Ratings:
Foreign and Local Currency: AA-/Negative/A-1+

For further details see ratings list.

Overview

• We expect the ongoing boycott of Qatar's economy will lead • to slower economic growth and hamper fiscal and external performance as outflows of external financing are offset by drawing upon government assets.
• The Qatari authorities are utilizing the country's large fiscal assets to limit the impact.
• We are affirming our 'AA-/A-1+' ratings on Qatar and removing them from CreditWatch with negative implications.
• The negative outlook reflects our view of the potential consequences of the boycott on Qatar's economic, fiscal, and external metrics, especially if the boycott is tightened or prolonged.

Rating Action
On Aug. 25, 2017, S&P Global Ratings affirmed its 'AA-/A-1+' long- and short-term foreign and local currency sovereign ratings on the State of Qatar. The outlook is negative. The ratings were removed from CreditWatch with negative implications, where we placed them on June 7, 2017. The transfer and convertibility (T&C) assessment is 'AA'.

Outlook
The negative outlook reflects our view of the potential consequences of the boycott on Qatar's economic, fiscal, and external metrics, especially if the boycott is tightened or prolonged.

We could lower our ratings on Qatar if the boycott reduces economic wealth levels to an extent that we no longer assess GDP per capita as a sufficient cushion to offset Qatar's weak trend growth rate. We could lower the ratings if policy predictability in Qatar were to become more uncertain. In order to support its economy and banking system, the Qatari government is liquidating and utilizing part of its fiscal assets. If our estimate of the government's liquid assets were to fall substantially, we could also lower the ratings.

We could raise the ratings if we saw domestic institutions mature faster than we expected, alongside significant improvements in transparency regarding government assets and external data quality.

Rationale
We affirmed the long- and short-term ratings on Qatar at 'AA-/A-1+'. This reflects our expectation that the authorities will continue to actively manage the impact of the boycott while preserving Qatar's core rating strengths, including strong public finances. While we expect that economic growth will slow as a result of the boycott, we still expect the government's infrastructure plan to underpin economic expansion and to partly offset low confidence and reduced consumption. The government has taken measures to support confidence in Qatar's banking system, including the repatriation of deposits previously held abroad into the domestic banking system belonging to the sovereign wealth fund Qatar Investment Authority (QIA). We expect further nonresident deposit outflows as they mature, which we expect will continue to happen in an orderly manner, limiting the likelihood that substantial additional support from the government to the banks would be needed. We do not expect the government's fiscal flow metrics to be materially altered by the boycott. Finally, while we expect external finances to weaken in the short term, higher oil price assumptions from 2019 (see 'S&P Global Ratings Raises Its Oil And Natural Gas Prices Assumptions For 2017,' published Dec. 15, 2016, on RatingsDirect) and an assumption that measures will not escalate further, should underpin an improving picture in the outer years of our forecast through 2020.

Institutional and Economic Profile: Government policies will remain supportive of economic growth

• Decision-making is centralized at the level of the emir and • the ongoing boycott complicates policy predictability, in our view. However, we expect government policy to remain supportive of economic growth and fiscal metrics to remain strong.
• Under our base-case, we assume that the current boycott will continue for an extended period, but will not materially escalate.
• We expect that economic growth will slow but the government's infrastructure plan will continue to support economic activity.

We expect the authorities to continue with key macroeconomic policies of fiscal consolidation and the economic-growth-enhancing $200 billion infrastructure development plan for 2014-2020. However, with the boycott in place, additional fiscal efforts may be required. Qatari authorities' policy response to falling oil prices since 2015 has been relatively strong and included reigning in current expenditures, merging line ministries, and implementing numerous cost-saving initiatives within its core government-related entities (GREs). In comparison with regional peers, fiscal deficits have been modest as a result and their financing strategy clear.

In response to the boycott, the government is using some of its assets to support the economy and banking system, which has significantly reduced potential banking system volatility. We note that the Qatari banks host a substantial amount of nonresident deposits and interbank exposures. Should these be withdrawn at maturity, as we currently expect, the government may liquidate more of its assets to deposit cash with the banks. State-owned enterprises may also require government financial support if the boycott is extended or prolonged.

