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Rating Action:

Moody's changes Qatar's rating outlook to negative, affirms Aa3 rating

04 Jul 2017

Frankfurt am Main, July 04, 2017 -- Moody's Investors Service has today changed the outlook on Qatar's rating to negative from stable and affirmed the long-term issuer and senior unsecured debt ratings at Aa3.

The key driver for the outlook change to negative is the economic and financial risks arising from the ongoing dispute between Qatar and a group of countries, including its fellow Gulf Cooperation Council (GCC) neighbors Bahrain (Ba2 negative), Saudi Arabia (A1 stable) and the United Arab Emirates (UAE, Aa2 stable). In Moody's view, the likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar's sovereign credit fundamentals could be negatively affected.

The rating affirmation at Aa3 takes into account a number of credit strengths embedded in Qatar's credit profile and reflects Moody's view that the sizable net asset position of the Qatari government and exceptionally high levels of wealth will continue to provide significant support to the sovereign credit profile for the time being.

The rating action also applies to the backed senior unsecured rating of SoQ Sukuk A Q.S.C., for which the outlook was changed to negative from stable and the rating was affirmed at Aa3.

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 CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE

The ongoing dispute involving Qatar and a coalition of countries including three of its fellow GCC neighbors (Saudi Arabia, UAE and Bahrain) as well as some other mostly Arab nations including Egypt (B3 stable), is unlikely to be resolved soon in Moody's view. The coalition countries have enacted a series of measures such as severing diplomatic relations, closing land, sea and air links, and expelling Qatari nationals from their countries. In addition, they have submitted a list of 13 demands as condition for removing these actions. Public exchanges between the various parties in recent weeks and previous periods of heightened tensions between Qatar and other GCC countries suggest that a quick resolution is unlikely and that the stalemate may continue for some time.

Depending on the duration and potential further escalation of tensions, the dispute could negatively affect Qatar's economic and fiscal strength.

Absent a swift resolution, economic activity will likely be hampered by the measures imposed so far. While Qatar's hydrocarbon exports are not affected at this stage, there have been reports of disruptions to certain non-hydrocarbon exports and a forced shutdown of helium production. The termination of direct flights between Qatar and coalition countries will affect services trade in areas like consulting and tourism. This will likely also affect the profitability of corporates, including government-owned or government-related entities such as Qatar Airways.

Moody's thinks that a prolonged period of uncertainty will negatively affect business and foreign investor sentiment and could also weigh on the government's long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education, and sports through a higher risk perception among foreign investors.

Weaker economic activity could also lead to deteriorating asset quality in the banking system and together with an escalation involving sanctions against the financial sector could necessitate a step-up in government liquidity support. No such sanction has been applied to date and activities in the banking system have returned to normalcy following a few days of volatility when the measures against the country were announced.

In addition to rising global interest rates, funding costs for the government and other Qatari-based issuers will increase further and the government's balance sheet would deteriorate quicker in a scenario of a prolonged stalemate that extends well into 2018. The sovereign has no external refinancing needs until Q1 2018 when a $2 billion sukuk issuance made by SoQ Sukuk A Q.S.C. will mature, but corporates -- including government-related entities -- and banks are facing more sizable redemptions over the next 12 months.

Aside from bond and sukuk, Moody's estimates that total short-term external liabilities amount to more than $115 billion (68% of nominal GDP projected for 2017) of which roughly one third is estimated to be due to creditors in the GCC. Moody's estimates that about half of this is accounted for by non-resident deposits and rollover risks would increase in a scenario of further financial sector sanctions.

RATIONALE FOR AFFIRMING THE RATING AT Aa3

The rating affirmation takes into account a number of credit strengths embedded in Qatar's credit profile, including the sizable net asset position of the government and exceptionally high levels of wealth. Moody's also acknowledges the fact that as long as hydrocarbon exports are not disrupted, the ongoing dispute will not affect the overwhelming majority of foreign exchange receipts in the current account balance and the bulk of government revenues.

The government has sizable asset buffers, including roughly $35 billion in net international reserves at the Qatar Central Bank and more than $300 billion of assets managed by QIA. They will likely continue to grow in nominal terms, and the government's net asset position, calculated as total assets at QIA less outstanding government debt, will stay above 100% of GDP over the coming years. However, transparency at QIA is weaker than for most other Sovereign Wealth Funds in the region and globally and there is very limited visibility about size, composition, and liquidity of those assets. In addition, this net asset calculation excludes wider public sector debt, which was close to 30% of GDP as of 2016, according to Moody's estimates.

Nevertheless, Moody's thinks that the government's resources together with liquid foreign assets in the banking system -- which amounted to about $30 billion as of May, according to the rating agency's estimates -- provide a strong mitigant against the rollover risks described above and credibly support the pegged exchange rate regime.

Finally, Qatar's exceptionally high levels of wealth and one of the largest hydrocarbon endowments globally, together with the leading position Qatar occupies in the global liquefied natural gas market, are further credit strengths. According to the IMF, GDP per capita in purchasing power terms stood at $127,660 in 2016, by far the highest in Moody's rating universe. This mitigates the social stability effects from the recent political dispute and associated import restrictions/potential increase in prices for certain goods and services for households.

WHAT COULD MOVE THE RATING UP/DOWN

The negative outlook reflects Moody's view that risks to Qatar's credit profile are skewed to the downside.

Having said that, a swift resolution of the ongoing political dispute accompanied by a quick lifting of sanctions would potentially support a return to a stable outlook. In addition, the following factors could lead to upward rating pressure:(1) a material reduction in external vulnerabilities through a lower external debt level and continued build-up of external buffers; (2) improved transparency about the type of financial assets held by the government, including the disclosure of details about asset composition and size; (3) improvements with regard to timeliness and scope of data availability; and (4) a more diversified economic base.

Conversely, Moody's would view the following factors as credit-negative: (1) a further escalation in the political dispute, leading to a deterioration of the government finance position, resulting in a continued increase in government debt levels as opposed to Moody's current expectation that debt levels will peak; (2) signs of an emerging fiscal or balance-of-payments crisis, leading to a faster depletion of fiscal and external buffers and marked by speculative attacks on the pegged exchange rate; (3) crystallization of sizable wider public-sector debt on the government's balance sheet; and (4) if the domestic or regional political environment were to deteriorate, resulting in disruption to oil and gas production and/or foreign investments in the economy.

Prompted by the factors described above, the publication of this credit rating action occurs on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

SUMMARY OF MINUTES FROM RATING COMMITTEE

GDP per capita (PPP basis, US$): 127,660 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.2% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.8% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -7.4% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.5% (2016 Actual) (also known as External Balance)

External debt/GDP: 148.7% (2016 Estimate)

Level of economic development: Very High level of economic resilience

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

On 28 June 2017, a rating committee was called to discuss the rating of the 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 institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed. The ongoing dispute between Qatar and a group of countries including fellow GCC members Saudi Arabia, United Arab Emirates and Bahrain has increased the likelihood of a prolonged period of uncertainty extending into 2018, which carries the risk that Qatar's sovereign credit fundamentals could be weakened.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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