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A good year for Islamic finance in Qatar

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Qatar is ready to go to the top of the Big League of Islamic finance as her economy shifts up a notch in readiness to fulfil the promise of Qatar National Vision 2030. Paul McNamara reports

How far Qatar can continue to stay ahead of the curve in a global economy that is still struggling to come to grips with the worst ravages of the global financial crisis?

Several of the Gulf Cooperation Council’s member continue to enjoy economies that are buoyed by revenues from plentiful natural resources, Qatar included, but the International Monetary Fund in recent weeks has urged economies across the Middle East to introduce fiscal restraint and deeper reforms in order to be able to safeguard their future in the midst of a still precarious world economy.

One particular focus of the IMF’s biannual regional economic outlook suggests that the GCC’s oil and gas producers will need to introduce reforms to allow the private sector to grow enough to produce jobs for their increasingly numerous youth populations. The IMF expects the GCC’s growth rate of 5.5 per cent this year slow to 3.7 per cent in 2013 and the various economies need to be prepared for this slowdown.

The IMF notes the tendency of some GCC nations to try to appease their younger nationals from any thoughts of fomenting another Arab Spring by spending money on making their lives more comfortable and distracting their attention away from pro-democracy protests. This can lead to a suffocating influence from state owned institutions to the detriment of the private sector, which might normally take up much of the slack of youth unemployment.

In reality Qatar is in a better position than some to face whatever may be ahead and the reason for this can be summed up in one word: diversification. It has long been recognised that emerging economies that are rich in natural resources can fall into a vicious cycle of dependence on plentiful foreign inflows of cash in exchange for oil and gas. The only proven method of avoiding such a trap lies in economic and business diversification.  This is the route that Qatar set out on as far back as 1995 when it signed up first for membership of the World Trade Organization (WTO).  The following year, in 1996, Qatar joined the General Agreement on Tariffs and Trade (GATT), a useful in addition to its membership of the GCC economic agreement, which it joined in 1983.

Qatar has never seen itself as an insular economy and the emirate has a custom union with the GCC, which means that the entire GCC market can be accessed from Qatar. Through the GCC Qatar has also been engaged in trade and investment negotiations with the European community and Japan for some years now.

What does all this diversification look like in practice?

In terms of financial services, Qatar long ago decided that it did not want foreign banks simply parachuting in suitcase bankers to undertake large project financings of energy projects and then leaving again when the deals were done. What Qatar wanted, instead, was the globe’s leading banks to come and set up shop in Qatar and share in Qatar’s growth story for the long haul.

In order to achieve this the Qatar Financial Centre was set up as a world-class financial centre that played by the same rules that apply in Wall Street and the City of London. It also established its own regulator in the form of the Qatar Financial Centre Regulatory Authority in order to provide the sort of environment and climate that sceptical foreign finance houses would require when they were dealing with the emerging economies of the Arab world. The strategy worked and the QFC is now home to some of the globe’s best-known and most respected finance and banking institutions.

However, in the spirit of diversity, it’s not all about money and business: the Museum of Islamic Art in Doha is a masterstroke of understatement. In a truly stunning piece of architecture, courtesy of architect I. M. Pei, it stands up against his other famous works such as the Louvre pyramids in Paris and the Bank of China building in Hong Kong in capturing the essence of nation coming of age and stepping onto the cultural world stage.

On the asset acquisition front Qatar is rarely out of the headlines these days as the nation’s various state-owned, state backed or state-influenced vehicles make eye-watering purchases that sometimes prove to be the envy of sovereign wealth funds and mutual funds alike. In recent weeks Qatar Holding, the investment arm of the nation’s sovereign wealth fund, has splurged US$250m on a company investing in mineral exploration and extraction in Africa and South America, US$100m on the Chernin Group and has announced a JV with Credit Suisse to form a new asset management company called Aventicum Capital Management.

The Qatar Investment Authority on the other hand, the emirate’s main international investment vehicle, was set up in 2005 to ensure the long term health of the nation through diversification and has developed a reputation as a canny investor since its launch. It’s always a good strategy to be flush with cash when there are high quality assets coming up for sale around the world at distressed prices and QIA has become a master of spotting a bargain.

The cumulative aim of all these measures is to endeavour to ensure that the names of both Doha and Qatar are familiar to governments, investors, businessmen, the arts community and sportsmen alike. It is a long-term strategy that will see Qatar host the FIFA World Cup, the most significant soccer event in the world, in 2022.

Qatar is no stranger to hosting massive sporting events and learned some hard lessons when it hosted the 15th Asian Games in 2006 proving that it really has to give itself enough time and planning to get things right, but that in the end the infrastructure of the young nation is capable of coping with a huge influx of sportsmen and sportswomen as well as sports tourists.

As the mighty Chinese economy shows real signs of slowing down, the attention of the world’s decision-makers responsible for foreign direct investment are once again casting their eyes towards the Arabian Gulf in the hope of catching the wave and backing the next winner. Qatar hopes to be on the receiving end of much of this renewed interest with a multi-pronged attack across the spectrum of business, finance, arts and leisure.