August 28, 2017 / 9:25 AM / a year ago

Fitch Downgrades Qatar to 'AA-'; Outlook Negative

(The following statement was released by the rating agency) HONG KONG, August 28 (Fitch) Fitch Ratings has downgraded Qatar's Long-Term Issuer Default Ratings (IDRs) to 'AA-' from 'AA' and removed them from Rating Watch Negative (RWN) where they were placed on 12 June 2017. The Outlooks are Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The rating actions reflect the following key rating drivers. Fitch believes Qatar's diplomatic and logistical isolation by some of its neighbours is unlikely to be resolved for some time. The group of countries led by Saudi Arabia and the UAE continue their boycott against Qatar, and their land, air and sea borders with Qatar remain mostly closed. International mediation efforts are still on-going but are not showing significant progress. In our view, the negotiating positions of Qatar and the boycotting countries remain far apart. The standoff has led Fitch to reassess the geopolitical risks facing Qatar. The risk of further escalation remains, although it may be mitigated by Qatar's network of alliances and its importance in global LNG markets, where it accounted for 30% of supply in 2016. At the same time, the full financial and economic impact of the embargo is uncertain and could prove to be larger than we currently expect. The measures taken against Qatar have dealt a blow to its external balance sheet. Separately, we have also cut our historical estimates of the assets of the Qatar Investment Authority (QIA) considering recent public statements by the governor of the Qatar Central Bank (QCB) on their size. We expect Qatar's sovereign net foreign assets (SNFA) to fall to 146% of GDP in 2017 from 185% of GDP in 2016 as the public sector, including the QIA, continues to move some of its deposits into Qatar's banks, offsetting the outflow of non-resident deposits. The non-financial public sector placed deposits of more than USD18 billion in Qatar's banks in June and July, and our forecast has this rising to USD35 billion by the end of 2017. The QCB extended repo facilities and placements of nearly USD10 billion in the same two months, and we expect QCB reserves to fall to USD20 billion by end-2017, from USD25 billion at end-June and USD32 billion at end-2016. We expect outflows of non-resident funding from Qatar's banks to continue, albeit at a slower pace than in June-July, as most of the remaining USD10 billion of GCC customer deposits have been withdrawn. In July, non-resident customer deposits and interbank placements in Qatar fell by USD7 billion, after a decline of USD15 billion in June. Much non-GCC external funding is being rolled over at a higher cost, but the escalation of tensions in the region could see it flee. At end-July, total non-resident customer deposits in Qatar's banks were still around USD43 billion, while non-resident interbank placements were USD49 billion, representing 15% and 17% of banks' non-equity funding, respectively. Qatar's 'AA-' ratings also reflect the following key rating drivers. We expect the pace of fiscal consolidation to slow, as the government bears some of the increased cost of imports and postpones certain non-oil revenue measures in a bid to support economic activity and sentiment. We forecast the government's fiscal deficit to narrow to 3.2% of GDP in 2017 from 4.9% of GDP in 2016 as an up-tick in oil prices and restraint in public sector pay offset higher spending on goods and services, transfers and development projects, with total spending 10% above budgeted amounts. Our deficit figures include estimated QIA income of around 4% of GDP. We expect GDP growth to slow to 2.0% in 2017 and 1.3% in 2018-2019, from 2.2% in 2016, with the dispute adding to the challenges facing Qatar's development programme and weighing on its growth outlook. The most affected sectors will include transport (Qatar Airways has lost about 10% of passenger flow) and tourism (around half of all visitors are from the GCC). Private investments on the back of persistently high government capital spending had begun to take over as drivers of non-hydrocarbon growth in recent years, but a long-lasting rupture with the GCC could undermine the prospects for many of these investments. Hydrocarbon growth will be supported by an increase in condensate production at the Ras Laffan II refinery in 2017 and a ramp-up of gas production for the local market from the Barzan field in 2018-2019. Qatar's oil and gas shipments have been mostly unaffected by the dispute, although tankers have had to adjust routes to avoid travelling from Qatar into the ports and waters of the UAE, adding some time and cost to their journeys. Logistical complications combined with higher risk perceptions could impact the pricing that Qatar is able to obtain on its exports, but Qatar's production costs are low and it will be able to maintain volumes. The recently announced 30% expansion of LNG production in the North Field, due to come