Despite a proliferation of towers under construction and an increase in gaudy hotels in Doha, the capital (pictured above), Qatar can still seem sleepier than most Gulf countries. Yet, while other states contemplate the prospects of contraction or low or non-existent growth, Qataris can be confident that their economy is red hot.

The International Monetary Fund forecast in January that Qatar’s economy would grow a giddy 29 per cent in real terms this year, up from an estimated 16.4 per cent in 2008. This compares to an expected global economic expansion of just 0.5 per cent in 2009, the lowest since the second world war.

“It feels like there is a storm going on, but just over at our neighbours and not over our house,” says David Salt, partner at law firm Clyde & Co in Doha. Another senior expatriate sums up the feeling of Qataris in a word: “Smug.”

The cause for optimism is not hard to spot. The sparsely populated peninsula has started to benefit from a long-term strategy to export liquefied natural gas from its vast gas fields – the third largest in the world. Exports will nearly double from 39.9m tons last year to 77.4m tons in 2010.

Vast hydrocarbon wealth, though, brings its own challenges. Qatar has been plagued by double-digit inflation since 2006 because of heavy government spending and steadily increasing household wealth. Inflation reached an annual 16.6 per cent in the second quarter of 2008 and it is “widely understood official numbers are understated”, according to JPMorgan Chase.

“We see a risk that the high level of inflation, which has already shown a weak response to deflationary pressures seen elsewhere, is becoming entrenched in Qatar’s economic structure,” warns Standard Chartered.

As Qatar has pegged its currency to the dollar, the central bank has not been able to raise interest rates to counter price increases. Nor can the government revalue its currency to cut the cost of imports, because of plans for a Gulf monetary union.

Therefore, the onus of inflation fighting falls on the government. Ibrahim Ibrahim, head of the General Secretariat for Development Planning, says inflation has been a unavoidable side-effect of swift modernisation. But he admits that “maybe we spent too much in a short time and that raised inflation”.

The country is nevertheless committed to combating price increases, says Mr Ibrahim, an influential economic adviser to Hamad Bin Khalifa Al Thani, the emir. “The infrastructure of the country was not very good . . . so we really had to spend a lot of money on this.

“We have enacted competition and consumer protection laws in order to reduce monopolies and make sure that competition is there and prices are not high,” Mr Ibrahim adds, predicting that inflation will fall to single digits in 2009.

That may be optimistic, according to economists. Inflationary pressures are likely to ease due to a credit crunch-induced drop in commodity prices and consumer lending, but the IMF forecasts that inflation will slow to 10 per cent this year, as do Bank of America Merrill Lynch analysts.

Concerns over the previously ebullient Qatari banking sector have also emerged. When the government said last autumn it would reinforce the capital of the banking industry by taking stakes of up to 20 per cent in Qatari banks, it seemed a positive but largely precautionary measure. Yet with the local stock market still languishing nearly two-thirds off its summer peak and signs that the property market is on its way down, intervention is looking more and more necessary.

Mohamed Moabi, chief economist at Qatar National Bank, says no country is able to escape the downturn. “Liquidity is an issue, and asset quality could increasingly become an issue for many institutions. You will see a gradual increase in non-performing loans over the next two years.”

Moody’s Investors Service recently changed its outlook on the Qatari banking sector to negative. The ratings agency is concerned by “a deterioration in the asset quality of Qatari banks arising from, among others, decreasing demand in the property market, leading to falling in real estate prices,” says Elena Panayiotou, a Moody’s analyst.

The agency is also worried about the direct and indirect exposure of Qatari banks to the increasingly volatile local stock market.

“Financial institutions are facing reality,” says Raghavan Seetharaman, chief executive of Doha Bank. “We cannot do any external financing so we have to optimise domestic funds . . . [and] market investments have suffered. This will continue to strain profits.”

The government is also committed to doing more to shore up banks if needed, and to ensure that inflation does not become entrenched, stresses Mr Ibrahim. The 2009 budget will likely freeze government spending, after several years of rapid increases, he says.

“There is no country in the world that is immune to the credit crunch . . . but Qatar is probably one of the least affected countries in the world,” says Mr Moabi.

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