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Rating Action:

Moody's affirms Qatar's Aa3 rating, maintains stable outlook

24 Sep 2020

New York, September 24, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Qatar's long-term issuer and foreign-currency senior unsecured debt ratings at Aa3 and maintained the stable outlook.

The rating affirmation is supported by a number of strengths embedded in Qatar's credit profile, which underpin the sovereign's resilience to shocks, including the current shock triggered by the coronavirus pandemic and lower global oil prices. In particular, these strengths include Qatar's exceptionally high level of per-capita income, its very large hydrocarbon reserves with low extraction costs, the government's very robust net asset position, and an established track record of macroeconomic policy effectiveness. The affirmation also reflects Moody's expectation that over the next few years the government will reduce its debt burden below 50% of GDP from an estimated peak of around 68% of GDP in 2020 through the combination of announced fiscal consolidation measures and a planned debt reduction exercise which will draw on the government's accumulated contingency reserves.

The stable outlook balances elevated regional geopolitical risks and the risk that an extended period of depressed oil prices delays the anticipated reversal of the weakening in government debt and debt affordability metrics against the potential fiscal and economic upside stemming from the planned expansion of the liquefied natural gas (LNG) production capacity.

Moody's has also affirmed the Aa3 backed senior unsecured rating of SoQ Sukuk A Q.S.C., a special purpose vehicle incorporated in the State of Qatar, which is wholly owned by the Government of Qatar and its debt issuance is, in Moody's view, ultimately the obligation of the Government of Qatar.

Qatar's long-term foreign-currency bond and deposit ceilings remain unchanged at Aa3 and the short-term foreign-currency bond and deposit ceilings remain unchanged at P-1. Qatar's long-term local-currency bond and deposit country risk ceilings also remain unchanged at Aa3.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

EXCEPTIONALLY HIGH INCOME LEVELS AND VERY LARGE HYDROCARBON RESERVES MITIGATE WEAKENING GROWTH DYNAMICS

Qatar's Aa3 rating is supported by several key credit strengths that underpin the sovereign's resilience to large economic and fiscal shocks such as the one imposed this year by the coronavirus pandemic. These strengths include (i) Qatar's exceptionally high per-capita income and proved hydrocarbon reserves, which will buffer its economic strength even if non-hydrocarbon sector growth remains relatively weak in the coming years, (ii) its access to robust contingency financial buffers, which significantly exceed the level of government debt, and (iii) its capacity and policy flexibility to reverse, over the medium term, the recent weakening of government debt and debt affordability metrics.

Moody's expects Qatar's economy to contract by 3.5% this year, largely due to the impact of the pandemic and government spending cuts on the non-hydrocarbon sector, whereas the decline in nominal GDP will be nearly four times as large, being magnified by the decline in oil prices. Moreover, Qatar's growth will likely remain subdued in the medium term, averaging 1.5-2% until 2024. While this is higher than the 1% annual growth rate recorded during 2017-19, it is significantly lower than the 3.8% annual average during the previous five years when non-hydrocarbon sector growth benefitted from strong government spending growth. A large cut in government capital spending in 2020 of around 20% will contribute to the 5.5% non-hydrocarbon sector contraction that Moody's expects this year while the spending restraint and the plans to further reduce government capital spending will slow Qatar's economic recovery from the coronavirus shock.

Nevertheless, Qatar's exceptionally high per-capita income level, which was $132,886 in 2019 on a purchasing power parity (PPP) basis, and the sovereign's extraordinary natural resource wealth provide an effective mitigant to a period of subdued growth. The exceptionally high per-capita income levels affords the government a relatively high degree of policy flexibility to adjust to large fiscal shocks without triggering social stability concerns, more so that Qatar's citizens (Qatari nationals) account for only around 10% of the total population and their unemployment rate -- which has only a very weak link to the level of economic activity in the non-hydrocarbon sector -- was less than 0.5% in 2019.

Qatar's relatively weak growth outlook is also mitigated by its very high level of proved hydrocarbon reserves, which will ensure that Qatar would be able to produce natural gas and crude oil at around the current rate for more than another 100 years. Qatar's very low natural gas extraction and LNG production costs, which Moody's estimates to be among the lowest globally at around $2 per million British thermal units, give it a uniquely competitive position in the global natural gas market, where it is the largest LNG exporter, and position it well against the potential longer-term impact of carbon transition of demand and prices of fossil fuels.

ROBUST GOVERNMENT BALANCE SHEET AND FISCAL POLICY FLEXIBILITY UNDERPIN RESILIENCE TO SHOCKS

Moody's expects the sharp drop in energy prices during 2020 to lower Qatar's fiscal strength as hydrocarbon revenues (79% of total government revenue in 2019) shrink by more than 20% and push the fiscal balance to a 2% of GDP deficit from a small surplus in 2019. Moreover, Moody's projects that government debt, which rose to nearly 60% of GDP in 2019 from 50% in 2018, will increase further to around 68% of GDP in 2020.

However, this increase in indebtedness is partly mitigated by the vast buffers offered by sovereign wealth fund assets accumulated during the periods of higher oil prices. Moody's estimates that these assets stood at more than 180% of GDP in 2019 and their liquid foreign currency portion covered nearly 150% of total government debt -- notwithstanding significant transparency shortcomings with respect to the level and the composition of the government's financial assets, which constrain the sovereign's Aa3 rating.

Moody's expects Qatar's debt burden to revert broadly back to its 2017 level of around 50% of GDP by the end of 2023 through the combination of (i) spending cuts, announced by the government in response to the pandemic, (ii) the debt repayment exercise which the government plans to carry out before the end of 2021, and (iii) the recovery in nominal GDP as a result of the assumed gradual increase in oil prices to around $50-55/barrel in the medium term.

