• We believe Qatar has effectively managed the ongoing boycott's impact on diplomatic ties and trade and transport links.
• We expect economic growth to accelerate and external accounts to remain in surplus from 2018-2021, except in the event of larger declines in oil prices.
• We are therefore revising the outlook on Qatar to stable from negative, and affirming the sovereign credit ratings at 'AA-/A-1+'.

Rating Action

Qatar, December 09, 2018:  On Dec. 7, 2018, S&P Global Ratings revised its outlook on Qatar to stable from negative. At the same time, we affirmed our 'AA-/A-1+' long- and short-term sovereign credit ratings.

The transfer and convertibility (T&C) assessment is unchanged at 'AA'.

Outlook

The stable outlook primarily reflects our view that Qatar will continue to effectively mitigate the economic and financial fallout of the boycott imposed on the country in June 2017 by Saudi Arabia, United Arab Emirates (UAE), Bahrain, Egypt, Libya, and Yemen, and that Qatar will continue to pursue prudent macroeconomic policies that support large recurrent fiscal and external surpluses over 2018-2021.

A negative rating action could arise, however, if the boycott ultimately has a more severe impact than we currently anticipate leading, for example, to significant capital outflows, or an unexpected deterioration in fiscal outcomes, which might reduce Qatar's fiscal cushion to absorb additional shocks.

We could consider raising the ratings if Qatar's political institutions were to develop to levels similar to those of its non-regional peers, alongside a marked increase in transparency, providing greater clarity on the Qatari government's external assets.

Rationale

We believe that the Qatari authorities have sufficient resources to continue to successfully manage the boycott fallout. The government has taken measures to ease the economic and financial impact, and we now expect larger budgetary and external surpluses at the end of 2018 than in our last review. We project Qatar will continue to operate surpluses in external accounts over our 2018-2021 rating horizon, on the back of oil prices above $51 per barrel.

As a response to the boycott, Qatar has opened new trade routes and relationships to support its high dependence on imports (estimated 35% of GDP). Another early effect of the boycott was the outflow of external financing for Qatari banks, primarily non-resident deposits and inter-bank placements, which were offset by liquidity injections from the Qatar Central Bank (QCB) and repatriation into the domestic banking sector of about $40 billion in public sector (mostly Qatar Investment Authority [QIA]) assets previously held abroad. We do not expect the banks to need additional government support, and non-resident deposits have gradually returned to the banking system. Despite these temporary boycott-related setbacks, Qatar's external balance sheet remains strong, with liquid external assets continuing to offset the country's stock of external debt by a sizable margin. We forecast that Qatar's net creditor position will increase by an average of 5% of GDP per year across our rating horizon. We view Qatar's external position, however, as somewhat constrained by the large recurrent data discrepancies that arise between Qatar's balance of payments and its reported international investment position, stemming from the government's lack of disclosure on its external assets.

Institutional and Economic Profile: Government policies will remain supportive of economic expansion • Decision-making is centralized at the level of the emir.

• The ongoing diplomatic rift could weigh on economic growth, but investments related to the government's sizable infrastructure program will continue to support economic activity.

In our base case, although the boycott could continue for an extended period, we do not expect the regional geopolitical risks to escalate significantly from already high levels, as illustrated for example, by Qatar's recent announcement that it will leave the Organization of Petroleum Exporting Countries (OPEC).

Domestic political and social stability prevails in Qatar, despite what we view as only gradual political modernization and a highly centralized non-transparent decision-making process. In our view, the country's public institutions are still relatively underdeveloped compared with those of most sovereigns we rate in the 'AA' category. Executive power remains concentrated

Research Update: Qatar Outlook Revised To Stable On Macroeconomic Resilience; 'AA-/A-1+' Ratings Affirmed in the hands of the emir--the monarch, head of state, and commander-in-chief of the country's armed forces. We see the predictability of future policy responses as being 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 attempts to diversify the economy. Data transparency is limited in relation to the country's international investment position; the government neither discloses nor reports the level of its fiscal and external assets.

The authorities are implementing a 10-year roadmap of projects over 2015-2024 to diversify the economy and prepare for the FIFA 2022 World Cup. The budget for major capital expenditure is expected to reach Qatari riyal (QAR) 454 billion (approximately $125 billion), equivalent to 14 % of GDP per year over 2015-2019, with an estimated additional QAR355 billion, or 9% of GDP, annually for 2020-2024. The projects focus on roads, hospitals, schools, and sewers, among other infrastructure needs, while direct spending on the sporting facilities to house World Cup events is estimated at about only QAR19 billion (equivalent to 3% of GDP in 2018).

Qatar holds the third-largest proven natural gas reserves in the world (at 852 trillion cubic feet) and is the largest exporter of liquid natural gas. This supports Qatar's credit quality, and we expect Qatar's reserves to provide many decades of production at the current levels. The hydrocarbon sector contributes about 55% of Qatar's GDP, 80% of government revenues (oil and gas taxes and royalties, plus dividends from Qatar Petroleum), and 90% of exports. The moratorium on Qatar's massive gas field, the North Field, was lifted in April 2017. The government plans to increase gas exports by about 40% to 110 million tons annually (approximately 987 millions of barrels of oil equivalent) by 2023-2024. Until then, our growth assumptions factor in broadly stable gas production, cautious business activity and confidence, alongside lower private sector consumption. The government's infrastructure program remains supportive of economic growth, in addition to investment related to North Field expansion. At an estimated 45% of GDP, about one-third of which is public, Qatar's investment spending levels are among the highest of all rated sovereigns. Furthermore, the government has announced measures to encourage growth in the tourism sector and support the labor supply, including a visa free entry program for 80 nationalities.

