Qatar robust to oil price shocks

Capital Intelligence believes the threat posed by the global economic downturn to Qatar’s ‘AA-’ sovereign rating is low and the long-term outlook for sovereign creditworthiness remains stable.
Qatar’s sovereign ratings are supported by the strength and flexibility of the government’s balance sheet and the country’s external finances, which in turn are underpinned by the sheer scale of hydrocarbon production relative to the small size of the population.
Capital Intelligence expects Qatar’s economy to grow by about 9% in real terms in 2009, reflecting capacity expansions in the liquefied natural gas (LNG) sector.
Sharply lower oil prices will, however, contribute to a moderate contraction in nominal GDP and activity in non-oil sectors is likely to slow significantly in response to tighter financial conditions and the downturn in the global economy. Inflation is expected to return to single digits but will probably remain comparatively high at around 8%.
The public finances are expected to remain strong, notwithstanding the oil price shock. Assuming an average oil price of USD40 a barrel and broadly unchanged policies, Capital Intelligence expects the central government budget to remain in surplus in the fiscal year ending in March 2010, although the magnitude of the surplus is projected to decline from about 14% of GDP in 2008/09 to around 3%.
The government’s room for fiscal manoeuvre in the event of further shocks is high.
Government debt is low at around 7% of GDP, while government financial assets have grown rapidly over the past five years and are probably at least seven times as large as the debt stock even after adjusting for likely valuation losses on foreign investments in 2008. These estimates are, however, subject to a large margin of error as details on the size and composition of assets are not disclosed by the authorities.
Even so, with the budget projected to remain in surplus the government’s net asset position can reasonably be expected to continue strengthening over the medium term.
Export earnings are projected to fall in 2009 and the current account surplus is expected to shrink but nevertheless to exceed amortisation payments on external debt by a substantial margin. Although gross external debt is reasonably high at an estimated 57% of GDP at end-2008, much of the external debt of non-banks is related to export-oriented projects in the hydrocarbon sector where repayment capacity appears to be strong even at current oil prices. Moreover, both the public sector (including Qatar Petroleum and its subsidiaries) and banking sector, which together account for the bulk of the debt stock, are net external creditors.
Capital Intelligence notes that Qatar’s banking system has so far weathered the global financial turbulence and systemic risks appear to be low. Nevertheless, the combination of markedly slower growth in non-hydrocarbon sectors of the economy and declining asset prices is likely to weigh on credit quality in 2009-10. Together with substantially lower loan growth this is expected to lead to reduced profitability and some banks may see their financial strength ratings come under downward pressure.
To shore up confidence in the sector, the government has instructed the Qatar Investment Authority (QIA) to purchase up to 20% (about USD5 billion or 5% of 2008 GDP) of the share capital of listed Qatari banks and we believe additional support would be forthcoming should the operating environment deteriorate further.