Country Risk Analysis - Qatar - Research Paper Example

?There is strong relationship between risk and return in finance. In fact most financial theories and assumptions are based on the relationship between risk and return. In very simple financial theory as the risk of an investment increase so does the expectation of return from that entity. Therefore all investments strive to lower their risk as to increase possibility of increase their investment pool. There are many different types of risks which can impact an investment. Each risk carries with itself a risk premium. A risk premium is basically the compensation paid to investor to undertake that particular risk. Some risks can be diversified away through investing in portfolios of investments which diversify each other’s risk. The risk that can be diversified away is called diversifiable risk or unsystematic risk. On the other hand systematic risk cannot be diversified and is thus also called un-diversifiable risk. Economic and political risk is inherent risks of operating in a country. The economic risk is the risk that economy of that country would change for the worse. This change could be due to bad management or uncomprehend able natural causes, such as reduction in oil prices for a country which has oil as its primary export. Political risk on the other hand points towards the stability in the country. This is the risk that there would be political turmoil in a country which would result in loses on investment. The recent changes in the Arabian Peninsula are changing the shape of Arab politics for ever. There have been major political changes in countries like Egypt, Libya and Syria. These political changes would in due course of time bring positive changes in the region and contribute to the economic stability and wellbeing of local. However these changes have also created a sense and environment of uncertainty in the political environment of the region. There is confusion as to which country would be affected by this political upheaval next. Amongst this political turmoil lies a country of 1.7 million people known as Qatar. The State of Qatar is located in the Middle East and shares its borders with the Gulf and Saudi Arabia. The country is a monarchy controlled by the Al Thani family. Other monarchies in the region are threatened by political upheavals; Qatar is no different due to its political system. However Qatar is still a peaceful country and there have been no apparent signs of any political upheavals. One of the reasons is the sound economic situations of the country. The economy of Qatar is growing rapidly and is considered one of the fasted growing economies of the world. The nation has a per capita annual GDP of 97,000 dollars, which is one of the highest in the entire world. The nation is rich with oil and gas reserves. However instead of simply consuming these resources like many other Arab nations, Qatar has strived to build itself as a strong economic power through development of infrastructure and industry. The economic growth is stable due to a strong inflow of foreign capital due to oil exports. This stability plays a primary role in reducing the financial risk of the country. The purchasing power parity of Qatar according to CIA Fact-book is estimated to be $123 billion. This is an increase of approximately 20% from previous years. Due to a rick economy the locals are not an active part of the country’s workforce. However efforts are being made to bring about a change in this department. The main hindrance in these efforts is the availability of an excellent social welfare system, which allows people to leave lives near 0 % present of poverty. This can be seen by the high per Capita GDP of Qatar which makes it one of the richest nations in the world. The country risk of Qatar has been defined as CRT-3. Risk tier 3 is defined as Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. This means that the country has very low economic risk. This low risk is due to the rapid growth of GDP in the recent past and expectations of a 20% growth in the year 2011. The production of Liquefied Natural Gas has played a large part in this growth. Although over all the carbon fuel reserves of Qatar are not as large as its counterparts but they are still significant. The natural gas reserves of Qatar are however the third largest in the world. Only the populated nations such as Iran and Russia have more gas reserves than Qatar. This represents half of Qatar’s total GDP and over 70% exports. As part of the GCC (Gulf Cooperation council), Qatar aims to improve its business environment to attract more multinationals. There are six other nations in the GCC and the councils aim is to increase inter country cooperation in different sectors amongst member countries. The talks of a common currency are also on the table. There is political enlightenment in the people and there is not eminent threat of any political problem. The reason for moderate rating is mainly the other political problems of the region as a whole. The financial risk for the country is moderate as well. There is an adequate financial regulatory system in place. A recent development has been the creation of a Qatar Financial Centre with aim of regulation of the country’s financial entities. Government also mostly regulates the insurance industry, and there are strong stakes of the government in this industry. The government does not only control the insurance sector but mainly controls most of the economic activity in the country. The oil and LPG production is totally in the public sector. The Country Risk analysis for Qatar given by a Belgium credit Agency ONDD shows the following results given in Figure 3. Figure 3 The risk assessment shows that there is very little risk of any political risk affecting Export transactions. All risk levels as can be seen from the graph above have been divided into 7 risk increments. The lowest risk level is 1 and the highest level is 7. As can be seen the political risk of short term export transactions is only 1 which is the lowest level. The political risk affecting direct investments has been classified into three different categories. This is the risk of war, risk of expropriation and government action and transfer risk. The risk of war in this case is 2. This is because there are general high tensions in the region