Moody’s recently affirmed Qatar’s LT foreign rating at Aa3 with a stable outlook. Qatar continues to be a favoured sovereign holding for us, particularly in the current environment, as it has a number of credit strengths that have put it in strong position to weather economic and fiscal shocks such as the coronavirus pandemic and lower oil price environment.
Moody’s expects Qatar’s real GDP to fall 3.5% in 2020 and growth to remain subdued, growing at an average of 1.5-2% until 2024. However, they view Qatar’s rating as being underpinned by factors such as ‘exceptionally high’ GDP per capita income (USD132,886 in 2019 on a purchasing power parity basis), large hydrocarbon reserves with low extraction costs, a government net asset position and an established track record of macroeconomic policy effectiveness. The stable outlook factors in geopolitical risks, the risk that oil prices stay weaker potentially raising uncertainty around the path of debt reduction set against longer term growth prospects from expansion of Qatar’s LNG facilities.
Qatar’s financial strength affords it the flexibility to reverse the trend in its weakening debt metrics over the medium term. Importantly, Qatar’s financial asset buffers exceed its debt: Moody’s estimate assets “at more than 180% of GDP in 2019.” They assume that Qatar’s debt: GDP will peak at 68% in 2020 and over the next few years it will be brought back down below 50% through a combination of spending cuts such as postponing/cutting back some non-essential infrastructure projects, debt repayment and a pick up in GDP as the economy recovers.
In addition to Qatar’s strong credit fundamentals, we still see valuation upside in a number of the USD denominated Qatar issues. For example, Qatar 6.4% 2040, while it has performed well YTD it is trading ~8pts off from its early August high: using a best Aa3 rating it trades on a yield of 2.7% and 2.8 credit notches cheap on our models.