On the surface, all appears calm on the main streets of Manama, Bahrain's capital. The international bankers, whose presence underpins the city's position as the regional financial centre, still fill the restaurants. The five-star hotels are full of several hundred American and Gulf businessmen and ministers attending a meeting aimed at increasing cooperation between the two regions. Another conference centre is filled by delegates to an international advertising conference.
One of the few signs that the country's traditional stability is under threat comes from the greater alertness of the police and security guards and searches of the luggage of all those entering the hotels.
These are uncomfortable days for Bahrain: resentment felt by the majority Shia population towards the minority Sunnis, who retain the real power and wealth, has escalated into a bombing campaign which has targeted five-star hotels and restaurants. These attacks, together with the government's response of executing a youth convicted of killing a policeman and the riots that followed, made headline news around the world and raised questions in international boardrooms about Bahrain's long-term future as a financial centre. But even if there are more bombs, there is broad agreement that there is unlikely to be a direct threat to the ruling al-Khalifah family for the foreseeable future. Companies and banks which employ Shia staff point out that they have not lost a day's work and that there is no decline in their staff's commitment. Some Bahraini and international bankers are concerned, however, that the government's only response has been to suppress the dissidents and give no concessions to the demands for a redistribution of wealth and an elected assembly.
"There is no serious challenge at the moment, but we must do something to address the causes of the problems by providing better amenities in Shia villages and by starting an economic revival that ensures that those who want them can have jobs," says one Bahraini banker.
If the disruption is not halted, international confidence could start to ebb away p; albeit slowly. Government officials and foreign bankers are acutely aware just how much damage that could do to Bahrain, whose offshore banking units (OBUs) are still dependent on wholesale interbank deposits from financial institutions outside the island.
According to Cyprus-based credit-rating firm Capital Intelligence, "the OBU sector remains arguably over-reliant on short-dated foreign wholesale deposits and, therefore, exposed and vulnerable to literally overnight and serious disruptions in their ongoing ability to fund their operations". This weakness was highlighted after the 1990 invasion of Kuwait when foreign banks suspended interbank placement and would not roll over existing deposits at any price.
In an attempt to minimize the risk of a further collapse in confidence, the financial sector is putting on a public display of confidence, insisting that it is business as usual. One senior government official told Euromoney: "Stability is a key factor to every country, and I believe the present crisis is only a temporary phase and that Bahrain will maintain the stability it has always had. There are no problems with market liquidity."
This view is reiterated by Ghazi Abdul-Jawad, the general manager of Gulf International Bank (GIB), the second-largest financial institution based in Bahrain. "There is some concern, of course, because security is a prerequisite for a financial centre. But there is no reluctance among counterparties to place money with us or a reluctance to trade with us. I have not seen any of our expatriates losing sleep or wishing to relocate. We are still able to recruit talent. No insurance companies are declining to quote and there is no escalation in premiums. But we should not be complacent, because our business depends on trust," he says. GIB has just reached agreement on a $250 million seven-year international syndicated loan for the bank's general funding.
One European manager says that he saw "no sign of a flight of capital. I have seen two substantial amounts of money withdrawn p; but that has nothing to do with the present problems".
Bahrain's ability to ride this current storm is based on more than just sentiment. One of its strongest assets is the reputation of the Bahrain Monetary Agency (BMA), the central bank, as a rigorous regulator. This reputation has been steadily built up since an initial period in the 1980s when some foreign institutions expressed doubts about the quality of its management.
If some complain that the BMA is too rigid p; it is, for example, insisting that all domestic banks use its Switch system for electronic banking, including one bank which does not have an ATM anywhere else in the world p; there is now considerable respect for it as both a helpful and a firm manager of the banking system.
Capital Intelligence says: "The balance between the BMA's relatively flexible and collegial supervisory role and its rigorously professional approach to ensuring compliance with the letter and spirit of the regulatory framework, has earned the agency high marks and enhanced the reputation and integrity of the financial marketplace ... These provide the island with an important competitive advantage in its concerted drive to maintain its hard-earned position as the Middle East's pre-eminent financial services centre." This view is confirmed by the senior and local bankers, who praise the thoroughness of bank audits and the efficiency with which the performance of financial institutions is monitored.
