x Abu Dhabi, UAETuesday 23 January 2018

S&P casts doubt on Qatar AAA bid

Qatar will struggle to win a credit rating upgrade unless the nation reduces its reliance on public spending, the ratings agency Standard & Poor's said after the government said it deserved AAA status.

Qatar will struggle to win a credit rating upgrade in the next two years unless the nation reduces its reliance on public spending, Standard & Poor's said after the government said it deserved AAA status.

Qatar's "limited monetary flexibility and its banks' increasing dependence on external financing" stood in the way of raising the rating from AA, the third-highest investment grade, said the S&P sovereign analyst Trevor Cullinan. Qatar's proximity to Iran could also prevent an upgrade, according to Commerzbank.

The country, which pegs its currency to the US dollar, relies on revenue from gas and oil exports to fuel the economy. The government plans to spend $140 billion (Dh514.17bn) on infrastructure projects by 2019, three years before the country hosts the Fifa World Cup, according to the finance minister Yousef Kamal.

"We are working on AAA instead of AA," he said. "Our strength deserves AAA."

A two-level upgrade to AAA would put the world's largest exporter of liquefied natural gas (LNG) on the same level as countries including Norway, the world's eighth-largest exporter of oil.

The cost of insuring Qatar's dollar-denominated debt has declined 20 basis points, or 0.2 percentage points, this year to 63 on March 8. That has narrowed the gap with Norway's credit default swaps to 43 basis points, the lowest since 2008, the data shows.

Qatar's plan comes at a time when the global economic slowdown and Europe's debt crisis is costing some advanced nations, including the United States and Spain, their top ratings.

This made it "quite challenging for Qatar to convince the rating agencies for a AAA rating", said Apostolos Bantis, a credit analyst at Commerzbank.

If anything, Qatar's rating remained vulnerable to "sharp and sustained declines in oil prices or banking developments" that weaken the country's external or fiscal positions, Mr Cullinan said. The net external liabilities of Qatar's banks surged to 97bn riyals (Dh97.9bn) in December from 43bn riyals a year earlier, S&P said, citing central bank data.

Qatari banks also raised $3.8bn from the bond market last year, compared with none in 2011 as they step up lending to the government and seek to expand beyond the country of 1.8 million people.

The yield on Qatar National Bank's $1bn worth of dollar-denominated bonds due 2018 fell five basis points last week, the fifth straight weekly decline, to 2.46 per cent.

The nation's 11 domestic banks have relied on lending to public sector entities. Loans in that category accounted for 46 per cent of total credit facilities in December, up from 39 per cent a year earlier, central bank data showed. Public sector loans jumped 47 per cent over the year, more than five times the growth rate for credit to private businesses.

The public institutions were "in the early stages of development compared with most AA-rated sovereigns",Mr Cullinan said. "Data gaps are significant and transparency is limited, by international standards. In particular, the government neither discloses its fiscal assets nor reports earnings on these assets."

Qatar has been snapping up global assets including London's Harrods department store, Credit Suisse Group, Xstrata and Volkswagen. Qatar National Bank, whose chairman is the finance minister, bought SociétéGénérale's majority stake in Egypt's National SociétéGénérale Bank.

The country will record a budget surplus of 8.5 per cent of GDP this year, the third-biggest among the six-nation GCC after Kuwait and Saudi Arabia, the IMF estimates show. Its government expects next year's budget, which goes into effect next month, to be a "little bit" bigger than the current budget one and based on an oil price of $65 a barrel, said Mr Kamal.

Qatar is seeking to diversify away from petroleum exports by developing industries and financial services. The government's spending plans ahead of the World Cup finals include $35bn metro and rail networks, new highways, a new port, nine new stadiums and sporting facilities.

The construction industry will grow 10 percent this year and the transportation sector will expand 15 percent, Mr Kamal said. He added that the country's economy grew 13 percent between 2008 and 2012, and that non-oil economic output wouldexpand 9 percent this year, in line with IMFestimates.

Still, at 28 percent, Qatar's net debt as a percentage of economic output is higher than AAA-rated Denmark and Norway, according to IMF data.

"Despite its strong growth record and upbeat prospects, the size of Qatar's economy is relatively small, and following the 2008 credit crisis the rating agencies are taking a more conservative approach on their rating actions," Mr Bantis said.

Investors would also factor in Qatar's proximity to Iran on the bonds, he added.

"In essence a AAA rating would not materially change Qatar's creditworthiness as regional geopolitical risks would continue to be factored into Qatar's spreads."

* Bloomberg News