due to the Iraq crisis, revolution in Syria and Libya. Moreover the region has always had high tensions because of strained relationships amongst Iran and Israel. The risk of expropriation and government action basically points towards the interference of government in businesses. In third world countries it is common practice that governments after undergoing political changes, take a 360 turn on their Foreign Direct Investment policies. A government which was welcoming foreign investments only weeks ago can suddenly adopt a nationalization policy and forcefully takeover all foreign businesses in their countries. The transfer risk points towards risk of losing investments during transfers. Another report COFACE takes another approach to risk analysis of Qatar. The following Macro Economic indicators are shown for the country. As can be seen on the graph that there are five economic indicators which are being used to analyse the economic condition of Qatar. The economic growth is always an important indicator of showing the amount of trust that can be placed in an economy. Stagnant economies have a high risk of collapsing or giving negative growth. As can be seen that Qatar also showed after effects of the 2008 economic recession. The growth in that year reduced from 16% present to only 9%. The positive economic growth in extremely adverse global economic conditions also shows the country’s back bone of taking on risk. The forecast for 2011 however show an even better growth than previous years. The public sector GDP is high as compared to more developed countries of the world; however there is stability in the %GDP. This shows that the government is not working towards a war path of nationalization but is rather focused on improving the national economy by inviting more foreign investments. This reduces risk of expropriation by government. The current account balance as percentage of GDP is also reducing which shows that the economy would become more open in coming years. The percentage of foreign debt to GDP is also stable at approximately 60%. This shows that the country is in no financial trouble and would not weaken its currency by borrowing more money from international markets. Another important indicator of the strength of a currency is the foreign reserves of an economy. The foreign reserves of Qatar were at 2.4 in 2008 and increase to 5.6 in 2009. The value has decrease to 4.6 and would be 4 in 2011. Conclusion The discussion shows that Qatar would continue to dominate a high percentage of growth in the Middle Eastern markets. The main export of the country as discussion above is Liquefied Natural Gas. As this is mostly public sector controlled, the start of two new mega gas liquidation facilities by the Qatari government would increase the country’s exports of LPG. However this would largely also depend on the global demand for LPG. The global demand for all carbon products is expected to remain stable if not grow. The world population has hit 7 billion and the price of oil has still not come down from $100/barrel. Thus it can be expected that there would be a large demand for LPG. A close competition to LPG of Qatar would be from the new concepts of Shale Gas in America. The Shale gas is expected to provide environment friendly gas to the American Economy. This would still not affect the volume of LPG exported from Qatar. However there are possibilities that the margins on LPG exports would come down. This decrease in gross margins would be offset easily by the new oil discoveries recently announced by the government. The Al Shaheen oil field is expected to increase to production of oil in Qatar. When it comes to fossil fuels, the government understands that it cannot rely only on LPG. As has already been seen the shale gas is proving to be a tough competitor to LPG. Therefore Qatar is trying to diversify its exports in order to reduce any risks. The recent investment in infrastructure and petrochemical production (Qatar Chemical Company II) are examples of these diversifications. In this regard winning the draw to host the Soccer world cup was a big leap for Qatar. This would make Qatar the first Middle East nation to hold such a major global sports event. The soccer world cup is the largest sporting event on the planet. The nation aims to use this as an opportunity to market itself and boost its international recognition. Millions of sports fans are expected to fly in for the world cup and all eyes of the world would turn to Qatar on this historical event. The country has already started preparing for this event. New airports, railway tracks and stadiums are being built. This is directly contributing towards the economic activity in the country and would positively impact the GDP. The current account would also recover in 2011 after facing the damages of the international recession. The problems in the Eurozone are also an opportunity for Qatar and other emerging economic powers to step-up on the economic stage and make themselves heard. As mentioned above the new LPG plants and oil findings would also contribute to improve this current account balance. An area of concern for the government is the growth of foreign debt. This debt has increased due to the billions of dollars the government of Qatar has invested in infrastructure projects. The return from these investments however is expected to pay for itself and reduce the debt in years to come. However there still remains a risk of something going astray. This risk has been mined by the huge 85 billion dollars investment holdings of Qatar in foreign markets. References ONND, 2011, Country Risk analysis Qatar, Available at : (http://www.ondd.be/webondd/Website.nsf/AllWeb/Qatar?OpenDocument&Disp=1&Language=en) COFACE, 2011, Country Risk Analysis, Business Risk and Financial Risk, Available at: (http://www.coface.com/CofacePortal/COM_en_EN/pages/home/risks_home/country_risks/country_file/Qatar?extraUid=572199) IMF, 2011, International Monetary Fund Outlook: World Economic Database. Available at: (http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/weorept.aspx?pr.x=59&pr.y=14&sy=2011&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=453&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC&grp=0&a=) Qatar Census Results, 2010. Available at (http://www.qsa.gov.qa/QatarCensus/Populations.aspx) Read More