No real competition
Abdulla Saif, BMA governor since 1981, wants to tighten the rules still further. "Our banks meet the BIS (Bank for International Settlements) standard in that they have a capital adequacy ratio of 8% or more. But I want to go further. We are urging them to go to 12%, which more and more international regulators are now insisting on," he says.
Bahrain's second strength is that there is no real competition as a regional banking centre. Although an increasing number of companies are choosing Dubai as their Gulf headquarters, there is little evidence that any of the significant banks will follow. "Even if trade and commerce go to Dubai, I believe the financial market will stay in Bahrain," says Abdullah Saudi, founder and former chief executive of the Arab Banking Corporation (ABC) and now an independent investment consultant in Bahrain.
No other Gulf central bank can match the BMA's reputation as a regulator, a standing that bankers believe could be challenged only if the United Arab Emirates (UAE) develops a cohesion between Dubai and Abu Dhabi, which has yet to be seen.
The BMA's reputation has been built up in difficult times. One banker noted: "In the past 15 years we have seen the Iran/Iraq war, the Kuwait Stock Exchange crash, a regional recession and the removal of credit lines when Kuwait was invaded. Even though some banks have got into trouble, the problems have all been resolved without a collapse."
Bahrain's geographic proximity to the main regional market in Saudi Arabia p; to which it is linked by a causeway p; is another advantage. "Our main business is funding projects in the Gulf Cooperation Council (GCC) states p; Saudi Arabia, Kuwait, Bahrain, UAE, Qatar and Oman," says GIB's Abdul-Jawad. "This takes up between 65% and 70% of our funding, and within that Saudi Arabia takes up by far the highest proportion. It is a major market for our bank."
Critical to Bahrain's continued success is the presence of the major market-makers, such as GIB, ABC and Citibank. "The question is, could we do our business better p; and that means in Saudi Arabia p; anywhere else than in Bahrain," says one overseas banker. "The fact is that the syndication market is here. As well as the market-makers, they are surrounded by the smaller players. Many of the big banks are in the Emirates, but they do not operate a coherent syndicated market there."
The tax-free environment has given Bahrain an added attraction as a booking place for loans for the Indian subcontinent and south-east Asia. Bankers also emphasize the quality of local staff, many of whom have been taught at the country's training centre. No other Gulf state provides a comparable layer of middle-class management, which now, says the BMA, means that the business is between 80% and 85% Bahraini. The only negative element of this, say bankers, is that it is much more difficult to dismiss local staff.
The real challenge will not come from the region but from the European and American boardrooms, where the benefits of a permanent presence in the Middle East are being increasingly questioned.
Already many of the peripheral players have been burnt off. The number of offshore banks has fallen from a peak of more than 80 in the mid-1980s to 47 since 1992: of these, 35 are foreign banks and 12 are incorporated locally.
Saif insists: "Brass-plate financial institutions are not acceptable to the BMA, since we believe that there is no substitute for fully manned operational offices over which we can exercise effective supervision and control." However, some banks are thought to be quietly cutting back on their operations.
There are, as ever in Manama, rumours that two or three operations are about to close for good. According to one banker, "about a dozen are doing little or no business and would probably like to go". One veteran of a quarter of a century in regional banking says: "Of the 47 here, I think half would quit tomorrow if they could. The speed of international communications makes it so much easier to cover the region from head office."
Those offshore banks which remain on the island have much clearer reasons for doing so. Gone are the days in the late 1970s and early 1980s when many banks appeared to be there because their rivals had a presence. Bankers believe there is an advantage in keeping an office in Manama. "There has to be a balance between controlling costs and maintaining a presence in the region. But I am convinced that by being here we are much more capable of understanding the market and risk than someone coming out from London," says one British offshore banker.
Project funding opportunities
The offshore market will continue to be dominated by the big regional banks, ABC and GIB, which account for more than 40% of the assets. Both have recovered after going through difficult periods in recent years. ABC, which last year produced $116 million profits p; 110% up on 1994 but still below the $135 million for 1993 p; suffered in the late 1980s from its exposure to developing countries and from a number of problem company loans in Europe. GIB was hard hit by the invasion of Kuwait, when it was forced to sell off some of its best-quality assets because of the withdrawal of some of its international funding facilities.
