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Rating Action:

Moody's downgrades Qatar's rating to Aa3 from Aa2 and changes the outlook to stable from negative

26 May 2017

Frankfurt am Main, May 26, 2017 -- Moody's Investors Service has today downgraded the Government of Qatar's long-term issuer and senior unsecured debt ratings to Aa3 from Aa2 and changed the outlook to stable from negative.

The key drivers for the rating downgrade are a weakening of Qatar's external position and uncertainty over the sustainability of the country's growth model beyond the next few years.

The stable outlook reflects Moody's view that implementation of fiscal and economic reforms, coupled with sizable reserve buffers, will help shield Qatar's credit profile from deteriorating further and remain consistent with a Aa3 rating.

The rating action also applies to the backed senior unsecured rating of SoQ Sukuk A Q.S.C., for which the rating was downgraded to Aa3 from Aa2 and the outlook changed to stable from negative.

As part of today's rating action, Moody's has also lowered Qatar's long-term foreign-currency bond and deposit ceilings to Aa3 from Aa2, whereas 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 were also lowered to Aa3 from Aa2.

RATINGS RATIONALE

RATIONALE FOR RATING DOWNGRADE TO Aa3

1) Weakening of Qatar's external position.

Moody's estimates that Qatar's total external debt reached almost 150% of GDP in 2016, up from an estimated 111% in 2015. The level and increase in Qatar's external debt-to-GDP ratio is the highest amongst Aa2-Aa3-rated sovereigns.

The sharp increase in external debt in 2016 was driven by a rise in commercial banks' foreign liabilities to $123 billion (81% of GDP) from around $85 billion the year before and the net foreign liability position of commercial banks has weakened to QAR185 billion ($51 billion, 33% of 2016 GDP) as of February 2017, from QAR122 billion ($33 billion, 22% of 2016 GDP) in February 2016. Non-resident deposits saw the largest increase, reaching an interim peak of QAR199 billion ($55 billion) in January 2017, up from QAR88 billion ($24 billion) a year before. While the amount of non-resident deposits has declined slightly since then (to about QAR190 billion as of March), they remain the second largest source of funding after liabilities due to foreign banks.

As a result of this much larger external debt load, external vulnerabilities for Qatar are somewhat larger than for highly-rated peers in the Gulf Cooperation Council (GCC). Excluding government financial assets managed by Qatar Investment Authority (QIA), Moody's estimates that Qatar's external vulnerability indicator was about 300% of available foreign exchange reserves in 2016, up from 218% in 2015, compared to 200% estimated for the United Arab Emirates and 86% for Kuwait.

Moody's expects Qatar's current account balance to move from a deficit of 5.5% of GDP in 2016 close to balance in 2017 and an average surplus of around 2% of GDP between 2018-21, which is significantly below the close to 28% of GDP average surplus observed during the first half of the decade. While Moody's expects overall balance-of-payments surpluses will support the recovery in foreign exchange reserves, continued debt-creating inflows on the financial account will keep total external debt levels close to 150% of GDP over the coming years.

2) Uncertainty over the sustainability of Qatar's growth model beyond the next few years.

Hydrocarbon growth and public investment were the main growth drivers over the past decade. Hydrocarbon growth was very strong during the period 2004-2013, with average annual growth of 13.2% in total production. Most of that growth came from gas production, which increased by an average annual growth rate of more than 18%.

During the same period, Qatar's total population increased from 660,000 to about 2.1 million, and continued to increase thereafter, standing at about 2.6 million as of 2016 (according to IMF numbers). This rapid population growth was the result of government-led investment in infrastructure which required large-scale low-skilled immigration, but also labor force increases in the higher-skilled segment. Population growth dynamics have been broadly mirrored by nominal private consumption growth. Strong growth in government capital expenditure (around 30% on average per year between 2003 and 2013) has resulted in strong annual increases in gross capital formation which averaged almost 24% per year between 2003 and 2013. While this has also led to strong import growth, exports grew faster, helped by hydrocarbon production increases and oil price rises.

Looking forward, there are several uncertainties over Qatar's growth model. These include an expected peak and potential decline in population numbers from 2020 (and maybe earlier) and the envisaged reduction in public investment. This would mean that private consumption as well as investment growth would slow down sharply.

The government's total public investment plan for major projects for the years 2017-2024 (which includes infrastructure spending for the FIFA World Cup 2022) will amount to QAR273 billion ($75 billion). The plan is frontloaded, with about QAR230 billion ($64 billion, or 85% of the total) to be spent in 2017-19, of which QAR90 billion per year will be spent in 2017 and 2018, and only QAR47 billion in 2019. While the government maintains that plans are subject to upward revisions in later years, as new projects are added, a slowdown in public sector investment is highly likely over the long-term.

While growth will be supported by the announced lifting of the self-imposed gas production moratorium, question marks remain over how effective the sizable public investment in infrastructure projects will be to diversify Qatar's economic base. Currently, Qatar ranks 83rd out of 190 countries covered in the World Bank's 2017 Doing Business ranking, behind other GCC members such as the UAE (26th), Bahrain (63rd) and Oman (66th), but ahead of Saudi Arabia (94th) and Kuwait (102nd).

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook is supported by a number of credit strengths embedded in Qatar's credit profile, including fiscal policies that will shield the sizable net asset position of the government, Moody's expectation of continued growth over 2017-20 and exceptionally high levels of wealth. Taken together, these factors will help shield Qatar's credit profile from deteriorating further and remain consistent with a Aa3 rating.

Fiscal consolidation is progressing. Fuel subsidy reforms have been implemented, the public sector has been streamlined, and first steps have been taken on utility tariff reforms. According to Moody's estimates, the fiscal balance in 2016 stood at -7.4% of GDP and Moody's forecasts it to come close to balance in 2017-18. The reduction in fiscal deficits is also helped by comparatively low fiscal breakeven oil prices which the IMF estimates at $53-$55 per barrel in 2017 and 2018. Based on these forecasts, the nominal increase in government debt is projected to slow down, and the debt-to-GDP ratio will peak at slightly below 50% in 2019 and gradually decline thereafter.

While Qatar's debt burden and affordability metrics will weaken beyond the median for Aa-rated sovereigns, the government's deliberate choice to fund fiscal deficits purely via debt issuance as opposed to liquidating government financial assets in QIA is supported by Qatar's established presence in international debt capital markets and the existing domestic yield curve.

In Moody's view, the government will maintain its strong net asset position. Qatar's sizable asset buffers, which Moody's estimates at around $300 billion (200% of GDP) in 2016, 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 Moody's estimates at close to 30% of GDP as of 2016.

Also credit supportive are Qatar's growth performance driven by large investments in infrastructure, and exceptionally high levels of wealth. Until 2020, growth will continue to be driven by the non-hydrocarbon sector, particularly public investment in preparation for the 2022 FIFA World Cup. Hydrocarbon sector growth will be supported in 2017 by the Barzan gas project coming on stream, and further out by the announced lifting of the production moratorium in the North Field. Moody's projects average annual real GDP growth of around 2.5% between 2017 and 2021.

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.

WHAT COULD MOVE THE RATING UP/DOWN

The stable outlook signals that upward and downward rating pressures are balanced.

The following factors and developments would be credit positive: (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.

The following factors or developments would be credit negative: (1) deterioration of the government finance position, resulting in a continued increase in government debt levels as opposed to Moody's expectation of debt levels to 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 disruptions to oil and gas production and/or foreign investments in the economy.

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 23 May 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 decreased. 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. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. External debt has increased sharply from already elevated levels, weakening the external position.

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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