Dubai: Standard & Poor’s Ratings Services affirmed its ‘AA’ long-term and ‘A-1+’ short-term foreign and local currency sovereign credit ratings on the State of Qatar. The outlook is stable.

The agency also affirmed the ‘AA’ long-term issue ratings on the bonds issued by Qatari Diar Finance Q.S.C. and SoQ Sukuk A Q.S.C.

The ratings reflect S&P’s view of Qatar’s high economic wealth and strong fiscal and external balance sheets. The ratings are constrained by Qatar’s limited monetary policy flexibility, still-nascent public institutions, and limited disclosure, particularly with respect to government assets and investment income.

Domestic political and social stability prevails, despite, in our view, only gradual political modernisation and a highly centralised decision-making process. Executive power remains in the hands of the emir. In our view, the predictability of future policy responses is tempered by weak political institutions, although in our base case we assume that policy will continue to focus on prudent development of the hydrocarbon sector, alongside further economic diversification. There are also material data gaps, particularly regarding the government’s asset position.

S&P estimates Qatar’s gross domestic product (GDP) per capita at $94,000 (Dh344,980) in 2014. “Trend” growth, which S&P defines as a weighted 10-year average of real GDP per capita growth, is expected to be broadly flat. “Nominal GDP has expanded by 20 per cent on average and may be a better indicator of prosperity than real GDP in a resource-based economy,” S&P said in its report, projecting that population growth will average about 6 per cent a year until 2017.

Qatar’s high wealth means that its relatively weak per capita economic growth performance is not an immediate concern for the ratings. However, beyond our two-year outlook horizon, Qatar’s economic risk position could deteriorate relative to economies that are expanding more rapidly.

Competitive position

S&P believes that there are medium- to long-term challenges to Qatar’s competitive position in the liquefied natural gas (LNG) market from new shale production, Russia’s gas pipeline to China, and increased pressure to delink LNG contracts from the oil price. “Nevertheless, we see several factors that support Qatar’s competitive position in the LNG market,” the report said. Firstly, global demand for natural gas is expected to remain strong to absorb the new supply. Second, Qatar’s strategy has been to diversify into all major markets, adjusting the mix of destinations and contract types according to market needs, the report said. Moreover, the majority of its exports are under long-term contracts, which provide certainty of volume off-take, while built-in diversion clauses in the contracts provide additional flexibility to manage quantity and price risks. Third, Qatar will continue to have a cost advantage over many of the new projects in other countries. “Since Qatar produces and exports significant quantities of condensate and natural gas liquids associated with natural gas, the effective average cost of producing LNG is much lower,” S&P said.

S&P said its forecasts are affected by expectations regarding oil and gas exports, which account for about 85 per cent of Qatar’s total exports. The ratings agency expects oil prices to moderate to about $100 per barrel by 2016 from about $105 in 2014. It also expects oil production will decline as output from maturing fields contract, at an average annual decline in crude oil production of 5 per cent over 2014-2017. Gas output (LNG and natural gas) is projected to be largely flat, given the moratorium on new investments in Qatar, while condensate volumes will likely increase by about 5 per cent per annum over the same period.

S&P expects general government revenues to decline to about 35 per cent of GDP by 2017 from about 42 per cent in 2014. We note that the government’s budget for 2014 and 2015 indicates expenditure growth of 3.7 per cent compared with the previous year. By contrast, during the five years to 2012, government expenditure rose by an average of 20 per cent a year. We expect government spending to slow to an average of 6 per cent for 2014-2017 to enable the government to maintain a relatively strong fiscal surplus averaging about 5 per cent of GDP over the period.