With these leading regional banks now back on course, the OBUs have in statistical terms rebuilt their asset base to near the levels of before the Gulf War. At that time there was a dramatic plunge to $53.4 billion from the 1989 peak of $72.6 billion. After the war a roller-coaster ride, which saw a 31% asset increase in 1992 followed by a 14% drop the next year, has been followed by a period of steadier growth: assets now total $67 billion, and some analysts predict that the previous record level may be passed by the end of the year.
Some believe that these figures understate the amount of business done in Bahrain. "OBU assets are important, but they are not the only indicator of activity," says Michael Lee, the financial markets adviser at the Ministry of Finance and National Economy. "Since 1992, there has been an increase in mutual funds p; more than 250 have been approved by the BMA. A lot of their business is not done on the balance sheet and so is not reflected in OBU asset figures."
Moreover, the total figures disguise the fact that the type of business carried out by the OBUs is changing. Abdulla Saif says, "In recent years, interbank operations have traditionally accounted for up to 70% of OBU assets and liabilities. We expect this picture to change over the medium term as the OBUs diversify towards greater participation in project loan syndications and in the provision of financing associated with regional privatization programmes and economic restructuring. Many opportunities could also come from the Middle East peace process in meeting the funding needs of reconstruction and rehabilitation."
Saudi argues that, with the continued low oil price and the tight budget constraints imposed by GCC governments, the original raison d'être for the OBUs of investing petrodollars in Europe and the developing world no longer exists. "When I started ABC in 1980, I used to look globally. Now I would look regionally," he says.
The economic downturn has meant fewer opportunities to participate in the multi-million dollar syndicated loans for government projects, particularly in Saudi Arabia. But it has increased the demand for money from a private sector suffering from the lack of demand. "Most of the financial activity and lending opportunities are happening in the private sector," says one western banker.
Capital market ambitions
These changes are also focusing the attention of both borrowers and investors on capital markets. "Until recently, regional customers' financial needs were principally oriented towards international investment," says Lee. "While the international financial markets will continue to play a central role in the second half of the 1990s, it is expected that there will be increasing opportunities for regional financial transactions."
The key will be to identify and focus on particular sectors. "The business has changed to be more specialized finance. Those OBUs who do not understand that and do not prepare for the new era should pack their bags," says Mohammed Al-Shroogi, Citibank's Gulf & Levant regional director.
Bahrain is also making a concerted effort to become the region's capital market, entering into a cross-listing agreement with the Muscat Securities Market and being open to the listing of regional and international equities, bonds and funds. Last year the first derivative-type products were introduced: the Delmon index which tracks the stock market's capitalization and two currency warrant issues. However, with many bankers believing that the stock exchange is underperforming and with the Gulf's traditional parochialism about cross-border investment, it will be some years before the market plays a significant role in the Bahrain economy.
In the short term one of the liveliest sectors is fund management, with more than 250 mutual funds authorized to market their products in and from Bahrain. Robert Fleming has been in Manama since 1984, and in the last two years has been joined by Mercury Asset Management, Barings, Alliance Capital and Peregrine Investments.
According to Lee: "More mutual funds will not only be marketed from here but also be registered, managed and listed in Bahrain. There is no reason why, in the longer term, more of the vast amount of regional funds invested internationally cannot be managed from within the region."
Bahrain's OBUs are also having to adapt to the increasing demand for Islamic banking. The leading market-makers, ABC, GIB and Citibank, are setting up operations to manage these funds. ABC has a subsidiary, as does GIB, which is considering whether to expand it into a separate banking operation. This has already happened at Citibank, which says that it will be the "first conventional bank to have an Islamic bank".
Bahrain already has the highest concentration of Islamic banks in the region, and is establishing rules which ensure that there is proper prudential supervision and that there is fair competition with the conventional banking sector.
"The potential in this area is enormous," says one investment banker in Manama. "We simply do not know how many investors, who now have their money in conventional institutions, would swap into Islamic banks if they were given the choice."
