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Rating Action:

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

13 Jul 2018

Frankfurt am Main, July 13, 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Qatar's long-term issuer ratings to stable from negative and affirmed the long-term issuer and foreign-currency senior unsecured debt ratings at Aa3.

The key driver of the outlook change to stable is Moody's assessment that Qatar can withstand the economic, financial and diplomatic boycott by the three neighboring Gulf Cooperation Council (GCC) countries and Egypt (B3 stable) in its current form, or with possible further restrictions, for an extended period of time without a material deterioration of the sovereign's credit profile. This assessment is in part based on evidence of broad resilience of Qatar's credit metrics to the economic and financial blockade over the past 13 months.

The rating affirmation at Aa3 takes into account a number of credit strengths embedded in Qatar's credit profile which, in Moody's view, remains supported by the large net asset position of Qatar's government, exceptionally high levels of per-capita income, very large hydrocarbon reserves and relatively low fiscal and external break-even oil prices -- all of which will continue to provide a significant shock absorption capacity to the sovereign.

The senior unsecured rating of SoQ Sukuk A Q.S.C. was affirmed at Aa3. According to Moody's the debt obligations of SoQ Sukuk A Q.S.C. represent debt obligations of Qatar's government.

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 STABLE FROM NEGATIVE

EVIDENCE OF CREDIT RESILIENCE TO THE GCC BOYCOTT

The stable outlook reflects Moody's view that Qatar's credit metrics will likely remain consistent with a Aa3 rating as the boycott continues. The stable outlook also makes provision for some additional restrictions and is supported by Moody's view that a quick resolution or a significant escalation of the regional dispute materially affecting Qatar's credit metrics are a low-probability event.

The boycott by Saudi Arabia (A1 stable), the United Arab Emirates (UAE, Aa2 stable), Bahrain (B1 negative) and Egypt started in June 2017 and caused a sudden closure of established land and maritime trade routes for Qatar's imports, a sharp drop in its goods and services exports to the four countries and a large outflow of foreign funding from the Qatari banking system.

The rapid recovery in imports, with initial levels restored in less than four months, illustrates the economy's flexibility and policy effectiveness in rerouting supplies. This involved arranging an "air bridge" for food and other staples in the early weeks of the blockade and increasing capacity of a newly completed Hamad Port to prevent macroeconomic disruptions and preserve social stability.

According to Moody's estimates, the economic impact of the boycott has been modest and largely temporary. The only sectors that have been visibly impacted by the boycott are tourism, with visitor arrivals from the GCC countries that accounted for close to half of the total arrivals in 2016, falling by 40% and unlikely to recover in the foreseeable future, and transportation, namely the national carrier Qatar Airways, which has been blocked from flying to 18 destinations in the Middle East and has said earlier this year that it has made a "substantial loss" during the past financial year.

Rather than a direct economic impact, the main credit implication of the boycott through a permanent loss in tourism and transportation revenues and potential is that it will hamper the government's economic diversification efforts. However, in Moody's view, these constraints on economic diversification do not materially affect the sovereign's credit profile.

Moreover, the effective mobilization of funds from the central bank's reserves and the sovereign wealth fund's foreign assets preserved financial and macroeconomic stability in the face of significant outflows from the Qatari banking system. While the interventions came at the cost of a material erosion in the central bank's reserves buffers, they also demonstrate effective coordination and crisis management capacity among the public sector institutions including the central bank, the ministry of finance and the sovereign wealth fund.

The outflows were equivalent to $30 billion or 18% of GDP during the second half of 2017, as GCC clients repatriated their deposits and GCC banks withdrew funding. The foreign outflows stabilized towards the end of 2017 and about a third of the cumulative outflows has reversed in the first five months of 2018. This has allowed the central bank and the Qatar Investment Authority (QIA, the sovereign wealth fund) to move back some of their assets offshore. Meanwhile, the foreign exchange reserves of the central bank increased to $23.3 billion in May 2018 from $13.2 billion at the end of last year (excluding gold and SDRs), albeit still well below their $33.7 billion level before the boycott.