In the boycott's wake, economic growth slowed to 1.6% in 2017 from 2.1% in 2016. More recent indicators suggest that growth has started to recover with non-hydrocarbon output expanding by about 6% during the first half of 2018. This uptick partly reflects further increases in construction, which makes up an estimated 15% of GDP. We project real GDP growth at 2.5%-3.0% over 2018-2021. However, we note that real GDP per capita trend growth is weak, with our 10-year weighted average at about negative 2%, predominantly reflecting high population growth (related mainly to expats working in construction), which has averaged about 7% over the past few years. With one of the highest GDP per capita of the sovereigns we rate, estimated at $69,700 in 2018, Qatar has sufficient wealth to mitigate the impact of weak trend growth. We expect relatively fast increase in population averaging about 4%-5% over the period to 2021 following the completion of many of the government's large infrastructure projects.

Flexibility and Performance Profile: External balances are set to improve, despite the boycott, with fiscal balance remaining strong over 2018-2021

• We estimate the current account surplus at about 5.3% of GDP in 2018-2021, as we expect hydrocarbon prices to fall over the same period.
• Although non-resident deposits dropped sharply in the wake of the boycott, they have gradually recovered to pre-boycott levels, demonstrating investor confidence in the financial sector. Nevertheless, this largely short-term external funding worsens Qatar's external liquidity position.
• The government's fiscal balance has returned to surplus in 2018, and we expect the high level of government assets will remain a core rating strength.

Qatar's goods exports to the boycotting nations were relatively limited; most of its gas receipts come from Asian customers. The UAE still accounts for 4% of Qatari exports, including gas exports through the Dolphin pipeline, which we do not expect to be affected by the boycott. Therefore, the impact of the boycott on Qatar's export earnings has been limited, in our view. Qatar has found alternative sources of goods that previously arrived from boycotting nations, although likely at higher prices, and now imports directly into its newly opened port. We expect the current account position will remain in surplus of about 7.5% in 2018 (versus 3.8% in 2017), supported by higher hydrocarbon prices, with which most of Qatar's gas contracts are linked. Over the medium term, we expect the current account balance to remain in a surplus of around 5.0%, largely driven by our oil price assumptions (see 'S&P Global Ratings Raises Brent Oil Price Assumptions For 2018 Through 2020; WTI Assumptions For 2018 And 2019; Natural Gas Price Deck Unchanged,' published Sept. 17 , 2018, on RatingsDirect).

Outflows of non-resident funding (non-resident deposits and inter-bank placements) from Qatar's banks reached about $22 billion (13% of GDP) at year-end 2017, around three-fourths of which was related to the boycotting countries repatriating deposits they had in Qatar. However, liquidity injections of about $40 billion (24% of GDP) by the QCB and public sector entities--mostly QIA--more than compensated the outflows. Non-resident deposits have gradually been rising since late 2017, when they fell to their lowest. In our view, the trend demonstrates investor confidence in the financial sector that shows banks' success in mobilizing funds from other sources outside of the Gulf Cooperation Council. Nevertheless, the maturity profile of these non-resident deposits is relatively short, weakening Qatar's external liquidity position. We estimate Qatar's gross external financing position will have risen to 173% of current account receipts in 2018, up from 157% in 2017. Over the same period, bank credit directly to the government has increased. We believe that the government has used the increase in external funding to finance its ongoing significant infrastructure program. This dynamic has weakened Qatar's external ratio (narrow net external debt) with external liabilities financing domestic assets. Despite rising levels of external indebtedness, Qatar's external balance sheet remains strong. We estimate Qatar's external liquid assets surpass external debt by around 95% of current account payments in 2018 and 110% on average over 2018-2021.

The Qatari authorities' policy response to falling oil prices since 2015 has been relatively strong. This included reigning in current expenditures, merging line ministries, and implementing numerous cost-saving initiatives within its core government-related entities. Fiscal deficits have been modest as a result.

We estimate that the fiscal balance will be in a small surplus in 2018 at the central government level, then deteriorate marginally to negative 1% on average over 2019-2021. We include investment income estimates on government assets in the general government balance, which results in a surplus of 5% of GDP over the same period. We expect the financing needs created at the central government level will be met largely by further debt issuance rather than drawing on assets. Our base-case revenue and expenditure forecasts reflect broadly flat hydrocarbon production estimates and high capital expenditures, but continued control of current expenditures.

We deducted the QIA funds used to support the domestic banking system from our estimate of the government's asset position, as we no longer viewed them as liquid. We estimate the government's net asset position to have reduced from 120% of GDP in 2016 to around 93% in 2017. Public sector funds used to support the banks are now gradually being withdrawn. We expect the net asset position to average 87% of GDP over 2018-2021. Deterioration in the net asset position is partly associated with government's debt issuance to fund its central government budget deficits. In particular, the government increased its domestic debt issuance substantially over 2017 and made a comeback to international bond markets with a three-tranche US$12 billion Eurobond in April 2018. Though we expect government debt to continue to grow gradually in absolute terms in the coming few years, total indebtedness measured as a proportion of GDP is expected to remain stable at 47% on average. We foresee Qatar's government net asset position remaining a ratings strength over our forecast period.

The QCB raised its deposit rate by 25 basis points in September 2018 for the third time in the year, following the hike in the key policy rate of the Federal Reserve. We expect Qatar to continue tracking the gradual U.S. tightening cycle, given the currency peg to the U.S. dollar. The peg has served Qatar well, providing stability for income flows and financial wealth and anchoring prices of tradables and therefore inflation. Despite limited monetary policy flexibility attached to the peg regime, the authorities reiterated their commitment to the system. The peg is supported by the sizable pool of external assets available to protect if needed.