Qatar has been given a positive outlook on its fiscal position, but the credit rating has been kept at Aa3. Given the healthy financial data and economic prospects, should the rating have been lifted?
An announcement by the credit rating agency Moody’s last week gave the country a positive outlook, but kept its rating at Aa3. It is reasonable to ask if this is too conservative a reaction.
Ratings agencies obviously have to examine the economic profile and prospects in detail, and not be overly influenced by headline data. But looking at the detail for the Qatar economy, not all of it tempers an optimistic outlook. I would like to consider three potential areas for improvements as stated by the rating agencies, and discuss the extent to which the country has hidden strengths within these areas:
Reliance on hydrocarbons
High spending on infrastructure
Reliance on hydrocarbons: Moody’s notification on November 2 cites Qatar’s ‘heavy reliance’ on hydrocarbons, while acknowledging that the country has exceptionally low extraction costs and that it is a significant producer of liquefied natural gas (LNG), one of the cleaner fossil fuels, used as a transition fuel. But it states that the country needs to be transformed to end this reliance, arguably understating the extent to which it has begun doing so. Tourism is a growth sector, and there is investment in renewables – the 800MWp Al Kharsaah power plant was connected to the national grid in October this year. Food production has been on-shored to such a significant extent that the country is an exporter.
High spending on infrastructure: This is mostly in the past, as the note on the credit rating acknowledges. There was significant capital expenditure in the 1990s and early 2000s, and further development in the past decade, in preparation for hosting the FIFA World Cup this year. What the ratings agencies perhaps understate is the extent to which Qatar’s modern transport, utilities and real estate are of the highest quality, providing a platform for further economic growth and economic diversification.
Geopolitical risk: This is perhaps the area where the western perspective most differs from that in the region. It is questionable that the Gulf is more prone to upheaval and instability than other regions. Europe has featured a large-scale land war in 2022, while the Middle East has not. The war in Ukraine led to an increase in demand for LNG from Qatar, as European nations sought to replace supplies that had come from Russia.
The fact that turbulence and conflict have featured in the region for the past 70 years means that national leaders have developed the ability to respond and adapt with contingency planning and strategic flexibility.
No economic model is risk-free. There is some resilience to the Qatari economy, and issues that present risks also include strengths and opportunities.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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