In our view, the current tensions weaken the cohesiveness of the Gulf Cooperation Council (GCC) and complicate policy predictability, particularly for Qatar. These changes were reflected in our decision on June 7, 2017, to lower our rating on Qatar  from 'AA'. Qatar has indicated that it will not meet the demands set by the boycotting nations but that it is willing to engage in a dialogue. Currently, we do not expect either Qatar or the boycotting nations to change their stance.

Domestic political and social stability prevails in Qatar, despite what we view as only gradual political modernization and a highly centralized decision-making process. In our view, the country's public institutions are still relatively undeveloped compared with those of most 'AA' category rated sovereigns. 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. In addition, material data gaps exist and transparency is limited by international standards. In particular, the government neither discloses nor reports the level of its fiscal assets.

Supporting the ratings, Qatar holds the third-largest proven natural gas reserves in the world, and is the largest exporter of liquid natural gas (LNG). We expect Qatar's reserves to provide many decades of production at the current levels. GDP per capita is currently among the highest of rated sovereigns, estimated at $58,000 in 2017. The hydrocarbon sector contributes about 50% of Qatar's GDP, 75% of government revenues (oil and gas taxes and royalties, plus dividends from Qatar Petroleum), and 85% of exports.

We note that real GDP per capita trend growth is weak, with our 10-year weighted average at -2.5%, mostly reflecting both high population growth (related mainly to the construction sector) which has averaged 8.7% over the past five years, againstreal GDP growth of 3.8% over the same period. GDP per capita levels have also fallen as a result of our new growth estimates. We have also lowered our growth projections since our last review to account for the disruption caused by the boycott. Our estimate includes static gas production and weakened business activity and confidence as a result of ongoing tensions as well as lower private sector consumption. However, we expect the government's infrastructure program to support economic growth, in addition to the activities of a new petrochemicals refinery. The government has also implemented measures to help boost growth in the tourism sector, including the introduction of less-onerous visa regulations. Should GDP per capita fall further, we could assess the cushion of currently very high economic wealth levels as insufficient to offset Qatar's weak trend growth rate.

We do not include the recent lifting of the moratorium on Qatar's North Field in our projections because the potential related revenues fall outside of our rating horizon through 2020. However, we understand that as a result of the lifting of the moratorium, the government expects Qatar's gas production to increase by 10% by 2022.

Flexibility and Performance Profile: Wider external imbalance likely, but no material deviation in fiscal performance expected

• We expect a slightly wider external imbalance as a result • of the boycott, but trade between the boycotting nations and Qatar is relatively limited.
• Outflows of nonresident funding from Qatar's banks have totaled • some $15 billion (9% of GDP) in the first half of 2017, but public sector inflows have totaled $19 billion (12% of GDP) over the same period.
• While pressures may emerge, we expect no change to Qatar's monetary arrangements.
• We do not expect a material deviation in fiscal performance and we expect that government assets will remain a core strength.

Qatar's goods exports to the boycotting nations are relatively limited (10% of total); most of its gas receipts come from Asian customers. Furthermore, the United Arab Emirates accounts for 6% of exports, including gas exports through the Dolphin pipeline, which we do not expect to be affected. Therefore, we expect that the drop in Qatar's export earnings will be manageable. On the import side, Qatar has found alternative sources of goods that previously arrived from boycotting nations, albeit at higher prices. We expect that these factors together will lead to a widening in the current account deficit.

As we pointed out in our March 2017 update, nonresident deposits had increased substantially over 2016, and acted as a financing line for the government, thereby weakening our external stock metrics. This trend started to reverse from February 2017 and outflows accelerated after the boycott started. We expect the trend of outflows to be substantial and to continue. GCC exposures in Qatari banks total about 20% of total external liabilities (roughly $100 billion). While Qatari banks are well capitalized and can withstand substantial withdrawals ('A Sharp Rise In External Debt Leaves Qatari Banks More Vulnerable,' May 8, 2017), the government has supported banks by repatriating some QIA deposits previously held abroad into the domestic system (part of the total $19 billion inflow, which also comprises repatriated deposits from state-owned enterprises), which we understand is designed to shore up confidence. Nonresident outflows appear to be taking place in an orderly manner. Any escalation of the boycott measures could accelerate this outflow and result in more material support, which would weaken Qatar's external stock position.

