The recent affirmation of Qatar’s sovereign credit ratings by Standard & Poor’s (S&P) is a significant achievement for the country given that lower oil prices are having a moderate impact on its macro-economy.
S&P has affirmed its AA long-term and A-1+ short-term foreign and local currency sovereign credit ratings on Qatar with a “stable” outlook.
Some of the key factors that have weighed heavily in Qatar’s favour are its vast natural resources, well managed economy, lower population and considerable foreign assets accumulated over the past decade. S&P says the government net asset position (general) will remain strong, averaging about 100% of GDP during 2015-2018.
That said, the ratings agency has revised down the price assumptions for 2015-2018 significantly in view of the sharp fall in international oil prices in the recent months.
Prices for crude oil in spot and futures markets have fallen by over 50% since June 2014, leading rating agencies such as S&P to revise their oil price assumptions significantly downward for 2015-2018.
Fiscal dependence on hydrocarbons receipts may impact Qatar, as in the case of other Gulf Co-operation Council (GCC) oil exporters, obviously due to the persistent lower oil prices.
A recent report showed that in some GCC sovereigns, Abu Dhabi, Qatar and Saudi Arabia in particular, hydrocarbons account for up to 90% of fiscal revenues.
The major oil exporting countries are likely to experience the biggest effects because of the large role oil typically plays in their economies, fiscal position, and external trade.
S&P estimates an average Brent oil price of $55 a barrel this year and $70 between 2015 and 2018, compared with its forecasts in June 2014 of $105 in 2015 and just under $100 between 2015 and 2018.
Sovereign ratings are clearly based on oil price assumptions (in the case of oil exporting GCC countries), which rating agencies have lowered substantially over the past few months.
Although general (government) revenues will decline due to lower hydrocarbons receipts, Qatar is unlikely to see a significant reduction in government expenditure in view of the country’s commitment to the National Development Strategy (NDS).
Under this, a capital investment of about 15% of the GDP will be made each year over the next five years, largely funded through the budget. NDS projects are expected to improve the economy’s productive capacity and strengthen Qatar’s competitive position, globally.
Besides the crude price decline, the medium-to-long-term challenges to Qatar’s competitive position in the liquefied natural gas (LNG) market are likely to come from new shale production, Russia’s gas pipeline to China, and increased pressure to delink LNG contracts from the oil price.
Nevertheless, Qatar’s competitive position in the LNG market is supported by strong expected global demand, the country’s strategy to realign destinations and contracts, and cost advantage.
Since Qatar produces and exports significant quantities of condensate and natural gas liquids associated with natural gas, its effective average cost of producing LNG is  much lower compared with its producers.