The offshore banks are also facing increasingly robust competition from the domestic institutions, although the tighter economic climate is forcing down margins. Nonetheless, with the exception of the National Bank of Bahrain, whose profits were down by 15% in the financial year 1994 to 1995 as it became overly dependent in the short term on a portfolio of fixed-income securities in a period of higher interest rates, the local banks did well. Bank Al-Ahli produced a 13% rise in profits to BD5.34 million ($14.2 million) in the financial year 1994 to 1995.
Saif at the BMA does not disguise his concern that with 19 commercial banks the domestic sector is heavily overbanked. This view is widely held in Bahrain. "The domestic market needs rationalization," says Hassan Juma, chief executive of the National Bank of Bahrain. "We have had to provide additional services because of the competition but there is no real growth in business. We must realize that we are really hurting ourselves."
However, like other regional central bank governors, Saif has found it is far from easy to put this into practice. There is no doubting the BMA's determination to reduce the number of financial institutions, and bankers believe this will happen when Saif puts on additional pressure for an increase in capital adequacy risk asset ratios from 8% to 12%.
Saif believes that the country's domestic banks will be able to compete internationally only if there are fewer of them and they are more substantially capitalized. "I would like to see our indigenous institutions play a bigger role in international markets and not be dependent on domestic and regional business. We have to build up enough resources to have a significant presence in these markets," he says.
Few banking centres can have survived as dramatic a first 20 years as Bahrain, whose initial boom was followed by a regional economic slump and political crisis.
The bombing campaign in the island has once again raised questions about its viability. But in the short term, at least, it will be the ability of senior bankers to adjust to the fluctuations in capital flows and demand rather than politics which will determine which financial institutions survive and thrive on the island.
Gas-rich and credit-hungry
Qatar's vast natural gas reserves guarantee it prosperity for decades to come p; that is, when the finance has been put together to develop them. This will surely come, but not necessarily at as favourable a rate as the government expects. Nigel Dudley reports
"We are starting to get traffic jams in Doha," says one European banker, pointing to a line of vehicles that in most major cities would be regarded as the most insignificant of hold-ups. The sight of more cars on the roads in Qatar's capital and the growing difficulty of a finding seats on flights to the city are the first signs that this Gulf state is about to lose its reputation as one of the region's backwaters.
Exploiting its oil reserves has already earned Qatar billions of dollars, which have been channelled into infrastructure developments and social services to provide living standards second only to Kuwait in the Gulf. Unlike most of its oil-rich neighbours, Qatar has not pumped its wealth into multi-storey plate-glass office blocks. Government buildings are comparatively modest p; some look in need of a coat of paint p; and much of Doha looks the way other Gulf cities that are now transformed looked more than a decade ago.
All that is about to change. The years of financial difficulties, which have produced fiscal deficits since 1989, should be over by the turn of the century as revenue starts to flow in from the country's gas reserves. Qatar has one of the largest natural gas fields in the world, with an estimated 320 trillion cubic feet of recoverable reserves, enough for an estimated 100 years of production. Even though oil production will be exhausted in little more than 20 years, this amount of natural gas, equivalent to 5% of worldwide reserves, means there is little pressure on the government to diversify from the primary energy sector.
But for the five years before gas revenues transform the country into a significant capital exporter, the government will have to face a tough period in which it will be strapped for cash. It has to fund a high fiscal deficit and finance the gas developments, whose costs are heavily loaded at the start of the project. This will not generate profits until well into the next century. Up to $10 billion will have to be raised, putting a considerable strain on Qatar's finances. According to the Petroleum Finance Company, the debt service for this year will account for 20% of GDP.
With tight liquidity (which is causing considerable difficulties for some local businessmen), a small local market and only four international banks with operations in Doha (Banque Paribas, British Bank of the Middle East, ANZ Grindlays and Standard Chartered), most of this funding will have to come from the international market. If Qatar is to retain the confidence of lenders it will have to convince them that it is getting its budget deficit under control and that political stability has returned following the bloodless coup in June 1995 when Sheikh Hamad, then crown prince and defence minister, ousted his father Sheikh Khalifa as emir.
