Is the war reshaping Qatar Investment Authority’s strategy?

The Qatar Investment Authority (QIA) entered this year in expansion mode on expectations of rising LNG revenues, with plans to increase allocations in the US and other Western markets while deepening exposure to AI (hello, SpaceX IPO…), infrastructure and strategic industries. The war in the Gulf upended the math by taking away the LNG revenue tailwinds Qatar was expecting to finance the playbook.

How bad was the hit? Iranian strikes have taken out around 17% of Qatar’s LNG export capacity, cutting annual revenue by an estimated USD 20 bn. Repairing the damage to Qatar’s LNG facilities and restoring its exports to pre-war levels could take up to five years, industry estimates suggest. The IMF now expects Qatar’s GDP to contract by around 6.0% this year.

What does this all mean for the QIA’s evolving investment strategy and risk management moving forward? We spoke with Azad Zangana, head of GCC macroeconomic analysis at Oxford Economics, to map out the war’s shocks and how the sovereign wealth fund could adapt. Edited excerpts below:

EnterpriseAM: How serious is the short-term economic disruption, and what does it mean for QIA’s strategy?

Azad Zangana: The current events have essentially changed the risk profile for the QIA. Prior to the war, the general assumption was always: Here’s a portion that goes into illiquid assets — we might need it in 50 years, or in 100 years. Now, the answer is, actually, we might need this in a year or two.

The need to diversify has gone up, but so has the need for liquid capital. Going forward, they will hold more liquid assets. That means going into public markets rather than buying another building or a shopping center. This will be the near-term change.

In the near term, there's going to be a pause to think about where capital is most required at this point in time. We're generally assuming that shipping fully resumes by the third quarter, so we're talking about four or five months worth of lost revenues. It is not enough to change long-term plans. It might lead to some short-term pain, but it’s much more about shoring things up in the short term and making sure that there’s enough capital flowing, because things like day-to-day government spending, including salaries, would typically be paid out of revenues coming in. If those revenues are stopped — which they have, as far as we can tell — then that needs to be paid for in a different way. One avenue is the repatriation of some of this capital.

I don’t think there’s going to be a sudden big change in strategy. What might shift, however, is that we could see a prioritization of holding onto more local, liquid capital in case of future emergencies.

The real worry emerges when we’re three or four months down the line and shipping is still halted — that’s a different story and is much more serious. You’ll start seeing greater liquidation of private holdings and private assets and then repatriation of that capital.

I don’t think we’re there yet. There have likely been some sales of liquid assets in public markets like equities and bonds, rather than private assets, to shoulder the smallest liquidation loss. The fund may have started some contingency planning to consider questions like: If we had to sell something that is very illiquid, what’s the best thing to sell? Can we start the process now for the end of the year?

EnterpriseAM: How could a prolonged disruption in LNG revenues affect the QIA’s role in stabilizing the economy?

AZ: Qatar is probably the most negatively impacted country in the GCC at this point in time. Bahrain and Kuwait are also unable to export, but they’ve been able to store some of the oil they produce, which can then be exported later. There’s a degree to which they can catch up. The problem with Qatar is that storing LNG is very expensive, so that’s not happening — they’ve just shut down production altogether and there is a genuine period of lost output and revenues.

Banks are vulnerable and are concerned with their exposure — who they’ve lent money to and those borrowers’ ability to repay, all of which depends on where the borrowers’ revenues are coming from. If they’ve lent to property developers, for example, there’s a degree of certainty these developers will complete their projects, then sell or lease the projects so they can make an earning and repay the loans. When it comes to government lending, they’re going to be quite dependent on the LNG revenues to be able to disperse that capital and repay those loans as well. So there is definitely exposure, and the longer this exists, the greater the potential for losses to occur.

In any case, Qatar holds a tremendous amount of overseas reserves that it can repatriate and probably cover the banking system for well over a year if it needed to. The question will be whether they want to use these reserves or if there is a better way to protect the state’s capital.

EnterpriseAM: Could the heightened security risk now accelerate the QIA’s strategy away from trophy acquisitions and toward more liquid or strategic investments?

AZ: We’ve seen a reduction in the amount of investment going into sports and sporting activities, especially overseas. That could certainly be an area that suffers, because although it generates good advertising for Qatar, the question is what’s the real value of that versus working in a sector to generate tangible returns and productivity gains as well over a long time? A similar reconsideration could go into some property holdings in the West — they’ll need to think about the ROI now and in the future, and whether there are better places to invest or if it’s a matter of changing how much property they hold.

Travel and tourism has been an important area, and I think that will continue to be the case. Even with the current shock to the sector, the long-term outlook is incredibly strong. It’s important for Qatar to keep competing and building out that sector. Investment in IT and artificial intelligence are also going to be very important as a global trend.

Renewable energy is going to be very important too. Combining that with the other investments that are going on is also going to be key. But there’s got to be more than that. They can’t just rely on big trends, because everybody else is doing the same thing. They have to think about other areas in terms of manufacturing that they can go into.

One thing that this crisis has really exposed is the import dependence of the region to the rest of the world. Food inflation in Qatar has absolutely shot up in the last few months because not enough agricultural produce is produced within the region that’s easy to import. They have to look at food security and see if there’s a way that they can produce more locally, even if it's more expensive.

Then there are strategic investments, which are focused on not just making as much money as possible, but thinking about how Qatar can benefit from having exposure to these areas. Investing in AI in the US enables Qatar to learn about AI from the West and bring some of that technology home. That direction of strategic investment will continue.