This week Qatar unveiled its latest National Development Strategy for 2018-2022. The 333 page plan is wide ranging covering areas such as infrastructure development, economic diversification, natural resources management and sustainable social and environmental development. The plan aims to increase efficiency and productivity while reducing spending to 21.2% of GDP and running small budget surpluses. It projects the economy will grow between 2.1% and 3% over this period.
Encouragingly, recent data releases have shown an improving trend in Qatar’s fiscal deficit position. Fitch note the Qatar Central Bank’s (QCB) preliminary estimate for 9 months to the end of September 2017 shows a fiscal deficit of QAR24.7bn (5.5% of GDP during the period), an improving trend from a 9% deficit in 2016 (full year). Importantly, QCB estimates exclude income from the Qatar Investment Authority (QIA). Fitch expects their headline measure of Qatar’s fiscal deficit (which includes income from the QIA) to improve to 2.5% of GDP in 2017 from 5.1% of GDP in 2016, helped by an improved oil price environment.
Oil continues its positive momentum with Brent crude futures touching $61.70 earlier today. Yesterday we wrote on the positive broader impact of this on the Middle Eastern exporters and particularly Saudi Arabia, and here write further on the likely direction of US government oil inventory data and the longer term impact of US shale production capacity.
Between now and the next OPEC meeting, scheduled for the end of this month, it’s hard to envisage any major developments from the region. With the recent success of Saudi and Russia agreeing to extend supply curbs, and adherence to OPEC production limits already surpassing 92%, they have played their cards as best they can and await the US oil industry’s response.
Good news for Qatar yesterday; more than 5 weeks into the dispute with a quartet of its neighbours, as the first batch of 4,000 airlifted cows began to arrive… Also, more importantly but less droll, Qatari bonds have rallied as much as 2.8% over yesterday and today following US Secretary of State, Rex Tillerson’s comments in Doha on the ‘very reasonable’ position of Qatar and the signing of (an apparently year-in-the-making) memorandum uniting their commitments against terrorism and terrorism financing.
A lot of our favoured sovereign and quasi-sovereign Eurobonds from the GCC have been strong performers over the past 18 months; this is despite ratings downgrades resulting from their high dependency on oil prices and weakened sovereign credit profiles due to deteriorating current account and fiscal balances, along with increased government debt levels. This most likely reflects that a lot of the issues were already trading several credit notches cheaper than their rating warranted, that their credit profiles although weakened are still robust and the continued search for yield across fixed income markets.
As if being knocked out of the ICC Champions Trophy by India wasn't enough, Moody’s has downgraded South Africa’s rating by one notch to Baa3 (with a negative outlook); both Standard and Poor’s and Fitch cut the country’s ratings to sub-investment grade, BB+, in April. Moody’s review, which started at the beginning of April, showed that although there are ‘a number of important strengths that continue to support South Africa’s credit worthiness’, a weakening institutional framework, uncertain policy and slow structural reform, and fiscal erosion are hampering growth.
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.
After a 12 year ban on new projects, Qatar Petroleum is to start a new natural gas project in the so-called North Field, Southern section, which they expect to have capacity of 2 billion cubic feet per day, which is the equivalence of 400,000 barrels of oil a day; this should come on-stream in around five years’ time.
The North Field and connected South Pars, which is shared with Iran, is the world’s largest reservoir of non-associated gas and Qatar Petroleum is the world’s top exporter of Liquefied Natural Gas (LNG).
Here at last, US Election Day and the most expensive campaign in history sees Hillary with a small 3.6% lead in the polls, the same margin as the Brexit polls, and we all know what happened there. Having always been taught ‘if you have nothing nice to say, say nothing at all’ we find it incredible that in a nation of over 300 million, the US has ended up with these two presidential candidates... oops nothing to say.
With central bank week in full swing we look back to our daily last week where we mentioned that our most likely scenario was for the BoJ to move to steepen the JGB curve and the Fed to remain on hold. Yesterday all eyes were on the Fed, after hearing that the BoJ had launched “QQE with Yield Curve Control”, or Quantitative and Qualitative Monetary Easing with 10-year yield control at 0%; intended to steepen the curve. Also as expected, the Fed maintained status quo; leaving a hike in December on the table.
As the Brexit effect continues to ripple through markets this week, sovereign bond yields have rallied to fresh lows and the US Treasury curve continues to flatten. Historically such aggressive falls in yields and the extent to which the US curve has flattened have indicated an approaching recession; we think it is a bit too early to call for a recession at this stage as moves have been amplified by global financial market uncertainty. However, we do not see any upside pressures in the short-term as concerns over global stagnation and further weak to mixed economic data will no doubt dampen already fragile market sentiment. In fact, the relatively cautious minutes from the June FOMC meeting released yesterday indicate a further delay in rate hikes and an even more gradual pace to future rate rises, with repeated reference to the “uncertainty”.
120 years ago today, the Dow Jones Industrial Average was officially launched by Charles Dow, with twelve industrial-related company stocks at an average price of 40.98. Since then the Index has rallied an impressive 43,460%, with only General Electric remaining in the now 30-stock index; industrials continue to dominate the weighting at just under 20%.
Sticking with record breaking, in the Middle East’s largest bond sale so far, Qatar announced a USD 9bn deal; the sovereign's first issuance in five years. The order book was unsurprisingly heavily oversubscribed, at ~2.6 times.
So the Japanese Government ten-year benchmark bond (JGB) traded with a negative yield in Tokyo overnight, the first for any G7 economy. Trading at -0.035% that means around 70% of outstanding JGBs are now trading with a negative yield. Safe haven buying in a holiday shortened week for Asia amidst a plunge in the Nikkei, down 5.4% at the close, was the main cause.