QATAR ECONOMY HEATS UP

UNCLAS SECTION 01 OF 02 DOHA 001809

SIPDIS

FOR NEA/ARPI - THORNE AND EB/CBA - BEHRENS
COMMERCE FOR FCS - ISRAEL HERNANDEZ AND ITA/MAC/AMESA - C.
LOUSTAUNAU AND M. TALAAT
STATE PASS TO USTR - JASON BUNTIN

E.O. 12958: N/A
TAGS: ECON EPET EINV PGOV QA
SUBJECT: QATAR ECONOMY HEATS UP



1. Summary. Qatari Minister of Economy and Commerce, Sheikh
Mohamed bin Ahmed Al Thani, has highlighted the country's bright
economic prospects in interviews with local press and in a front-
page story in the recent Middle East Economic Digest. The economy
is expected to grow by 25 to 27 percent, up from 20.5 percent in

2004. This growth is being generated by high energy prices,
massive investment in the natural gas sector, and heavy public
sector investment in infrastructure. On the down side, inflation
is picking up, particularly because of high real estate rental
costs and prices for construction materials. The Ministry is
promoting a new, tax-free financial center, a Science and
Technology park, and a planned "free investment zone" for foreign
investment. End Summary.

Growth Outlook
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2. The national economy is expected to grow by 25 to 27 per cent
this year, said the Minister of Economy and Commerce, Sheikh
Mohamed bin Ahmed Al Thani, in a press report October 30. He
hinted that he sees the boom continuing over the next six to
seven years. Growth was around 20 per cent last year, Sheikh
Mohamed told a local Arabic daily and a business periodical in
recent interviews. A relatively higher rate of inflation at the
moment is a direct fallout of the high economic growth. "The kind
of growth the economy is witnessing is not possible without a
higher inflation rate," he said.


3. Qatar's development strategy is based on optimum utilization
of its massive gas resources. One of the main components of
Qatar's economic policy is to help raise the country's
competitive edge as a source of affordable and safe energy.
According to the minister, investment in liquefied natural gas
(LNG),gas-to-liquids (GTL),petrochemical ventures, hospitality
and construction industries, as well as health and education
sectors, is planned to exceed a staggering $100bn. Qatar's
leading business, Qatar Petroleum, the government-owned giant
which has stakes in all oil and gas ventures and in other
industrial projects from chemicals to steel, will increase its
capital from QR 20 billion to QR 50 billion (approximately $13
billion) to be able to take on the "mega-projects" and industrial
expansion.


4. Another sector that will see a major investment is maritime
transportation. Qatar will have the world's largest fleet of
Liquefied Natural Gas (LNG) carriers within five years, according
to Robert Curt, managing director of the Qatar Gas Transport
Company (QGTC or "Nakilat"),which manages the marine interests
of the Ras Laffan industrial city's LNG and pipeline projects.
Curt said Qatar would need a total of about 90 LNG carriers to
handle its natural gas exports over the next five years, which
includes over 48 vessels that are currently in service or on
order. "This will be the largest fleet of LNG carriers servicing
one natural gas producing country. In addition, we will also need
a number of Liquefied Petroleum Gas (LPG) and sulfur carriers,"
said Curt (a U.S. Maritime Academy graduate) in September. He
highlighted the need for low-cost debt financing and the hiring
of ship operators and crews as issues facing QGTC.

Tax-Free Zones
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5. Sheikh Mohamed has been concerned about diversifying the
economy beyond the large publicly-held companies, and three "free
zones" will help address the issue of economic balance: the Qatar
Financial Center (QFC),the Science and Technology Park, and the
planned Free Investment Zones. The minister said the country
needs to reduce red tape and paperwork to the minimum and
encourage free trade and the QFC has done much in this area. The
centre, which operates as a free zone for financial ventures, is
expected to attract international financial institutions to open
offices in areas such as project finance but not retail banking
(the ventures won't have branch locations around town). The
centre is led by a commercial authority, the QFC Authority, and a
regulator, the Regulatory Authority. These entities are
independent of each other and from the government of Qatar, but
they have independent budgets funded by the state, and both will
report independently to the Council of Ministers. Businesses
participating in the centre will be entitled to 100% ownership
and full repatriation of profits. Businesses will also be
entitled to a three-year tax holiday, after which a corporate tax
rate of 10% will apply.


6. Like the QFC, the Science and Technology Park is a tax-free
zone. The Qatari government fully funded construction costs for a
complex to house configurations of technology and research
centers and branches of foreign companies located at Education
City, the facility that contains branches of five American
universities. GE, Microsoft, Royal Dutch Shell and several of
other oil majors have committed to opening offices or research
facilities at the park.


7. One of the ministry's key projects for the next two quarters
is the establishment of a free investment zone (FIZ) and a
regulatory body. The law establishing this body is currently in
draft form. Foreign firms would be targeted to invest, but Qatari
individuals or companies could also do so. It is expected that
the zone would be restricted to certain industries, such as
manufacturing or services. It is possible that the "zone" may be
a virtual one, existing as a legal construct only. Firms in the
FIZ would be exempt from tax for 20 years and would have full
right to repatriate profits.

Free Trade Area?
--------------


8. In his interview in the October 14 issue of the Middle East
Economic Digest, Sheikh Mohamed -- who was featured on the cover
-- suggested that an FTA with the U.S. remains some way off. "Any
FTA has to be good for the country. And if you look at us as a
country, we do not have the finished products yet, which will
benefit directly from an FTA with the US. What we sell is raw
materials," he said. "The other thing is that we need to make
some changes here first. We cannot open up while our private
sector and some of our laws are in the making. Take the law on
competition; it is now at the cabinet level. We also need a very
strong anti-monopoly law.... We are in dialogue with the US and
we will be having a meeting in the coming months. And while we
will need the FTA in the long term, we are not now the finished
product."

Private Qatari Firms Anxious about Liberalization
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9. Pampered by the state for years, Qatar's private sector is
apprehensive about foreign competition in the country's fast
opening up economic and business environment. Used to operating
in a monopolistic and protected regime, family and private
businesses are keen to ensure they retain state backing and are
not sufficiently preparing for competition. Sheikh Mohamed,
speaking at the government-sponsored Qatar Chamber of Commerce
and Industry (QCCI),said, "We have conducted a study on how best
to equip you to operate in a competitive environment, so be
prepared for the fight." Fair and free competition is good for
everybody -- the economy, the players themselves, and the market
at large, said the minister. Monopolies are detrimental to
progress, he said, in support of the establishment of free trade
areas with other countries. "We have been signing agreements
since 1997 committing ourselves to opening up the state economy,"
said the minister, implying it was not possible to backtrack on
the policies only to protect the private sector. He agreed
however to a suggestion that red tape needs to be eliminated from
the ministry in order to improve efficiency in business.

Comment
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10. Qatar's economy is indeed booming, presenting many
opportunities for U.S. companies interested and able to do
business in the region. The embassy briefs and assists a regular
stream of new, returning, and resident executives and managers.
They have reported that the month of Ramadan, ending now, saw no
leveling off in the pace of activity. All this is not to say that
Qatar's economy is open. It is not. Significant constraints
remain in labor, telecom, financial, and other sectors. But slow,
small steps are being taken in the right direction.