The use of QIA assets also impacts Qatar's fiscal position by reducing government assets. However, this is offset in our ratios by a lower GDP estimate. We therefore expect Qatar's strong net asset position to be maintained over the forecast. In line with external flows, the bulk of Qatar's fiscal receipts are from hydrocarbon sales, and, as such, we see a limited impact on Qatar's fiscal balance over the forecast period.

We also expect that higher hydrocarbon prices from 2019 will boost fiscal revenues and contribute to a gradual reduction in fiscal deficits. Still, we expect that the fiscal deficit will be about 8% of GDP in 2017 at the central government level, gradually falling to 3% by 2020, and in turn we expect that debt will increase
before starting to reduce. We include investment income estimates on government assets in the general government balance and exclude them from the central government balance.

Commensurate with increased debt, interest expenditures account for over 5% of revenues. Providing some upside to these projections is the strong possibility that the delayed gas project--Barzan--could come online over 2017, which could boost Qatar Petroleum's revenues and ultimately those of the government, in addition to bolstering growth. We expect the financing needs created at the central government level will be met by further debt issuance rather than drawing on assets. To this end, the government has increased its domestic debt issuance substantially over 2017 thus far, as opposed to borrowing directly from banks or through external debt issues. Our base-case revenue and expenditure forecasts reflect broadly flat hydrocarbon production estimates--at 3.5 million barrels of oil equivalent per day-- and high capital expenditures, but continued control of current expenditures (which almost halved over 2016).

We believe the fixed exchange rate of the Qatari riyal to the U.S. dollar leads to limited monetary flexibility, and we expect the currency peg to be maintained. Qatar's real effective exchange rate has appreciated by 14% since early 2014. In our view, this represents a deterioration in international competitiveness of the country's modest tradeables sector and a dampening of nonhydrocarbon GDP growth, absent any offsetting factors such as improved efficiency or technological capacity.

Key Statistics
Table 1

Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. We subtract Qatar's monetary base in our estimate of usable reserves. QAR--Qatari riyal. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. N/A--Not applicable. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot
Table 2

S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of S&P Global Ratings' 'Sovereign Rating Methodology,' published on Dec. 23, 2014, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of 'strength', 'neutral', or 'weakness' are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to achange in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.

Related Criteria And Research
Related Criteria

• General Criteria: Methodology For Linking Long-Term And Short-• Term Ratings - April 07, 2017
• Criteria - Governments - Sovereigns: Sovereign Rating Methodology - December 23, 2014
• General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments - May 18, 2009

Related Research

• Credit FAQ: Potential Implications Of Qatar Boycott For Gulf Cooperation Council Sovereigns, - August 09, 2017
• Gulf Sovereigns Will Find It Hard To Diversify Away From Hydrocarbons - July 25, 2017
• Middle East And North Africa Sovereign Rating Trends Midyear 2017 - July 12, 2017
• Sovereign Risk Indicators - July 6, 2017. An interactive version is also available
• A Sharp Rise In External Debt Leaves Qatari Banks More Vulnerable - May 08, 2017
• Default, Transition, and Recovery: 2016 Annual Sovereign Default Study And Rating Transitions - April 03, 2017
• Industry Report Card: GCC Banks Will Show Resilience In The Face Of A Weaker Operating Environment In 2017-2018 - January 23, 2017
• S&P Global Ratings Raises Its Oil And Natural Gas Prices Assumptions For 2017 - December 15, 2016
• GCC Sovereigns' Financing Needs In 2015-2019 Could Total $560 Billion - October

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee agreed that the fiscal assessment had deteriorated. All other key rating factors were unchanged.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria.