Dagong Global Credit Rating Co., Ltd.
Jun 5, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to maintain both the local and foreign currency sovereign credit ratings of the State of Qatar (“Qatar”) at AA-, while downgrading both outlooks from stable to negative. In the short term, Qatar will stabilize the economic growth through large-scale infrastructure constructions. Sustained fiscal consolidation, adequate fiscal reserves and foreign exchange reserves will continue to support the government solvency. However, in the context of the Fed raising interest rate, increasing bank liquidity risk resulted from the Fed’s interest rate hike will put pressure on the government solvency.
The main reasons for maintaining Qatar’s sovereign credit ratings are as below:
1. The short-term economic growth will be stimulated by the new natural gas project, while long-term economic growth potential is subject to rare talents and fragile industrial structure. The slowing-down public investments and the slump oil prices had reduced Qatar’s economic growth to 2.7% in 2016. The oil prices recovery in short term are limited as the rising supply of US shale oils exacerbated oil oversupply. What’s more, Qatar's public investment would keep slowing as its oil production is inhibited by the production cut agreement. But Brazil's natural gas project signed in November 2016 will significantly promote natural gas production. Thus Qatar economic growth is expected to rebound to 3.4% in 2017 and fall to 2.8% in 2018. Although Qatar’s government vigorously promoted economic diversification while developing oil and gas industry, its average economic growth is expected to be 2.0% from 2019 to 2021 due to its vulnerable and hardly improved industrial structure as well as the shortage of talents.
2. The gradual financial improvement and large sovereign wealth funds will maintain the debt repayment source stable. The sharp decline of state-owned enterprises’ investment return will reduce fiscal revenue, but the current expenditure will continue to decrease, and the capital spending will decline from 2018. Therefore Qatar’s general government primary financial deficit rate is expected to fall to 2.1% in 2017 and 0.1% in 2018, and the corresponding financing needs will reduce to 8.9% and 8.5% of GDP. In addition, the size of Qatar’s sovereign wealth fund is large, and the ratio of net government financial assets to gross domestic product (GDP) is as high as 191.0% at the end of 2016. Thus the debt repayment source is sufficient and stable.
3. Adequate fiscal reserves and foreign exchange reserves will support the government solvency both in local and foreign currencies. The ratio of the general government debt to GDP is expected to increase to 50.1% in 2017 and 50.2% in 2018respectively as improving fiscal situation will slow down the growth of government debts. Besides, the government has no high short-term debt repayment as its debts are mainly long-term one. With the slow recovery in international oil prices and the increase in the natural gas production, Qatar’s current account deficit will gradually narrow. Coupled with the large sovereign wealth funds and foreign exchange reserves, the government solvency maintains stable.
As the low oil prices greatly reducing deposits from Qatar’s government and the oil and gas enterprises, the banking system has become more dependent on nonresident deposits and oversea wholesale financing as well as increased the size of Qatar's foreign debts. The ratio of Qatar's external financing needs to GDP has increased from 6.6% in 2014 to 59.7% in 2016, showing an obvious deteriorating external liquidity. In the short term, the Fed's hiking interest rate will lead to the tightening of the international liquidity, while the fixed exchange rate system against dollar will force Qatar’s monetary policy to tighten, thus increasing the external liquidity risk and asset quality. Therefore, Dagong downgrades Qatar’s sovereign credit rating outlooks from stable to negative both in local and foreign currency in the next 1-2 years.