Fitch Ratings has affirmed Qatar’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘AA-’ with a Stable Outlook. The ratings reflect Qatar’s strong sovereign net foreign asset position, the global rating agency said yesterday.
The Fitch expects that weaker hydrocarbon revenue and disruptions to non-hydrocarbon income as a result of the coronavirus pandemic will lead to low-single-digit deficits in 2020-2021, after surpluses in 2018-2019. Qatar has cut its budgeted spending by 16 percent for the year mainly by postponing some non-essential development projects beyond the 2022 World Cup.
The bulk of Qatar’s gas exports are sold under longterm (oil-linked) contracts, and around half the hydrocarbon revenue received in 2020 relates to 2019, limiting the drop in hydrocarbon revenue to 27 percent in 2020, and leading to a decline of 9 percent in 2021. Fitch estimates that Qatar’s fiscal break-even oil price will average $48/bbl in 2019-2021, one of the lowest among Fitch-rated energy exporters.
Fitch expects the nonhydrocarbon sector to contract by 5 percent in 2020 reflecting a strict lockdown in response to the coronavirus in the second and third quarters of the year, after non-hydrocarbon growth of 1.3 percent.
The government debt/GDP is expected to fall to 59 percent by 2021, from 68 percent of GDP ($126bn) in 2019, including domestic T-bills and overdrafts with local banks.
The government has indicated recently that it intends to repay $20bn in debt by 2021, including over $10bn in 2020, on top of scheduled maturities. This will be funded by Ministry of Finance (MoF) reserves built up through $34bn in Eurobond issuances over the past three years. The size of the MoF reserve account is undisclosed.
It consists of funds placed abroad (separate from the Qatar Investment Authority; QIA), funds at the QCB, and funds at local banks. According to Fitch, Qatar’s contingent liabilities are large, in particular stemming from banks, which have assets of over 200 percent of GDP.
The banking sector is an integral part of Qatar’s economic model and the sovereign has an extensive record of supporting it. Bank profitability and capitalization before the pandemic were sufficient to absorb some worsening of asset quality.
The government’s strong overall asset position mitigates some of the risks from contingent liabilities. Fitch estimates that sovereign net foreign assets (reserves plus other government assets less external debt) rose to 130 percent of GDP ($239bn) in 2019 from 105 percent of GDP in 2018, largely reflecting the estimated assets of the QIA, which were buoyed by strong asset market returns.
The rating agency expects that the government would be able to obtain significant liquidity from these assets if the need arose. The QCB’s reserves also rose to nearly $40bn or five months of current external payments in 2019 on the back of a modest current account surplus, from over $30bn in 2018.
Expansion of LNG production could deliver sizeable improvements to Qatar’s public finances in the long term. QP intends to add 49 million tonnes per year (1.9 million barrels of oil equivalent per day) of LNG production from its North Field by 2027, a 64 percent increase over the current capacity of 77 million tonnes.
While Fitch assumes that the project will reduce QP’s cash flow to the state by around $25bn spread over 2022-2028, the additional LNG production could ultimately result in more than $20bn per year of additional hydrocarbon revenue to the government (after winddown of QP capital spending and assuming some of the project costs are covered by debt and international partners).
The selection of international partners for the expansion has been postponed until end-2020, but QP is proceeding with engineering and design work and has acquired options for the construction of 100 LNG tankers for $20bn.