Tuesday 13, June 2017 by Nabilah Annuar

Fitch places Qatar's 'AA' IDR on Rating Watch Negative

Fitch Ratings has placed Qatar's 'AA' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN).

The Short-Term Foreign- and Local-Currency IDRs of 'F1+' and the issue ratings of 'AA' on Qatar's long-term foreign-currency senior unsecured bonds have also been placed on RWN. Fitch has affirmed the Country Ceiling at 'AA+'. 

The RWN on Qatar's ratings reflects the heightened uncertainty resulting from the decision of Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt and some other Arab countries to sever diplomatic and logistical ties with Qatar. While some discussions have taken place to resolve the crisis, it is becoming more likely that the crisis will be sustained and negatively affect Qatar's economy and its credit metrics. 

The risk of further logistical and financial restrictions is increasing, and the risk of the use of military force, while still remote, can no longer be entirely excluded. Domestically, the isolation could lead to strains between those advocating reconciliation with Saudi Arabia and those supporting the highly independent position that Qatar has pursued so far, bringing political stability into question. 

The 'AA' ratings reflect Qatar's large sovereign assets (sufficient to finance more than 20 years of present budget deficits), along with the country's fiscal adjustment efforts, a large hydrocarbon endowment and one of the world's highest GDP per capita ratios. Qatar's hydrocarbon dependence is a key rating weakness, with oil and gas extraction averaging 50 per cent of GDP and 80 per cent of external receipts and government revenue. Other weaknesses include a government debt level above those of rated peers, and mediocre scores on the World Bank's measures of governance and the business environment (both below the 70th percentile).

Saudi Arabia and its allies have banned all land, sea and air transport between themselves and Qatar, with the apparent exception of the Dolphin oil pipeline that brings Qatari gas to the UAE. This has immediate repercussions as Qatar has been dependent on imports from its neighbours and on goods shipped from outside the region via the key port of Jebel Ali in the UAE. It is likely that given its vast resources Qatar will be able to handle strains on supplies of food and other goods, but at a cost, which might eventually be borne by the government.

The countries involved have so far only imposed limited restrictions on financial flows and exposures to Qatar. An outright ban on financial relations with Qatar could lead to disruptions in the Qatari financial industry, but the authorities have the financial resources, in the form of central bank reserves as well as Qatar Investment Authority assets, to contain these strains. 

However, if the imposed isolation lasts for a longer period, the implications for Qatar's business environment and economic model would become more serious. Qatar's drive for diversification has focused on establishing the country as a regional hub and a destination particularly for tourists from the region. Prolonged isolation could undermine the business model of Qatari companies, including SOEs, potentially requiring costly bail-outs. The isolation could also adversely affect the public finances.

Fitch's proprietary SRM assigns Qatar a score equivalent to a rating of AA- on the Long-Term Foreign Currency IDR scale. 

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers—public finances: +1 notch, to reflect exceptionally large government assets.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM.

The RWN reflects the following risk factors that may individually or collectively result in a downgrade of the ratings: an absence of a timely resolution to Qatar's isolation; further escalation of measures against Qatar; and evidence that the measures taken against Qatar are having a significant impact on the economy or other credit metrics.

Factors that could result in a removal of the RWN and the affirmation of ratings is a timely normalisation of Qatar's external relations without an adverse impact on the economy or other credit metrics.

Fitch assumes that the authorities have access to sufficient liquid assets, in terms of central bank reserves and QIA assets, that it can address any short-term supply disruptions and liquidity issues in the financial markets. 

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