Qatar gains credit in global markets

Confirmation of Qatar’s investment grade rating, together with a positive outlook, represents a significant boost for the economy

Credit ratings agency Fitch last month announced a positive outlook for Qatar’s public financing. This indicates a strong possibility that the AA– rating is set to be increased by one notch, or perhaps two to AA+, within a year or two.

It is an independent confirmation that the economic fundamentals and prospects are strong, and represents a fair reward for the government’s policy of long-term strategic planning, and borrowing only for investment. Just three years ago, the proportion of debt to GDP was 85%, resulting from a combination of low oil and gas prices and spending on infrastructure in preparation for the 2022 FIFA World Cup. The proportion has since come down to 45%, projected to fall to 42% in 2024, while Fitch estimates that the net external debt is 13%, down from 30% at end 2021. It commended the use of budget surpluses to pay down debt.

The current rating of AA– is the fourth highest out of 20 on Fitch’s scale. As a high investment ranking, it can attract investors seeking good returns with low risk. Fitch is one of the three most important ratings agencies, along with S&P and Moody’s.

There are other strengths in Qatar identified by Fitch. The trade surplus has risen, with a 2.9% year-on-year increase to just under QR 23 billion in February 2023. The value of exports is almost four times that of imports, according to figures from the Planning and Statistics Authority. The rating agency noted the expansion of North Field liquefied natural gas (LNG) production, revenues from which should bring Qatar’s fiscal break-even oil price to below $50 per barrel by 2026-27, from $57-58 in 2023-24. The country’s LNG production is set to increase from 77 million tonnes per year to 126 million over the period. The announcement was made before the rise in oil prices triggered by Saudi Arabia’s announcement in early April of cuts in oil production by OPEC countries.

The government budget surplus is estimated at 10% of GDP, and the state holds significant foreign assets, and a high GDP per capita. The state will continue to be able to transfer large sums to the Qatar Investment Authority, the nation’s sovereign wealth fund.

Negative indicators noted by Fitch were that debt, while low by international standards, was higher than other Gulf nations; a strong dependence on hydrocarbons and weak indicators on some aspects of governance. Debt-to-GDP has been on the high side at times in the recent history of Qatar, but this is a volatile indicator for a hydrocarbon-based economy, in which GDP is heavily influenced by the oil price. The priority for management of such an economy is to build a portfolio of strong and diversified assets and long-term investments, and these are areas where Qatar scores well.

The Gulf states learned a hard lesson during periods of low oil prices in the 1980s and 1990s, and had the foresight to set up sovereign wealth funds, to ensure longer-term investment, diversified investments, preventing the entire economy being dependent on fluctuations in global commodity prices over which a small nation has no control.

In Qatar, Government debt has been coming down. In the past two decades, investment has not only been for infrastructure, but also higher added-value products for exports, principally LNG. LNG is a refined, specialist energy source. Its use has lower emissions than others and it has a strategically significant role in the transition towards low or zero emissions economies.

In the past, ratings agencies have been critical of the extent of overseas investments and deposits in Qatar’s banks, noting that there is a risk of withdrawals at times of economic uncertainty. But the level is not too high at around 20-30%. Moreover, the particular profile of overseas deposits attracted to Qatari banks ought to carry more weighting, because in important respects it is a positive indicator.

A more significant factor than overseas versus domestic capital is long-term versus short-term funding. Qatar’s banks register a healthy proportion of long-term deposits, which have been shown to boost banking stability, and the principal sources for which are international. Through the upheaval of the blockade by local economies of Qatar during 2017-2021, and the Covid-19 pandemic and low oil prices, you did not see significant withdrawals from Qatari banks. So they passed a severe real-world stress test. They did not experience the type of sudden withdrawals that precipitated the collapse of Silicon Valley Bank, for example.

The announcement by Fitch last month is overwhelmingly positive for Qatar, and it is the result of long-term investment and economic diversification, not just fiscal prudence.?

Published in the?Gulf Times?on 10 April 2023