Although Qatar’s dispute with its neighbours has not escalated, it appears to be no closer to being resolved a year after a blockade was imposed on it by several Arab neighbours, said Fitch Ratings.
Nevertheless, on the first anniversary of the blockade, Fitch revised Qatar’s outlook to ‘Stable’ from ‘Negative’ and affirmed its Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘AA-’.
On 5 June 2017, Qatar was diplomatically and economically cut off by a group of countries, including Saudi Arabia, the UAE, Bahrain and Egypt.
Fitch said the dispute highlights Qatar’s relative vulnerability to regional geopolitical shocks. Kuwait’s mediation efforts appear to have stalled, while calls from the US for a resolution have not produced results.
Key rating drivers
The rating agency said the revision to the outlook to stable reflects several key rating drivers.
Qatar has successfully managed the fallout from last year’s rupture of trade, financial and diplomatic relations. Public sector liquidity injections have stabilised the banking sector and stemmed the outflow of non-resident funding. The fiscal deficit has narrowed sharply and Fitch expects it to turn into a surplus in 2019. The economy has reconfigured its supply chains and continues to grow at a robust pace. There has been no escalation of measures against Qatar.
Around $10bn in non-resident funding has flowed back into the banking system since November 2017, after falling by $30bn in June-October 2017, mainly due to withdrawals of deposits by Saudi Arabia and UAE-based clients. A return of non-resident funding has allowed the public sector to pare back its liquidity assistance to the banking sector by $10bn in January-April 2018, from cumulative injections of $40bn in June-December, consisting mainly of placements by the Central Bank, the Ministry of Finance and the Qatar Investment Authority (QIA).
The agency estimates that sovereign net foreign assets (reserves plus other government assets less external debt) were $236bn (141% of GDP) in 2017, down from $250bn in 2016. The decline was due to a reduction in official Central Bank reserves to $15bn as at end-2017, down from $32bn at end-2016. Fitch estimates other government external assets at around $270bn as at end-2017, little changed from 2016 and mainly in the QIA.
Strong asset market returns are estimated to have offset much of the impact on QIA external assets from repatriating liquidity into Qatar’s domestic banks.
The government fiscal deficit narrowed to 2.8% of GDP in 2017 from 6.3% of GDP in 2016, including the estimated investment income on the QIA, as falling spending offset weakness in hydrocarbon revenue (which reflects price movements with a lag).
The immediate budgetary costs of the boycott appear to have been minimal and mostly relate to forgone revenue from the postponement of excise tax and VAT implementation.
The spending decline was led by a 20% drop in capital spending, with the government not having to make payments for some project milestones that had slipped. Current spending also fell.
The government budget is expected to be balanced in 2018 and to post a surplus of 2.9% of GDP in 2019 as higher oil prices seep through to public finances, excise tax and VAT are implemented in 2019 and growth in current spending is restrained. Capital spending is expected to bounce back in 2018 and plateau at QAR100bn ($27.5bn) per year in 2018 and 2019. The forecasts for the government budget are based on a baseline Brent oil price assumption of $57.5/bbl, said the agency. M
QAR1 = $0.27