Doha: Standard & Poor’s Ratings Services affirmed its AA long-term and A-1+ short-term foreign and local currency sovereign credit ratings on the State of Qatar. The outlook is stable.
“We also affirmed the ‘AA’ long-term issue ratings on the bonds issued by Qatari Diar Finance Q.S.C. and SoQ Sukuk A Q.S.C.
The ratings reflect our view of Qatar’s high economic wealth and strong fiscal and external balance sheets. The ratings are constrained by Qatar’s limited monetary policy flexibility, still-nascent public institutions, and limited disclosure, particularly with respect to government assets and investment income.
Domestic political and social stability prevails, despite, in our view, only gradual political modernization and a highly centralized decision-making process. Executive power remains in the hands of the emir. In our view, the predictability of future policy responses is tempered by weak political institutions, although in our base case we assume that policy will continue to focus on prudent development of the hydrocarbon sector, alongside further economic diversification. There are also material data gaps, particularly regarding the government’s asset position.
“Qatar is one of the wealthiest economies we rate; we estimate its GDP per capita at $94,000 in 2014. We estimate “trend” growth, which we define in our criteria as a weighted 10-year average of real GDP per capita growth, to be broadly flat. “Nominal GDP has expanded by 20% on average and may be a better indicator of prosperity than real GDP in a resource-based economy, in our view. We project that population growth will average about 6% a year until 2017.
“In our view, Qatar’s high wealth means that its relatively weak per capita economic growth performance is not an immediate concern for the ratings. However, beyond our two-year outlook horizon, Qatar’s economic risk position could deteriorate relative to economies that are expanding more rapidly.
“In our view, there are medium- to long-term challenges to Qatar’s competitive position in the liquefied natural gas (LNG) market from new shale production, Russia’s gas pipeline to China, and increased pressure to delink LNG contracts from the oil price. Nevertheless, we see several factors that support Qatar’s competitive position in the LNG market. First, we expect global demand for natural gas to remain strong to absorb the new supply. Second, Qatar’s strategy has been to diversify into all major markets, adjusting the mix of destinations and contract types according to market needs. Moreover, the majority of its exports are under long-term contracts, which provide certainty of volume off-take, while built-in diversion clauses in the contracts provide additional flexibility to manage quantity and price risks. Third, Qatar will continue to have a cost advantage over many of the new projects in other countries. Since Qatar produces and exports significant quantities of condensate and natural gas liquids associated with natural gas, the effective average cost of producing LNG is much lower.
“Our forecasts are affected by our expectations regarding oil and gas exports, which account for about 85% of Qatar’s total exports. In our base-case scenario, we assume that oil prices will moderate to about $100 per barrel by 2016 from about $105 in 2014. We also assume that oil production will decline as output from maturing fields’ contracts. We expect an average annual decline in crude oil production of 5% over 2014-2017. Gas output (LNG and natural gas) as projected to be largely flat, given the moratorium on new investments in Qatar, while condensate volumes will likely increase by about 5% per annum over the same period.
“Given our oil and gas production assumptions, we expect general government revenues to decline to about 35% of GDP by 2017 from about 42% in 2014. We note that the government’s budget for 2014 and 2015 indicates expenditure growth of 3.7% compared with the previous year. By contrast, during the five years to 2012, government expenditure rose by an average of 20% a year. We expect government spending to slow to an average of 6% for 2014-2017 to enable the government to maintain a relatively strong fiscal surplus averaging about 5% of GDP over the period. We no longer include an estimate of government investment income from the Qatar Investment Authority in the government balance.
“Nevertheless, the government plans to implement a significant capital investment program of about 15% of GDP over the next five years as part of its national development strategy, largely funded through the budget. As a result, slowing growth in government expenditure to such a significant extent could prove difficult to achieve.
“Alongside government investments funded through the budget, public enterprise and private-sector spending on the national development strategy is likely to be funded by borrowing from domestic financial institutions. This may cause banks’ net external liability positions to widen and their loan-to-deposit ratios to rise. That said, in 2014, increased public-sector deposits on banks’ balance sheets have reduced banks’ reliance on external funding, and the loan-to-deposit ratio has stabilized at about 105%.
“We expect the national development strategy projects to improve the economy’s productive capacity and strengthen Qatar’s competitive position. However, there is a risk that an investment agenda of this scale could weaken the government’s strong balance sheet, reduce the stability of the banking system, or increase leverage in the corporate sector.”
“Notwithstanding these risks, we assume Qatar’s net external asset position will remain strong, exceeding 150% of current account receipts in 2014. Qatar has accumulated considerable foreign assets over the past decade as a result of its resource development. We forecast that the general government net asset position will remain strong, averaging about 95% of GDP during 2014-2017. The pace of asset accumulation will depend on how hydrocarbon production and prices develop. We expect Qatar’s assets to provide many decades of production at current levels. This balances the risk arising from concentration in the economy because oil and gas directly account for about 60% of nominal GDP and government revenues,” it added.
“The stable outlook reflects our view that Qatar’s high economic wealth levels and strong external and fiscal positions balance its institutional shortcomings and limited monetary flexibility over the next two years. We could lower the ratings on Qatar if developments in hydrocarbon production and prices or in the banking sector were to weaken the country’s external or fiscal positions,” S&P, said.
“We could raise the ratings on Qatar if we saw domestic institutions mature faster than expected, alongside significant improvements in transparency regarding government assets and external data quality.”