The spending cuts that were announced in March and then expanded in June highlight the government's fiscal policy flexibility, which was equally demonstrated during the previous oil price shock in 2015-16, and its high capacity to absorb oil price shocks. It also reflects the government's prioritization of stability of public finances over achieving short-term growth objectives. Moody's expects that total government spending will be reduced this year by around 14% (or 4.3% of 2019 GDP) relative to 2019, most of which will come from the cancellation or postponement of non-priority infrastructure projects until after the 2022 FIFA World Cup. The flexibility to implement a large spending cut has been strengthened by the large share of capital spending (43% of total) included in the approved budget, a large portion of which is discretionary in nature and can be delayed. Moreover, the government intends to maintain overall spending at the reduced level also in 2021 with further capital spending cuts planned in the medium term as the key infrastructure projects are completed.

GOVERNMENT TO RETIRE DEBT USING ACCUMULATED CONTINGENCY RESERVE FUNDS

The increase in government debt during 2018-19, prior to the coronavirus shock, was exclusively due to the government's decision to borrow in excess of its budget financing needs. Despite small fiscal surpluses in both 2018 and 2019 (averaging 1.6% of GDP) and a very modest external debt repayment schedule ($3 billion), the government raised $33.5 billion from external borrowing during those two years, including $24 billion from large multi-tranche issuances of international bonds. While this has facilitated a small reduction in domestic debt, Moody's assumes that most of this borrowing has been saved as part of contingency reserve funds of the Ministry of Finance with the intention to build precautionary buffers and use some of this saving for the repayment of large external maturities ($10.9 billion) in 2020 while also taking advantage of favorable external financing conditions.

It is Moody's understanding that the government has now approved a plan to use $20 billion (or 13% of 2020 GDP) of these funds to reduce its gross borrowing requirement during 2020-21, which, in Moody's baseline scenario, will lead to a reduction of government debt by nearly $11 billion by the end of next year and a decline in the debt burden to less than 64% of GDP from more than 68% of GDP in 2020. Moody's expects that further debt reduction during 2022-23 will be supported by the return to fiscal surpluses as a result of a continuous gradual recovery in oil prices and the continuation of the government's fiscal spending restraint.

RATIONALE FOR THE STABLE OUTLOOK

PROSPECT OF SIGNIFICANTLY HIGHER LNG OUTPUT AND LOWER CAPITAL SPENDING MITIGATE DOWNSIDE CREDIT RISKS

The stable outlook balances a number of risks stemming from Qatar's exposure to regional geopolitical tensions and its exposure to fluctuations in global energy demand and prices against the longer-term growth and revenue upside potential related to the planned expansion of Qatar's LNG production capacity and the government's plans to further reduce capital spending.

Geopolitical risks are mostly related to the risk of a further significant escalation in tensions between Iran and the US and its regional allies, which could lead to an extended disruption of maritime traffic through the Strait of Hormuz, on which Qatar depends for virtually all of its exports and most of its imports. Although Moody's assigns only a small probability to such an eventuality, its impact on the government's fiscal position and Qatar's current account balance would be significant and commensurate to the duration of such potential disruption.

Another significant downside risk stems from the possibility that oil prices remain at depressed levels for longer than Moody's currently expects, leading to larger and more persistent fiscal deficits and increasing the uncertainty around the expected path of government debt reduction.

These downside risks are balanced by the potential growth and government revenue upside from progress towards expanding LNG production and gradually phasing out the government's large infrastructure spending program. The work is currently underway to significantly expand Qatar's LNG production capacity by around 40% to 110 million tons per annum (mtpa) during 2025-27 with government plans of another 15% increase (to 126 mtpa) during 2028-29. Under Moody's baseline scenario, a combination of the planned capital spending cuts (to around $11 billion during 2023-32 from $22 billion in 2019 and the planned $16.5 billion in 2020) and additional fiscal revenue from new LNG production could reduce the government debt level well below 40% of GDP in the next six to seven years, even after accounting fully for the cost of the investment required for the LNG capacity expansion.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

As Qatar is the largest exporter of LNG in the world, Qatar's environmental risks derive from carbon transition. Qatar's credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. However, in light of the measures against climate change taken so far, this is not Moody's baseline. Qatar is also one of the countries with the highest level of water stress due to its scarcity of natural renewable water resources and high rates of water consumption, requiring that more than half of its water demand be filled from energy-intensive seawater desalination.

Social risks currently have no material impact on Qatar's credit profile because of the country's very high GDP per capita and the absence of ethnic or religious tensions. We regard the global coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Governance risks in Qatar are primarily related to the limited transparency in fiscal data and fiscal policy, and poor disclosure regarding the size, composition and performance of its sovereign wealth fund assets. This is partly mitigated by the country's relatively strong institutions and track record of monetary and macroeconomic policy effectiveness.

GDP per capita (PPP basis, US$): 132,886 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -0.2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.4% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.3% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 21 September 2020, a rating committee was called to discuss the rating of Qatar, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A faster and larger than expected reduction in the government debt burden over the medium term would likely prompt an upgrade of the rating, especially if accompanied by greater transparency about the size and composition of the government's financial assets. A material and durable reduction of regional geopolitical risks would also allow for upward rating migration.

An increasing likelihood that government debt will not decline in the medium term as currently expected may lead to a downgrade. Such a scenario would likely reflect a longer than anticipated shock to global hydrocarbon demand that would put material pressure on the government's financial position and lead to an erosion of external buffers. A further material escalation of the geopolitical tensions, threatening to disrupt Qatar's export routes, would also likely exert downward pressure on the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The local market analyst for this rating is Alexander Perjessy +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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