Qatar’s “open market” is “committed to free trade” and“warmly welcomes foreign investors” to help diversify the economy, according tothe Ministry of Business and Trade’s Investment Promotion Department’s latestreport, “Rise With Qatar”. In other words, very much standard fare forinvestment promotion boards around the world.
Despite the rhetoric, while Qatar’s major spending spree oninfrastructure and hydrocarbon projects are certainly generating much interestand opportunities, away from such sectors the options for private investors arerather restricted.
“Opportunities are limited to high level projects like roadsand railways, and while local players can’t do it all there is a need to createspace for private companies to develop,” said Narayanan Ramachandran, head ofadvisory for Bahrain and Qatar at consultancy firm KPMG. “The challenge is thatthe percentage of private activity needs to increase. Government andquasi-government sectors dominate so the private sector needs to grow.”
The Qatar Exchange (QE) is still off-limits to foreigners —Gulf Cooperation Council citizens are entitled to 25 percent of shares in afirm — while setting up a business has a $55,000 [AED 202,015] price tag, 100percent foreign ownership is restricted to specific sectors, other venturesrequire 51 percent ownership by a Qatari national, and bankruptcy laws arevague. Even purchasing property, confined to 18 areas for foreigners, does notgrant much security, with only a few ownership deeds having been issued and theresidency permit that comes with a property “just an open-ended tourist visa,”as one analyst put it.
“Qatar seems first world but in reality [it is] not thatopen. From the outside, Qatar looks like a good and free market, but to buy anythingyou have to go to this or that guy with the experience and the connections.There are many monopolies to contend with,” added the analyst.
Hopes that foreign investors would have greater access tothe market were dashed in early May when the Advisory Council opposed agovernment proposal to allow non-Qataris to invest in exclusive dealershipsselling foreign goods and services. “Any move to permit non-Qatari capital inexclusive dealerships would gravely endanger Qatari businessmen,” the AdvisoryCouncil said in Qatari daily The Peninsula.
The move was criticized anonymously in the press as ensuringthe existence of monopolies and curtailing competition, with the ruling pushedforward by several prominent local businessmen that are members of the council.
Sectors where foreign investors can have 100 percentownership are restricted to “priority sectors,” namely business consultingtechnical services; IT; cultural, sports and leisure services; distributionservices; agriculture; manufacturing; health; tourism; development;exploitation of natural resources; energy and mining.
“The government increased this year the number of sectorsthat can be invested in — over 49 percent — for foreigners. The authoritiesknow the restrictions are not helpful for encouraging investment, but they needto bring the local constituency along with them over time,” said AndrewWingfield, a partner at international law firm Simmons and Simmons in Doha.
Despite the seemingly broad swathe of investmentopportunities now on offer in Qatar, barriers to new foreign businesses arestill considerable.
Limited liability companies (LLCs) that want to set up inthe country are required to have a paid-up capital of QR200,000 [$54,913 orAED201,695].
“That is expensive, even before you open the business’sdoor, but the rationale is that it stops the fly-by-nights and [ensures] thebusinesses that come here will be serious,” said Wingfield. “But for LLCs toborrow from local banks, the Qatar Central Bank (QCB) will not allow lendingunless shareholders give a guarantee. Such a requirement is not mandatory inmany other jurisdictions but it is in Qatar. It could be said to be a veryprudent move to protect the banks, but it is another hurdle to investment.”
The message being put out is that companies have to bewilling to pay to get in on the action. While this flies in the face of thecountry’s propounded open market, it reflects a protectionist approach, whichis not necessarily a bad thing if well regulated and transparent. Indeed, it isa policy widely used by developing countries to build up their economies, asSouth Korea has done and is still doing, albeit primarily to protect theindustrial and manufacturing sectors.
“There is a degree of protectionism on one side, but thereis the intent by the government to open up sectors to be competitive that werenot,” said Anil Khurana, director of Operational Strategy and Private Equity atmanagement consultants PRTM. “For instance, on the automotive side, the primeminister said in the future there will be no exclusive dealerships and therewill be competition.”
Yet while the economy is set to open up more, currently GCCcompanies are not being given preferential treatment, despite the supposedtenets of the Gulf common market that allow for the free movement of GCCcompanies and citizens. “There is a new law to allow GCC companies to set upbranches in Qatar, but we’ve not seen the law yet. That should help business asat the moment they need a subsidiary,” said Wingfield.
