S&P Global Ratings revised to negative from stable its outlook on the long-term sovereign credit ratings on the State of Qatar. At the same time, the ‹AA› long-term and ‹A-1+› short-term ratings were affirmed. S&P said the negative outlook reflects the risk that Qatar›s external position could deteriorate further should the rapid growth in external debt continue to outpace external liquid asset growth, thereby reducing the buffer provided by its sizable external assets. Qatar›s external liquidity position has weakened with the rapid growth of banks› foreign liabilities and public sector debt, which has pushed up the country›s external financing needs. Qatari banks› external liabilities increased sharply by 24 percentage points of GDP over 2016, with nonresident deposits in particular increasing by 17 percentage points of GDP. Public sector external debt also grew by some 14 percentage points of GDP over 2016, reflecting government deficit financing. S&P forecast that liquid external assets will exceed external debt by 100% of current account receipts (CARs) and gross external financing needs at 167% of CARs plus usable reserves, compared with 147% and 146% respectively in our last publication in September 2016. The growth of nonresident deposits was partly as a response to the slower growth in domestic funding over the past few years, reflecting the lower profitability of oil and gas companies, the report said. To offset this stasis, and in support of foreign expansion plans, Qatari banks have attracted foreign deposits both from the region and also Europe. However, liquid foreign assets have not grown in tandem with foreign banking sector liabilities. This has changed the structure of Qatar›s external balance sheet, with coverage of liquid external assets over external debt reducing. Central Bank data indicate that less than half of the increase in foreign liabilities over 2016 were lent abroad. Domestic banks› exposure to the government and 100% government-owned entities increased by roughly 10 percentage points of GDP in 2016. "These nonresident deposits have an average duration of six months, which could also pose a financing risk if incentives for depositors were to reverse suddenly without an offsetting inflow. Future growth of nonresident deposits at a similar pace to 2016 – and absent an offsetting increase in liquid external assets- – would likely put pressure on the ratings." The deterioration is in the context of very substantial external assets and, while it is incrementally weaker, we still regard Qatar's external stock position to be a key strength," S&P report noted. S&P also forecast that higher hydrocarbon prices will boost fiscal revenues and contribute to a gradual reduction in fiscal deficits. "Still, we expect that the fiscal deficit will be about 7% of GDP in 2017 at the central government level, gradually falling to balance by 2018-2019, and in turn we expect that debt will increase slightly before starting to reduce. We include investment income estimates on government assets in the general government balance and exclude them from the central government balance," the report added. Commensurate with increased debt, interest expenditures now account for over 5% of revenues.