on-stream after 2020, could forestall competing projects in other countries but will likely be profitable even if the global LNG market continues to be oversupplied. At an expected 146% of GDP in 2017, Qatar's SNFA are well above the 'AA' median and are sufficient to finance two decades of fiscal deficits or to repay all the estimated external liabilities of GREs, banks, and the private sector (around 90% of GDP). Qatar's SNFA are underpinned by the foreign assets held by the QIA. Specific figures on the size, returns and asset allocation of the QIA are not publicly disclosed, but we estimate that its foreign assets amounted to USD283 billion at end-2016. We expect QIA foreign assets to fall in 2017 as a result of draw-downs to support the banking sector, which may not be completely offset by the return on QIA assets. Qatar has demonstrated its ability to adjust its public finances to a low oil price environment. Spending fell 16% between 2015 and 2016 on the back of strong reductions in current spending. The government has reduced its capital spending programme for 2014-2024 to USD130 billion from USD180 billion by delaying some projects and changing the scope of others. The government has prepared scenarios for further cuts to capital spending in case oil prices fall again or in case pressures from the embargo intensify. Gasoline, electricity and water subsidies have been cut and initiatives to raise non-oil revenue are underway. The government remains committed to implementing VAT and excise tax in line with the rest of the GCC despite current political disagreements. Qatar has been able to restructure its supply chain and avoid major economic and social instability. We expect only a slight up-tick in inflation (to 4% in 2017 from 2.8% in 2016). Inflation was 0.2% yoy in July 2017 (4% for food). Imports dropped 40% in June, but we expect that this will be temporary. Ports in India and Oman have replaced Dubai's Jebel Ali as transhipment points for goods destined for Qatar. Significant stockpiles of construction materials are giving the government time to examine longer-term supply options even as deliveries from quarries in Iran and Oman continue. Qatar Airways' cargo capacity has been used to maintain supplies of food and other perishable goods. Qatar's 'AA-' ratings also reflect one of the world's highest ratios of GDP per capita, balanced against hydrocarbon dependence, government debt levels above those of rated peers, and mediocre scores on measures of governance and doing business (both below the 70th percentile). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Qatar a score equivalent to a rating of 'A+' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Public Finances: +1 notch, to reflect exceptionally large government assets. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to negative rating action are: - A failure to reduce fiscal deficits or a materialisation of large contingent liabilities, placing further strain on sovereign assets. - A further deterioration in Qatar's external balance sheet, for example due to continued outflows of non-resident funding. - Further escalation of measures against Qatar. The Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to an upgrade. However, future developments that could, individually or collectively, lead to positive rating action are: - A return to fiscal surpluses, for example due to sustained higher hydrocarbon prices, spending cuts or measures to raise non-oil revenue. - An improvement in Qatar's external balance sheet. - Normalisation of Qatar's external relations. KEY ASSUMPTIONS Fitch assumes that Brent crude will average USD52.5/bbl in 2017, USD55/bbl in 2018 and USD60/bbl in 2019. Fitch assumes natural gas prices will evolve broadly in line with oil prices. Fitch assumes that Qatar will continue to be able to export hydrocarbons and trade with countries that are not currently party to its dispute with neighbours. Fitch assumptions on the actual value of QIA assets are based on its top-down estimates and guidance provided by the Qatar government. Fitch further assumes that the majority of these assets can be monetised over time to meet liquidity needs as they arise. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR downgraded to 'AA-' from 'AA'; RWN removed; Outlook Negative Long-Term Local-Currency IDR downgraded to 'AA-' from 'AA'; RWN removed; Outlook Negative Short-Term Foreign-Currency IDR affirmed at 'F1+'; RWN removed Short-Term Local-Currency IDR affirmed at 'F1+'; RWN removed Country Ceiling revised down to 'AA' from 'AA+' Issue ratings on long-term senior-unsecured foreign-currency bonds downgraded to 'AA-' from 'AA' Contact: Primary Analyst Krisjanis Krustins Associate Director +852 2263 9831 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Jan Friederich Senior Director +852 2263 9910 Committee Chairperson Stephen Schwartz Senior Director +852 2263 9938 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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