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
