HONG KONG — Normalization of relations between Qatar and its neighbors would be credit positive for Qatar, but high public sector debt will remain a drag on the country’s sovereign ratings, says Fitch Ratings.
There have been recent signs of progress towards a resolution of the dispute that began in mid-2017 between Qatar and the ‘Quartet’ (the United Arab Emirates, Saudi Arabia, Bahrain and Egypt) and resulted in the near-complete rupture of trade, financial and diplomatic relations.
The GCC summit on Jan. 5 2021 may reveal the scope of any agreement. Normalization, if it occurs, would be likely to proceed gradually, beginning with bilateral steps between Saudi Arabia and Qatar.
Improved regional relations would bolster prospects for Qatar’s non-oil economy over the medium term, once the impact of the coronavirus pandemic fades.
A resumption of travel links could eventually lift tourism inflows, and greater interest from buyers elsewhere in the region could buoy the local real-estate market.
A reassessment of the geopolitical risks facing Qatar was one of the factors that led us to downgrade its rating to ‘AA-’ from ‘AA’ in August 2017. Moreover, when we affirmed the rating, with a Stable Outlook, in June 2020 we identified a structural reduction of geopolitical risks, combined with other factors, as a potential positive rating driver.
Nevertheless, high leverage will remain a key rating constraint. We expect Qatar’s general government debt-to-GDP ratio to hit 76% in 2020, up from 60% in 2017, including government overdrafts and T-bills, substantially above the median for ‘AA’ rated sovereigns.
Our forecast assumes government debt-to-GDP will fall to 64% in 2021, driven by the authorities’ stated intention to repay debt using cash reserves built up through surplus bond issuance over the last three years. However, debt reduction so far has been more gradual than the government had initially indicated.
The sovereign’s contingent liabilities are large, notably those stemming from local banks. The banking sector, with assets worth over 200% of GDP, is an integral part of Qatar's economic model, and the sovereign has an extensive record of supporting it.
Qatar's banks have concentrated domestic exposures, including exposure to the real-estate sector, and are exposed to adverse shifts in external funding conditions. Their net foreign liabilities rose to a record $130 billion, or 70% of GDP, in 2019. We estimate the debt of non-bank government-related entities is also significant, at around 38% of GDP in 2019.
The government's strong overall asset position mitigates some of the risks from high indebtedness, although Qatar’s assets are the most opaque in the region. We estimate sovereign net foreign assets (reserves plus other government assets less external debt) at 137% of GDP ($240 billion) in 2019, largely reflecting the estimated assets of the Qatar Investment Authority (QIA) which have been buoyed in recent years by strong market returns.
Qatar will post a roughly balanced budget in 2020, including estimated investment income from QIA assets. The 2021 budget, released last week, plans for a deficit of 6% of GDP excluding investment income, at an oil price of $40/bbl. We see this as broadly realistic and expect a fiscal deficit of about 3% of GDP in 2021, including investment income, assuming oil prices at $45/bbl. We estimate Qatar's fiscal break-even oil price at an average $50/bbl in 2020-2022.
The government has offset the budgetary hit from low oil prices by postponing public capital spending, and expansion of liquefied natural gas (LNG) production stands to deliver substantial improvements to public finances in the long term. Nonetheless, weaker-than-expected energy markets or fiscal consolidation efforts could put upward pressure on deficits and debt, and pose risks to the sovereign rating.