The first key tests of international banking sentiment will be in the next few weeks when Qatar raises a sovereign loan of $350 million. It should also complete the long-delayed borrowing of the $680 million upstream element of the Qatar Liquefied Gas Company (Qatargas), a joint venture 70% owned by the state's Qatar General Petroleum Corporation (QGPC), 10% each by Mobil of the US and Total of France, and 7.5% each by Japanese companies Marubeni and Mitsui. Later in the year ministers hope to complete a $600 million financing package for the second project, Ras Laffan LNG company (Rasgas), 70% owned by QGPC and 30% by Mobil.
The sovereign loan
Market reports say that the sovereign loan will be lead managed by JP Morgan, the government's financial adviser, and Qatar National Bank, the dominant bank in the Emirate. The national bank is taking this role for the first time, reflecting the determination of the new management, headed by general manager and chief executive John Finigan, that it should broaden its role in financial intermediation.
The loan is expected to be $350 million for seven years at 50 basis points over Libor and Qatar's senior bankers are confident that it will be substantially oversubscribed. This compares favourably with its two recent sovereign loans, lead managed by Sumitomo Bank of Japan. Last October the government borrowed $300 million over five years at 60bp over Libor, having agreed a $250 million five-year loan at 70bp over Libor in December 1994.
Most of the international bankers flying into Doha are positive. "Qatar remains a good financial risk," says one European banker. "We have been able to identify a level of income for the start of the next century which suggests the country will generate a huge amount of money. On the basis of identified income and spending, the country will have an important surplus of funds in 10-15 years."
Finigan is also confident. "When the World Bank classified Qatar as the richest country in the Gulf and the eighth wealthiest in the world, it was not just because of its enormous gas reserves. The emirate has played a seminal role in the industrialization of the region. it has also adopted a sensible budget management strategy and is borrowing prudently to guarantee its future export earnings and prosperity," he says.
There are some dissenting voices, concerned that any new loan may be used to fund the deficit rather than being linked to a specific investment. "We did not take part in earlier sovereign loans because they were not associated with specific projects," says one British banker. "I have been surprised at the country's ability to get such cheap finance. In my view, it should be paying at least 1% over Libor." One Paris banker says: "Too much of the future oil and gas earnings have been pledged as security against loans for the gas projects, so I would not like to take on more sovereign risk. I would rather lend to the gas projects directly than to the country."
A debatable credit rating
Negotiations on the loans associated with the liquefied natural gas developments have been protracted. The $2 billion downstream financing for Qatargas p; $1.6 billion in export credits from Japan and a $400 million loan p; was agreed last October. This caused few difficulties, since guaranteed gas purchases by Japan of 6 million tonnes per year (tpa) have provided security for the borrowing.
But reaching agreement on the loans for the upstream element, for which the coordinating banks are Barclays, Crédit Lyonnais, Société Générale and Gulf International Bank, has proved much more difficult, not least because of government insistence that this be done on the basis of non-recourse financing. The government is still keen to raise the money, even though it has funded more than 90% of the work directly and, with negotiations in their final stages, the banks seem eager to
lend it.
The finance ministry is likely to adopt a similar strategy with the $3.2 billion development of Rasgas, for which the main construction contract was awarded to Japan Gas Corporation. South Korea has agreed to buy 2.6 million tpa, but to be viable a deal needs to be agreed for a further 2.4 million tpa.
A key element was the finance package, which for the winning bid was led by Industrial Bank of Japan and Credit Suisse. Any deal would be more complex if, as reports suggest it may, QGPC tried to sell up to 20% of its stake to an outside investor, a deal it would want to link with discounted financing for the loan element of the project. "The government will try to get banks to lend to them at what I would regard as kamikaze rates," says one banker.
Nor does the government have any intention of guaranteeing this loan. "If they cannot reach agreement with the banks on the financing, they will initially fund the project themselves and possibly not reach agreement on the loan until the work is nearly completed," says a Doha-based banker.
