Qatar 'AA-/A-1+' sovereign credit ratings affirmed; outlook stable

"The ratings on Qatar are supported primarily by strong fiscal surpluses, substantial external liquidity, healthy economic prospects driven largely by the gas industry, and high per capita income," Standard & Poor's credit analyst Luc Marchand said. "The ratings remain constrained, however, primarily by the geopolitical risks facing sovereigns in the Gulf region, and capacity and institutional constraints which are higher than for other 'AA' rated sovereigns."

We expect Qatar's strong fiscal performance to continue, and project a general government surplus of 7.6% of GDP in fiscal year 2008-09 (ending March 31, 2009) against an expected surplus of 8.0% of GDP in 2007-08.

General government debt is expected to be 7.4% of GDP at fiscal year-end 2008-09. Including the estimated assets in the various government funds, the state is expected to record a net asset position of about 72.2% of GDP in fiscal 2008-09.

Mainly driven mainly by increases in export receipts from oil and liquefied natural gas (LNG), Qatar will also benefit from a strong external liquidity position, with current account surpluses of 18%-20% of GDP forecast for 2008-11.

Real economic growth is expected to maintain its impressive pace, averaging 13.5% annually in 2008-09 and 10% in 2010-11, compared with an estimated 13.2% in 2007.

Qatar's economy is, however, facing capacity constraints that have fuelled a jump in inflation to an average of 12.8% in 2007.

Should inflation continue to rise into the medium term, it would complicate Qatar's efforts to develop the services sector into which significant funds have been invested.

"The stable outlook on Qatar balances the government's considerable success in continuing to foster improved economic and fiscal performances against serious regional geopolitical risks stemming primarily from continued tensions over Iran's nuclear activities," Mr. Marchand said. "Near-term risks related to inflation are compensated by the high competitiveness of the hydrocarbon sector, based on very low production costs, labor costs in the non-oil sectors (which are still relatively low), and the weak U.S. dollar on which the local currency is pegged."

Upward momentum of the ratings will depend primarily on the evolution of regional geopolitical risks.

If progress is made in containing geopolitical pressures, institutional reforms remain on track, and there is continued economic growth, combined with further improvements in the general government net asset position, this could lead to the ratings being raised.

Conversely, if the geopolitical risk heightens or if inflation accelerates to a point where the competitiveness of the non-oil economy starts to decrease significantly, downward pressure on the ratings is possible.