The demonstrated financial and institutional capacity to use the sovereign wealth fund's (SWF) foreign assets mitigates Qatar's external vulnerability stemming from the economy's large external debt repayments in relation to the level of the central bank's foreign exchange reserves. That being said the lack of transparency about the exact size of the QIA assets and their composition prevents a detailed assessment of Qatar's financial capacity to stem potential balance of payments pressure.

On the fiscal side, the direct fiscal costs of the GCC blockade have so far been very small and limited to the funding of the "air bridge" during the first two months of the blockade (less than 0.1% of GDP). A more significant fiscal cost has been indirect due to the delayed implementation of planned new revenue measures, including utility tariff and public service fee hikes that were scheduled for mid-2017. These measures were put on hold to give the private sector additional room to adjust to the blockade, leading to an estimated loss of government revenue of 1.5-2.5% of GDP. However, this revenue shortfall was fully offset by lower capital expenditure, and Moody's expects that the delayed revenue measures will be implemented during 2018. Similarly, Moody's expects that the 5% value-added tax, which the authorities were supposed to implement at the be beginning of 2018 and which would yield up to 0.9% of GDP in additional non-hydrocarbon revenue for the budget, will be implemented by early 2019, putting fiscal reform back on track.

Meanwhile, any revenue shortfalls this year will be more than offset by higher oil prices which the 2018 budget assumed at $45/barrel, most likely well below the average level in 2018 and underscoring the authorities' prudent approach to budgeting.

Contingent liabilities that could potentially crystallize on the sovereign balance sheet in relation to the extended losses of Qatar Airways, which is fully owned by the QIA, would be comfortably absorbed by the SWF. Moody's estimates that the SWF had assets worth close to 190% of GDP at the end of 2017, compared with 3.3% of GDP in Qatar Airways' debt obligations, only a fraction of which would plausibly crystallize.

RATIONALE FOR AFFIRMING THE RATING AT Aa3

Qatar's Aa3 rating remains supported by a very large net asset position of the Qatari government, that Moody's estimates at 137% of GDP at the end of 2017; exceptionally high levels of per-capita income ($61,282 in current US dollars and $124,529 on a purchasing power parity basis); and very large hydrocarbon reserves (including more than 140 years of natural gas production at the current rate).

Qatar's rating is also supported by its moderate fiscal and external break-even oil prices, the oil price levels that would balance the government's budget and the current account respectively. According to the IMF, Qatar's fiscal breakeven price is around $47/barrel for 2018 (when income from the SWF assets is included in revenue), while its external breakeven price is $57/barrel, both below current oil price levels and in line with Moody's medium-term assumptions (around $45-65/barrel).

Furthermore, Moody's expects that the fiscal breakeven price will decline by up to $20 over the medium term as the government halves its capital spending after the 2022 FIFA World Cup and raises LNG production by close to 30% from the new gas development in the North Field during 2023-2024. As a result, Qatar's government budget is likely to be broadly balanced or, in the medium term, in surplus, leading to a gradual decline in government debt from just under 50% of GDP in 2017 towards 40% of GDP early next decade.

WHAT COULD MOVE THE RATING UP/DOWN

The stable outlook reflects Moody's view that risks to Qatar's credit profile are balanced. A sustained and material reduction in external vulnerabilities through a combination of a decrease in external debt and a re-building of foreign exchange reserves would likely prompt Moody's to upgrade the rating, especially if also accompanied by improved transparency about the size and the composition of the government's financial assets.

Conversely, an escalation of the regional tensions that would (1) threaten to disrupt Qatar's hydrocarbon exports on a prolonged basis, (2) put material pressure on the government's financial position, including through crystallization of wider public sector liabilities on the government's balance sheet, and (3) lead to a further significant depletion of the external buffers would likely lead Moody's to downgrade the rating. Furthermore, a material slowing or reversal of fiscal consolidation that would point to a sustained rise in the government's debt burden would put downward pressure on the rating.

SUMMARY OF MINUTES FROM RATING COMMITTEE

GDP per capita (PPP basis, US$): 124,529 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.6% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.6% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -5.8% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 3.8% (2017 Actual) (also known as External Balance)

External debt/GDP: 88.0% (2017 Actual)

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 09 July 2018, a rating committee was called to discuss the rating of the Qatar, Government of. The main points raised during the discussions 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 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.

The Local Market analyst for these ratings is Alexander Perjessy, +971 (423) 795-48.

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

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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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