Yousef Hussain Kamal, under secretary at the ministry of finance, economy and commerce, is unrepentant at the refusal to offer a sovereign guarantee. "The reasons are very clear," he says. "For the state to be sure that these projects are viable, we have to be sure that the bankers go through their feasibility studies properly and calculate that there is money to finance the loans. This is a comfort for us; if a project is viable, it should be bankable. Secondly, if we take Qatargas alone, the total cost is more than $5 billion. If the state wants to guarantee this, it will equal our oil revenue for 18 months."
Some Doha bankers, though, argue that in the gas development sector the question of government guarantees is academic. They point out that these projects are so important to Qatar's development that ministers would not allow any cash flow problems to lead to a loan default.
Despite the probable success of these financings, there are serious doubts about the country's short- and medium-term economic and political prospects. Bank analysts have become significantly more cautious in recent months about giving clear endorsements of the government's strategy. Some bankers cite the attempt by QGPC to sell some of its equity in Rasgas as evidence that cash is getting short.
Most dramatically, US ratings agency Moody's Investors Service, which is making a concerted effort to expand its business in the region, stunned Qatari ministers by giving the country a rating of Ba1, below investment grade. Moody's managing director David Levy argues that the emirate's dependence on oil and gas revenue will cause a "higher volatility of growth than in more diversified economies" and points to what he describes as a "deteriorating fiscal position".
Moody's says: "Projects in the gas sector will bring about additional capital import requirements and outward workers' remittances will remain in excess of Qatar's trade surplus. As a result, the country's foreign assets may be reduced further and foreign currency-denominated debt should rise until the end of the century from levels that fall well within the median of countries in Qatar's peer group."
There is unconcealed indignation in Doha at this analysis. Kamal suggests that Moody's credibility is damaged by its decision to put Saudi Arabia only just above investment grade. "Moreover, we do not believe they have given enough weight to the economic fundamentals. Apart from our capacity to increase oil production and our gas reserves, we produce petrochemicals and we are doubling steel capacity. State revenue will then be twice what it is today. Qatar is a rich country but there are significant costs of developing that wealth," he says.
This view is generally endorsed by bank risk analysts who argue that the country's long-term gas income outweighs their short-term concerns. There was also general bemusement at Moody's decision to rate Qatar below Oman, which was given an investment grade despite having fewer natural mineral resources.
The country-risk poll of economists and political analysts in the March issue of Euromoney showed a slight weakening in Qatar's position over the past six months but the change is only marginal and does not indicate a major reappraisal. The more positive line is also accepted by credit-rating agency Standard & Poor's, which gave the country an investment grade of BBB. The more cynical bankers note that S&P's assessment was solicited, while Moody's was not.
"The rating is based on Qatar's responsible economic management, large natural gas resources, high per capita income and moderate, but rising external debt burdens," says S&P. It also concludes, "Despite the rise in its external debt, the long-term maturity structure of the debt will keep Qatar's debt service burden at very moderate levels, rising gradually to 20% of exports by 1999 from 7% in 1995, even under conservative estimates."
S&P also says: "The immense long-term benefits of both projects [Qatargas and Rasgas], which will begin to accrue in 1997, fully justify their costs." Even though the government might have less financial flexibility than in recent years, S&P says, "investments are being financed by long-term, non-recourse debt alone, with debt-servicing costs spread over 10p;20 years, the bulk of which are scheduled for beyond 2000. Once full-scale gas production begins, sales should generate ample cashflows to comfortably repay outstanding debt."
The main concern of most economic analysts is the lack of reliable and verifiable information, particularly about secret reserves. Qatar is by no means the only Gulf state to face this criticism. In the years of petrodollar surpluses, accurate economic statistics and government secrecy about the level of reserves mattered little. It is a different matter now that some Gulf states need to borrow, and there is an increasing demand for loans from private-sector firms whose cashflow depends on government contract payments.
A new openness
In Qatar's case the problem is more acute because of the scale of its borrowings and because it has run a budget deficit since 1989. Potentially the most damaging blow to its credibility was the revelation that the previous emir had departed with an estimated $3 billion or more of the country's secret reserves. While bankers assume that substantial secret reserves were left behind, any indications that Sheikh Khalifa removed significantly more than this amount would damage the country's financial standing.
