, often too subtle to detect.
The bid for building a financial centre in the region is an interesting development but also fraught with challenges. There are fears that the development activities toward building financial hubs might not be sustainable in the long run, especially when the construction stops and the country ends up with white elephants that are just too expensive to maintain. There is still something of a touch of Potemkin in the giant construction boom underway at these hubs in the Middle East.
And then there are the basics. Inflation continues to go up and the cost of building the talent pool for what are considered the sunrise industries such as investment banking, property and tourism can be very expensive. The more ambitious hubs such as Dubai and Qatar, have done a good job when it comes to selling themselves to the outside world as new financial gateways, a financial oasis for the Gulf States that are already among the richest countries in the region.
Pearce of QFC says that finding the right mix of policies to attract financial institutions and investors can often be difficult, but Qatar knows what needs to be done. When the government decided a few years back to establish a financial centre, it immediately started working towards raising legal and regulatory standards.
It is the objective to set up a legal environment that is easily understood by foreign companies that has driven the initiative to unite all the regulatory bodies under one roof. “We recognize the need to improve the business environment and bring our practices at par with international standards.” The need to effectively enforce laws is also critical, Pearce adds.
Pearce says that for many companies, legal transparency has become a prerequisite for doing business in a financial centre outside their home countries.
During his interview with The Asset during his visit to Hong Kong in mid-April, Pearce devoted considerable time differentiating Qatar from its rival Dubai, which has been attracting the maximum media attention all over the globe. Pearce says the DIFC and the QFC are worlds apart in the nature of their business platforms and vehemently rejects any suggestion that the QFC has been copying Dubai’s model of attracting business.
“We are definitely not a copy of Dubai,” he says, adding that unlike DIFC, the Qatar Financial Centre is not an offshore centre and is neither a free zone for finance companies, which translates into better deals for companies operating in Qatar. “Unlike Dubai, where there are a lot of restrictions in what a company can do or not do, there are fewer do’s and don’ts in doing business in Qatar. There are no restrictions on doing business in the local currency, and so retail and insurance are quite open, and they can be done not only domestically but also regionally.”
This is the reason, he says, why the QFC platform has become much more interesting for investors in recent months. “It is a market that is developing very fast against the backdrop of an economy that enjoys real sustainability with its 200-year supply of natural gas. These factors, among other things, set the country apart from most economies in the Middle East.”
Standard & Poor’s noted in its report in March 2008 that Qatar’s creditworthiness is unique among the states of the Gulf Co-operation Council. Along with its substantial gas and oil resources, the state also pursues a proactive policy of investing the proceeds of its revenues. This has led to a high GDP per capita that is expected to reach US$75,800 this year, making its people one of the richest in the world. The growth in the country has been extremely robust in the last eight years. In 2000, the country’s GDP was only US$8 billion, but increased to US$30 billion in 2005 and in early 2008 hit about US$60 billion. It is forecast that in three years time, GDP will reach US$100 billion fuelled by huge oil revenues.
The government has embarked on a massive spending spree to improve the country’s infrastructure, and plans to spend a least US$140 billion in the next five years. “While we are also developing our capabilities and infrastructure for hydrocarbons, much of the money also now goes to education, transport, water and power.”
There are concerns. Qataris are still too dependent on hydrocarbons for their economy and that is not likely going to change for a long time. In their report, Standard & Poor’s say that inflation worries has been somewhat mitigated by the relatively low-labour costs and because of the weak US dollar to which the currency is pegged.
The country is quite vulnerable to price spike-ups given that authorities have limited tools to combat inflation. Inflation jumped to around 12.8% in 2007 mainly because of the weakness of the US dollar and a surge in property rental prices and the figure is expected to climb to around 14% this year.
Inflationary pressures, according to Standard & Poor’s, remain quite high given that the country continues to enjoy very high domestic demand. The inflow of expatriates and the expansionary fiscal policy due to rising wages and pensions for nationals will continue to exaverbate demand-pull inflation, the rating agency says.
Pearce says there are many reasons why companies locate to Qatar. A key attraction is the tax structure, which has been widely praised as easy to understand and has sometimes proved to be more attractive than that offered by its rival Dubai, which has a zero tax regime but nonetheless charges corporates about a tenth of 1% of every US$1 million sales they generate at the DIFC. Pearce says QFC–registered corporates pay only 10% for locally-sourced income and there is no tax on reinsurance and captives.
According to Pearce, the subprime credit crisis seems to have hardly had any impact on Qatar, adding that during the first three months of the year they received applications and queries from at least 80 financial institutions on how to establish themselves in the country. During the period, Industrial Commercial Bank of China, the biggest bank in the world in terms of capitalization, established a full-service branch in Doha, the capital city. Pearce says the uncertainty in London and New York might turn out to be good not only for Qatar but also for the whole of Middle East as people might decide to move to this region. “We need all the good people we can get to achieve our goal of establishing a viable financial centre for Qatar.”
