Moody's issues annual sovereign report on Qatar

'The ratings were last upgraded in July 2007, from Aa3, chiefly to reflect the growing resilience of the Qatari government's balance sheet as oil- and gas-driven fiscal surpluses are funnelled through the state-owned Qatar Investment Authority to build up financial assets abroad. These assets, which are mostly invested in non-hydrocarbon sectors, provide an 'oil hedge' and their returns increasingly contribute to the country's Gross National Income,' explains Tristan Cooper, a Moody's Vice-President / Senior Analyst and author of the report.

Qatar's ratings also reflect the extremely rapid expansion in the domestic economy's productive capacity as more upstream and downstream hydrocarbon export projects are brought on line. 'Qatar is already the world's largest exporter of Liquefied Natural Gas (LNG) and it plans to more than double its LNG export capacity by 2010. With consensus forecasts indicating that oil prices will remain at elevated levels over the medium term, this will further boost the country's GDP per capita, which is already the highest in the world in purchasing power terms,' Mr Cooper says.

The key elements constraining Qatar's ratings at their current level are political and institutional factors, to which Moody's gives comparatively more weight in the Aa rating category. 'Qatar's domestic institutions are still in a developing phase and the regional geopolitical environment is more hazardous than is the case with higher-rated countries,' Mr Cooper notes.

Moody's recognises that Qatar's foreign assets provide an increasingly important source of capital diversification and that the non-hydrocarbon sectors are also enjoying strong growth. However, the domestic economy remains highly dependent on hydrocarbons and its performance is therefore far more volatile than is the case with larger, more diversified economies.

'The most pressing short-term challenge for Qatar, as in other emerging markets, is inflation, which is undermining competitiveness, creating economic distortions and could raise social tensions. Inflation is being exacerbated by very strong growth in government expenditure and the currency peg to a weak US dollar,' explains Mr Cooper.

Finally, although the government's direct debt remains small, its contingent liabilities are rising rapidly given growth in the liabilities of government-owned corporates and banks. 'Whilst much of the country's corporate debt is being used for highly profitable hydrocarbon export projects, Moody's has some concerns with regard to Qatar's banks: given their aggressive loan growth, banks' asset quality could suffer, particularly in the event of a sharp correction in real estate prices, which have soared in recent years,' Mr Cooper cautions.

The issuance of this credit report by Moody's Investors Service is an annual update to the markets and is not a formal action to alter the credit rating of the issuer.