Moody’s has downgraded Qatar’s long-term issuer and senior unsecured debt ratings rating to Aa3 from Aa2 but changed the outlook to stable from negative. It cites ‘a weakening of Qatar’s external position and uncertainty of the sustainability of the country’s growth model’ as the key reasoning. Qatar still remains rated AA by S&P although they have it on a negative outlook.
One of Moody’s concerns is Qatar’s increase in its total external debt which reached 150% of GDP in 2016 and showed a significant increase from 111% in 2015 which they note was the highest rate of increase amongst the Aa2 to Aa3 rated sovereigns. The rating agency also noted an increase in Qatar’s external vulnerability indicator or EVI, calculated as short term and currently maturing long-term debt to foreign exchange reserves, and that it is higher than Aa2 peers such as the UAE and Kuwait.
However, we like to look at the asset side of the balance sheet and not just the debt position in isolation hence we look at net foreign assets (NFA) and for us the picture looks a lot less concerning. Qatar has a significant asset buffer in terms of its sovereign wealth fund (QIA) and has one of the strongest NFA positions in our universe. In fact, Moody’s acknowledge this issue stating the EVI for Qatar ‘is high at 464% expected in 2017, but this is because we do not include QIA's assets in the calculation. Including our estimates for QIA's assets, the 2017 EVI stands at only about 40%. Factoring in these additional buffers, we have adjusted the score for Qatar's external vulnerability risk downwards from an indicative score of 'medium' to a final score of 'very low' because we believe that the country's vulnerability to external risks is less pronounced than quantitative indicators would suggest, given Qatar's sizable foreign exchange reserves.’
We would also note that Qatar is expected to move into a position of current account surplus in 2017 both on Moody’s and the IMF forecasts so there will be a considerable easing in the pressure on the current account. Plus, Qatar also has a relatively low fiscal breakeven oil price at $53-55 per barrel for 2017 and 2018.
We remain comfortable with our positions in Qatar as they trade sufficiently ‘cheap’, even with a downgrade, offering several notches of credit protection. For example, State of Qatar 6.4% 2040 trades 4.7 notches cheap using an Aa2 equivalent best rating (AA by S&P) and 3.7 notches cheap if we use Moody’s downgraded Aa3 rating, still making it an attractive core portfolio holding. Similarly, the core quasi-sovereign holdings of Nakilat and Ras Laffan have been downgraded one notch by Moody’s to reflect the sovereign downgrade: Nakilat 6.067% (1st lien) and 6.267% 2033 (2nd lien) issues are now rated A1 and A2 respectively and Ras Laffan 5.838% and 6.332% 2027 issues are now rated A1. These bonds, even factoring in one notch of downgrade, trade close to four credit notches cheap so remain amongst our favoured holdings.