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Rating Action:

Moody's confirms Qatar's Aa2 government bond and issuer ratings and assigns negative outlook, concluding review for downgrade

14 May 2016

Frankfurt am Main, May 14, 2016 -- Moody's Investors Service has today confirmed the Government of Qatar's long-term issuer and senior unsecured debt ratings at Aa2 and assigned a negative outlook. Today's rating action concludes the review for downgrade which Moody's initiated on 4 March 2016.

The confirmation of Qatar's Aa2 rating reflects Moody's view that, despite the negative effect from a protracted period of low oil prices on the country's economy, government finances and external strength, the sovereign's overall credit profile remains consistent with a Aa2 rating.

The decision to assign a negative outlook captures the risks emanating from the comparatively stronger general government debt increase from already higher levels. It also takes account of implementation risks related to the Qatari government's reform plans, which Moody's assumes in its baseline scenario will be effective in protecting the country's economic and fiscal strengths.

The rating action also applies to the backed senior unsecured rating of SoQ Sukuk A Q.S.C., for which the rating was confirmed at Aa2 and assigned a negative outlook.

Qatar's long-term and short-term foreign-currency bond and deposit ceilings remain at Aa2 and Prime-1, respectively. Qatar's long-term local-currency country risk ceilings also remain at Aa2.

RATINGS RATIONALE

RATIONALE FOR CONFIRMING THE Aa2 RATING

Moody's decision to confirm the Government of Qatar's rating at Aa2 is supported by the expected continued strong growth performance, extraordinarily high levels of wealth, an institutional framework that is effective in implementing reforms, comparatively lower vulnerability to the oil price shock, a fiscal policy that will shield sizable buffers and benefits from an established sovereign yield curve, as well as institutional experience and capacity to issue debt.

The country's comparatively strong growth performance will be driven by continued large investment in infrastructure, predominantly in preparation for the 2022 FIFA World Cup. Moody's forecasts average annual real GDP growth of 3.6% for 2016-2020, reflecting zero growth in oil and gas production from 2017, as well as a decline in real growth in the non-oil sectors over the forecast horizon, averaging 6.7% in 2016-2020, down from 10.1% during 2011-15. After two years of contraction, Moody's expects nominal GDP growth to turn positive again from 2017 onwards, with nominal GDP reaching its 2014 level by 2019.

Qatar's extraordinarily high levels of wealth, with GDP per capita estimated by the IMF at around $132,000 in 2015 in purchasing power parity terms, provide a significant buffer and should help the government to introduce subsidy reforms and other revenue-enhancing measures, such as fee increases for government services.

Moody's expects the impact of low oil prices on Qatar's government balance sheet and on its external balance sheet to be manageable. The country's comparatively low fiscal and external breakeven oil prices, which the IMF estimates at $53 per barrel and $45 per barrel respectively on average for this year and next, support Moody's view that fiscal and external current account balance trends will turn positive from 2017. Moody's forecasts that Qatar's fiscal deficit will fall from 10% of GDP in 2016 to less than 4% by 2018 and that the current account deficit will improve from 6% of GDP to 3% over the same period.

The rating agency expects Qatar's debt burden and affordability metrics to weaken beyond the median for Aa-rated sovereigns. However, the likelihood that the government will choose to fund fiscal deficits via debt issuance rather than by drawing down the sovereign wealth fund assets of the Qatar Investment Authority (QIA), which Moody's estimates at close to $300 billion (around 180% of GDP) at the end of 2015, will help to keep the country's very strong net creditor position intact.

Under Moody's baseline scenario, Qatar's government debt-to-GDP ratio will rise to 54% by 2017, almost double the median for Aa2-rated peers. Nonetheless, at its peak, the stock of debt will be less than one-third the size of the QIA's assets. Moreover, Moody's expects that the combination of robust growth and fiscal consolidation measures will lead to a reversal in the government debt trajectory from 2018 onwards and lower the debt burden to 44.5% of GDP by 2020.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that the risk of a stronger-than-envisaged deterioration in core credit metrics outweighs the prospects of faster improvements than currently expected. The medium-term debt trajectory is quite sensitive to different nominal growth and budgetary outcomes. Relatively small cuts in growth and increases in the average deficit position would cause the debt burden to diverge still further, and more rapidly, from the Aa2 median.

According to Moody's, the risk of the government being unable to achieve its fiscal and economic objectives outweighs the risks of a positive shock. While the government has implemented a number of reforms since 2012, predominantly focused on reducing implicit subsidies for fuel, electricity and water, the rating agency believes that it's the broader aims of reducing current spending on public-sector wages and salaries (around 20% of total spending in 2014 and 2015) will prove more challenging, because they are likely to require cuts in the public-sector workforce which is dominated by Qatari nationals.

The government has limited room to cut investment spending further (given that significant reductions have already been made in expenditure on the FIFA World Cup 2022 and related infrastructure investment) because this would pose downside risks to growth and run counter to its economic diversification strategy. As such, there are downside risks to Moody's fiscal deficit and government debt projections.

The lack of a clear financing plan over the coming three years is another risk factor. While Qatar has issued in international markets in the past, the current low oil price environment is affecting all of its regional peers and is therefore increasing competition for funding. Together with tightening domestic liquidity, Moody's expects that this backdrop will probably lead to higher funding costs for both domestic and external funding, and together with rising debt levels will push up debt-service payments in the future.

WHAT COULD MOVE THE RATING UP/DOWN

Given the negative outlook, the likelihood of upward movement for Qatar's rating is very limited at this point in time. However, Moody's would consider moving the rating outlook back to stable if fiscal consolidation were to progress faster -- as would be reflected in a faster-than-expected narrowing of deficits in 2017 -- and if government debt were therefore to increase less than currently projected, offering greater assurance that it would ultimately move back towards the Aa2-rated median of around 30% of GDP. Importantly, such trends would support a stable outlook if they occurred as a result of structural fiscal reforms, rather than through potentially higher oil prices. Improved transparency about the type of financial assets held by the government, including the disclosure of details about asset composition and size, would also be credit supportive.

Conversely, Moody's would consider the following factors or developments to be credit-negative and as likely to lead to a negative rating action: (1) if the government finance position were to deteriorate further, resulting in an increase in government debt levels in the coming years that materially exceed the expected peak of 54% of GDP in 2017; (2) if there are 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) if sizable wider public-sector debt were to crystallize on the government's balance sheet; and (4) if the domestic or regional political environment were to deteriorate, resulting in disruptions 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.

GDP per capita (PPP basis, US$): 132,099 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.7% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.7% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -2.1% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 8.3% (2015 Actual) (also known as External Balance)

External debt/GDP: 90.7% (2015 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 09 May 2016, 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 principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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
SUBSCRIBERS: 44 20 7772 5454

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's confirms Qatar's Aa2 government bond and issuer ratings and assigns negative outlook, concluding review for downgrade
No Related Data.
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