Moody’s downgrades Qatar’s credit rating

LONDON: Moody’s Investors Service has downgraded Qatar’s credit rating by one notch, citing increasing external debt and uncertainty over the sustainability of the country’s growth model over the next few years.

Moody’s downgraded Qatar’s long-term issuer and sovereign debt ratings to Aa3 from Aa2, but changed its outlook on Qatar to stable from negative, citing optimism around the implementation of fiscal and economic reforms.

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, according to a statement from Moody’s Investors Service.

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.

As part of the 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. since then (to about 190 billion Qatari riyals 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 percent of available foreign exchange reserves in 2016, up from 218 percent in 2015, compared to 200 percent estimated for the UAE and 86 percent for Kuwait.

Moody’s expects Qatar’s current account balance to move from a deficit of 5.5 percent of GDP in 2016 close to balance in 2017 and an average surplus of around 2 percent of GDP between 2018-21, which is significantly below the close to 28 percent 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 percent of GDP over the coming years, according to the statement.

“Looking forward, there are several uncertainties over Qatar’s growth model,” the statement added.

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 273 billion Qatari riyals ($75 billion). The plan is frontloaded, with about 230 billion Qatari riyals ($64 billion, or 85 percent of the total) to be spent in 2017-19, of which 90 billion Qatari riyals per year will be spent in 2017 and 2018, and only 47 billion Qatari riyals 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.