Most analysts' assessments of Qatar's prospects are positive despite, rather than because, of the figures produced by the government. Indeed, bankers noted that "a higher degree of disclosure and transparency could affect favourably S&P's opinion on Qatar's credit standing." One step which could make a difference is if the government were to introduce a domestic bond market to replace its present practice of borrowing at preferential rates from the domestic banks. "We are studying the issue of local treasury bills and bonds and hope there will be an agreement with the stock exchange by the end of the year," says Kamal at the finance ministry.
Western bankers cite this as an example of how, under the new ruler, Sheikh Mohamed bin Khalifa al-Thani, the finance minister, and his deputy Kamal, are beginning to accept the case for greater openness. But this is a slow process p; by the time it is completed, gas revenues may have made such a strategy unnecessary. There is also a readiness to set long-term goals, exemplified by the enhanced role for the supreme council for planning.
Meeting budget targets
Budget deficit projections are invariably difficult with earnings so dependent on the volatile oil market. But a critical test of the government's credibility will be whether it meets the recently announced budget targets for 1996/97 of QR13.74 billion ($3.8 billion) spending and QR10.79 billion revenue.
Economists say they would be concerned at any failure to meet the forecast QR2.95 billion deficit, which is already too large for a country of Qatar's size and resources. This would make it much harder to balance the budget by the target date of 1999, particularly if the drop in oil prices predicted for the next two years occurs.
But ministers insist that budget assumptions for the price and production level of oil have been very conservative, making it likely that the final deficit will be less than half the forecast total. The final figure for the 1995/96 deficit is also predicted to be at least QR2 billion below the budgeted QR3.5 billion. "In the last two years we have proved to the markets that we can manage our finances," says Kamal.
Bank economists are not yet convinced. They will attach less weight to the figures than to evidence that the government is introducing changes that will produce a permanent change in structural imbalances. That will be far from easy.
"We have started to reduce spending," says Kamal, "but we have to take account of population growth, increased demand for services and inflation."
One option would be to introduce nominal charges for education and health care, measures which have produced spectacular cost reductions in other Gulf states. But so early in the emir's rule he might not be willing to risk the unpopularity this might bring. Ministers are also actively considering privatizing public companies; considerable savings could be made by shedding excess labour.
Despite enthusiastic support at a recent conference in Doha for the principle of selling off state assets, early action is not expected. As S&P notes: "The use of public sector employment for distributive and patronage purposes precludes meaningful action on this front."
Potential lenders have also become nervous about Qatar's political stability after the emir was deposed by his son in June 1995 and the subsequent failure of his father to regain power in a coup attempt in February this year. An accurate assessment of the alliances within the ruling al-Thani family are all but impossible for outsiders. But there is a broad consensus that Sheikh Hamad has a stronger grip on power than his father and will be able to resist any further attempts to remove him. Moreover, even if Sheikh Khalifa were to regain power, the development of the gas industry is so important to Qatar that he would be very unlikely to renege on any of the current government's financial commitments.
There are also some doubts about security in the region. Qatar has tried to nullify any threat from its near-neighbour Iran by establishing closer links with it than have other Gulf states.
However, relations with Qatar's partners in the Gulf Cooperation Council (GCC) remain tense despite an apparently successful attempt to patch up a dispute which reached a climax when Sheikh Hamad stormed out of a heads of government summit last December. There are also border disputes with Saudi Arabia and Bahrain, though in recent weeks there have been signs of an easing of tension between Doha and Riyadh.
These frictions would be a cause for serious concern if the Gulf's defence relied on the peaceful cohesion of the Gulf Cooperation Council. However, Qatar's security, like that of other Gulf states, depends on the willingness of the US and Europe to intervene should there be a threat to the west's oil supplies. That commitment was tested by Iraq's invasion of Kuwait, and Qatar's position has been reinforced by security accords with the US, France and the UK.
Bankers are divided about whether to lend to Qatar at the rates the government expects to pay. The majority, though, are prepared to give the government the benefit of the doubt. But there is a clear warning that this enthusiasm may start to wane unless the rulers of Qatar are far more open about its financial position.
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