That said, there are some 289 Saudi Arabian companies inQatar and later this year a trade delegation comprising more than 100businessmen from the kingdom is slated to visit Doha to scope out thepossibilities of joint ventures, bag infrastructure contracts related to theWorld Cup and discuss the establishment of a joint Saudi-Qatari bank. GivenQatar and Saudi Arabia’s recent political rapprochement, this could signalpreferential tenders to Saudi companies, said an investment analystoff-the-record.
Regulatory constraints
On top of the high entry requirements for businesses, theQCB in April implemented stricter regulations on Qatari banks’ retail lendingto help reduce leverage in the retail segment. Personal loans were capped atQR2 million [$549,000 or AED2 million] for Qataris and QR400,000 [$109,000 orAED 400,357] for expatriates, limited to 72 months and 48 months respectively,and equated monthly installments are not to exceed 75 percent of a Qatari’s monthly income or 50 percentof an expatriate. In the short-term such a move will restrict retail lendingand impact on banks margins, but in the long-run it is expected to improveasset quality and prevent the level of defaults that abounded in the wake ofthe financial crisis.
“The limit on lending to individual customers and thecapping of interest rates will clearly have an impact on the banks. These aregoing to impact the volume of growth the banks can procure, and obviouslyimpact our rate of profitability,” said Commercial Bank Chief Executive OfficerAndy Stevens to the Gulf Times following the QCB’s decision.
QCB’s orders came just months after a harder impact on theQatari banks, when in February the central bank ordered 16 commercial banks towind down their Islamic banking units by the end of the year. QCB justified themove by citing the difficulty to regulate the two financial sectors, with theconventional banks having to abide by Basel requirements while the Islamicbanks are following guidelines issued by the Malaysia-based Islamic FinancialServices Board.
While the move will benefit the country’s three dedicatedIslamic banks, it is being viewed in a negative light by international lendersin the advent that other regional central banks follow suit. It has also sentmixed signals to the banking sector while raising concerns over QCB’sregulatory abilities as it stated it got “mixed up” in monitoring both bankingsectors.
And while the ruling was to be expected, it was doneovernight without consulting the banks. “It had been discussed by [QCB] for thepast three years, but the timing and speed with which it happened was notexpected by the banks,” said Ramachandran. “Whether the directive will beachieved by the end of 2011 is still too early to tell.”
The directive had particular sting for HSBC’s Islamicbanking unit, Amanah, which was set up just seven months prior to theannouncement and prompted the global bank to seek a “workable solution” withQCB.
A further issue in the financial market is that the centralbank has not created a single integrated regulatory body to oversee all bankingand financial services in the country, which was intended to bring in the QatarFinancial Center (QFC) under the same regulator as QCB.
QFC was established in 2005 to attract internationalfinancial institutions to Doha that were to operate separately from local banksand be independently regulated by the QFC Authority (QFCA), which is based onbest practices in international financial centers such as London and New York.The intention to unify the framework was announced in July 2007, but four yearson it has yet to be implemented.
“One challenge in the market is the integration of theregulatory framework of the QCB with the QFC, but we are not aware of thetime-line,” said Ramachandran. “And while the QFC has certainly attractedservice providers, the question now is the strategic thinking of overallregulations and the differences between the local players regulated by the QCBand the banks by QFC.
“I also think the QFC has to do wider business than justQatar (if it wants to be a regional financial hub), as it is looking first atthe local market. Qatar has to consider how to get that regulatory frameworkright and attract more regional players. So far, QFC’s framework is to bring inestablished players with a certain pedigree and not for new financialinstitutions.”
The financial viability of the QFCA has also beenquestioned, with the body not including their balance sheet in the 2010 reviewfollowing reports that the QFC relied on state funding and was not breakingeven.
With Qatar dragging its feet on the unified regulatoryauthority, some consider that Doha has missed the boat in terms of attractingmore financial service providers, particularly over the past few months whenDoha had the chance to poach players away from the established financial centerof Manama amid the political unrest in Bahrain, and before that from Dubai inthe wake of its debt crisis. As law firm Clyde and Co. noted about the benefitsof the establishment of a unified regulator: “Such a move is likely to benefitinternational financial institutions in doing business within the region. It isalso likely to give Qatari institutions a competitive advantage in the mediumterm as those businesses adapt to a more competitive international regulatoryenvironment.”
