Economic Analysis - Price Pressures To Remain Manageable - NOV 2017

BMI View: The Qatari government will continue to absorb added import costs linked to the r eorganisation of supply chains - necessitated by fellow GCC-members ' boycott against the country - limiting the impact of the ongoing diplomatic crisis on prices over the coming quarters. Meanwhile, Qatar's central bank will continue to track the US Fed's monetary tightening cycle closely through to 2019, given the riyal's dollar peg.

We expect price pressures in Qatar to remain manageable over the quarters ahead. The ongoing diplomatic crisis in the Gulf and resultant restrictions on cross-border movements between Qatar and Saudi Arabia, the UAE, Bahrain and Egypt will add to import costs as supply chains are reorganised. However, we believe the government will absorb most of these in order to ease the effects of the crisis on the local population and businesses. Recent data showed only a small, temporary uptick in inflation following the outbreak of the crisis on June 5 - to 0.8% y-o-y in that month - and a deceleration to 0.2% in July, indicating that this trend is playing out. We also believe that Doha will hold off on fiscal consolidation measures amid the crisis in order to avoid fuelling popular discontent, limiting the likelihood of these putting upside pressure on inflation in the coming months.

Diplomatic Crisis To Have Limited Impact On Prices
Qatar - Breakdown Of Consumer Price Index, % chg y-o-y
Source: Qatar Ministry of Development Planning and Statistics, BMI

Over the next few years, we expect rising hydrocarbon prices to drive a moderate acceleration in inflation. Our Oil & Gas team expects Brent prices to average USD54.0 per barrel (/bbl) and USD55.0/bbl in 2017 and 2018, respectively - significantly higher than the USD45.1/bbl level recorded over 2016. As the government has removed long-standing energy subsidies and linked domestic petrol and diesel prices to global markets, this will add some inflationary pressures in the country. Furthermore, once the diplomatic crisis subsides, the government is likely to move ahead with plans to implement more taxes on goods deemed harmful to human health or the environment in 2017 (including tobacco and sugary drinks) and on certain luxury items.

It is also preparing to introduce a Gulf Cooperation Council (GCC)-wide value-added tax in 2018 - though we believe the inflationary impact of this measure will be relatively limited, given its small size (5%) and the fact that many food items and essential services (including education) will be exempt.

Meanwhile, some of the upward pressure on inflation will be offset by increased housing supply, which has caused housing prices - a key driver of inflation in recent years - to fall in recent months. Overall, we forecast inflation in Qatar to average 2.8% in 2017 and 3.1% in 2018, from 2.7% in 2016.

Qatari Authorities Will Follow US Lead
Qatar & US Central Bank Policy Rates, % eop
Note: Shaded area = BMI forecasts. Source: QCB, US Fed, Qatar Ministry of Development Planning and Statistics, BMI

Rate Differential With The US To Hold Steady

The Central Bank of Qatar (CBQ) will continue to track the US Fed's tightening cycle through to 2019, given the riyal's dollar peg. Following the US Fed's June 2017 hike to its benchmark interest rate by 25bps, the QCB raised its overnight deposit rate by the same the same margin to 1.50%. It chose to keep its overnight lending and repo rates at 5.00% and 2.25% respectively - likely in order to limit pressure on local banks' funding costs in the short term, amid the ongoing diplomatic crisis. We forecast another two hikes each by the US Fed in 2018 and 2019 - and expect the Qatari monetary authorities to broadly follow suit.

Qatar's large foreign reserves - sufficient to cover around 12 months of imports - mean the central bank would be able to defend the riyal's peg to the dollar should the interest differential with the US narrow. Rising energy prices and FIFA World Cup-linked projects are set to push economic activity and inflation up, however, weakening the case for the QCB to delay hikes over the coming years.