Introduction: Moody’s is one of three major international credit rating agencies (CRAs) – the other two being S&P and Fitch – that evaluate the Sate of Qatar’s (SoQ) sovereign creditworthiness. These ratings are important for any government’s debt management exercises as they affect the country’s ability to access financing – for fiscal deficits and other external funding needs – through debt capital markets (DCM).
Government-related entities (GREs), such as Ooredoo (telecommunications) and Qatar National Bank (QNB), also benefit from the strength of the SoQ’s credit rating as private creditors use the sovereign’s borrowing spreads as a pricing benchmark for GREs looking to sell bonds.
In other words, rating upgrades or downgrades can lead to materially higher or lower costs of funding. On large multi-billion-dollar transactions – such as the jumbo bond issued by the SoQ in April 2018 – even marginally higher spreads can translate into accrued interest payments in the millions of dollars.
Moody’s uses the following criteria to assess any sovereign issuer’s ability to service its debt:
– Economic Strength – Wealth, size, diversification, and long-term potential;
– Institutional Strength – Governance, quality of institutions, and policy predictability;
– Fiscal Strength – Ability to deploy resources to face current and expected liabilities;
– Susceptibility to Event Risk – Risk of sudden risk migration
On 13 July 2018, Moody’s changed the outlook on Qatar’s sovereign issuer rating to stable from negative, citing that “Qatar can withstand the economic, financial and diplomatic boycott by the three neighboring Gulf Cooperation Council (GCC) countries and Egypt in its current form for an extended period of time without a material deterioration in its credit profile.”[1]
Key Highlights of Credit Opinion:
– Current SoQ rating: Aa3 (outlook: stable)
– Continued strength of fundamental credit metrics, underpinned by:
– Vast hydrocarbon reserves, fueling high export capacity and a dominant global LNG market share (28%);
– Exceptionally high per-capita incomes – with a nominal GDP per capita of $69,933 in 2018 (forecast) – allowing for significant shock-absorption capacity and reform flexibility for the government.[2]
– Continued progress in the government’s debt reduction (de-leveraging) program is credit-positive. Government debt to GDP (debt/GDP%) has declined from 49% in 2017 to 42% in 2018 and is expected to fall further to 36% in 2019.[3]
– The stable outlook is consistent with Moody’s expectation of a declining government debt burden under Moody’s baseline oil price assumption of $75/barrel in 2019 and $65/barrel in 2020.
– What could lead to a rating upgrade? Coupled with the government’s de-leveraging strategy, a sustained re-building of foreign exchange (FX) reserves – which were negatively impacted by the blockade – would prompt Moody’s to consider upgrading the rating. According to Qatar Central Bank (QCB) data, FX reserves have increased from $14.8 bn in December 2017 to $29.4 billion in November 2018, an increase of 99%.[4]
– During the course of 2019, it will be worth monitoring how Moody’s rating sensitivity will correlate with Qatari policymakers’ steps to build up QCB reserves, strengthen its external position and continue to successfully manage the status quo of the blockade.
– Institutional Strength: The Credit Opinion states that “The government’s responses to the GCC boycott imposed in June 2017 demonstrate policy effectiveness and coordination between public sector entities, as well as a strong institutional capacity to manage crises.”[5]
– Budget 2019 Highlights: The government is targeting a small budget surplus of QAR4.3 billion (0.6% of projected 2019 GDP), compared to a budgeted deficit of QAR28.1 billion (4% of estimated GDP) for 2018. This will be the first fiscal surplus in 3 years, reflecting higher oil prices. (Brent crude average in 2018 was $72/barrel, compared with $54/barrel in 2017).
– Major capital projects – public investments in infrastructure for the World Cup and the economy at large – will continue to account for the lion’s share (43%) of government expenditure.[6] This flows both from the need to complete requirements for hosting the 2022 FIFA World Cup, and from the Qatar National Vision 2030, which prioritizes investments in the building blocks of a modern competitive economy.
Qatar’s OPEC Exit: Moody’s does not expect Qatar’s decision “to have any credit implications for the sovereign. Qatar’s reliance on LNG means that OPEC’s decisions on oil supply and their implications for oil prices will continue to have an indirect impact on Qatar’s government and export revenue. For Qatar to no longer be part of these decisions will not change the sensitivity of its credit metrics to oil price fluctuations and will not have material impact on the country’s hydrocarbon production and growth dynamics.”[7]
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[1] Moody’s, “Moody’s changes Qatar’s rating outlook to stable, affirms Aa3 rating,” 13 July, 2018
[2] Moody’s, Government of Qatar: Financials
[3] Moody’s Credit Opinion, “Regular Update: Government of Qatar”, pp.2
[4] QCB Monthly Monetary Bulletin – November 2018 – Table 11, “Total Official Reserves”
[5] Ibid., pp. 3
[6] Ministry of Finance – Qatar
[7] Moody’s Credit Opinion, “Regular Update: Government of Qatar”, pp.6