Published on 25 Feb 2020.
RAM Ratings has reaffirmed Qatar’s gAA3(pi)/Stable and seaAAA(pi)/Stable ratings on the global and ASEAN scales, respectively. The ratings are premised on the nation’s vast sovereign reserves and its resilience in overcoming a trade and diplomatic boycott led by Saudi Arabia. In adjusting to the rift, Qatar had broadened the geographical composition of the country’s trade and financial transactions, improved its business environment and enhanced domestic food production. As the path to resolving tensions remains unclear, potential risks include a worsening of regional relations that could undermine investor confidence, and invariably, a decline in global energy prices and loss of market share in the liquified natural gas (LNG) space.
Qatar’s extensive sovereign reserves – a combination of assets in its sovereign wealth fund, official foreign reserves and government deposits – are valued at above USD400 billion or 210% of GDP as at end-June 2019, which anchors its rating at gAA3(pi). The country’s official foreign exchange reserves, having rebounded to beyond pre-blockade levels, were able to provide a comfortable 6.7 months’ coverage of imports as at end-September 2019, cushioning macroeconomic shocks. Non-resident deposits and flow of funds from foreign financial institutions have also resumed after diplomatic tensions in the region have somewhat dissipated, evidenced by a reduction in public sector deposits in the banking system for support. Also viewed positively besides the recovery of the banking system is Qatar’s move to accelerate reforms such as the liberalisation of foreign investments and improvements in labour law, making it one of the first countries in the region to do so.
The recent first phase of a US-China trade deal that requires China to double its energy imports from the US by 2021 may result in a decrease in Chinese demand for Qatar’s LNG. Nonetheless, the impact on Qatar may not be significant as China is not one of its top three export destinations, making up only 12% of the former’s total LNG exports in 2018 compared to Australia’s 35%. Assuming a diversion of LNG demand away from Qatar to fulfil the deal, the country will likely only lose about 1% of global market share. At present, Qatar is the world’s top LNG exporter, supplying approximately a fourth of global LNG. The changing market dynamics require Qatar to adjust its strategy to maintain its dominance. Notwithstanding benefits of the long-term nature of LNG contracts, a prolonged period of low energy demand arising from COVID-19 could put pressure on LNG prices. As such, Qatar’s dependence on hydrocarbons is flagged as a negative rating driver as it poses a direct macro-financial linkage to the economy, exports and government revenue.
Any upward adjustment of Qatar’s sovereign ratings would require faster than anticipated growth in the private sector and a sustained pace of growth in the non-hydrocarbon sector. That said, an upgrade is unlikely in the medium term owing to the lingering effects of the diplomatic row. Besides the downside risks mentioned earlier, systemic risk arising from an over-supplied real estate market that jeopardises the stability of the country’s financial system will also warrant downward rating action.
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Ratings on Qatar