OREANDA-NEWS. Fitch Ratings has affirmed Qatar's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with a Stable Outlook. The Country Ceiling is affirmed at 'AA+' and the Short-term foreign-currency IDR at 'F1+'.

KEY RATING DRIVERS
The 'AA' ratings reflect Qatar's large sovereign assets, the government's fiscal adjustment efforts, a large hydrocarbon endowment and one of the world's highest GDP per capita. Qatar's hydrocarbon dependence is a key rating weakness, with oil and gas extraction averaging more than 50% of GDP over the past five years and hydrocarbon-backed government spending accounting for a further 30% of GDP. Qatar's credit strengths are also balanced by government debt and deficits that are set to rise above those of rated peers, and by mediocre scores on the World Bank's measures of governance and the business environment (both below the 70th percentile).

We expect the general government to post deficits of around 10.4% of GDP (QAR61bn) in 2016 and 2.7% of GDP (QAR18bn) in 2017, as lower oil and gas prices hit revenues while the overall impact of expenditure reduction measures remains small. The government intends to tap debt markets instead of drawing on the assets of the Qatar Investment Authority (QIA). In total, new issuance will push Qatar's government debt ratio up to 44% of GDP in 2016 from 32% in 2015. Capital income will allow QIA assets to rise to a forecast USD330bn by end-2017, from an estimated USD300bn at end-2015. As with other oil producers, large swings in nominal GDP will shift the ratio of QIA assets-to-GDP to nearly 200% in 2016 and back to 180% in 2017, from 190% in 2015.

Under our baseline oil price assumptions (USD13/bbl lower than the government's), we expect total government revenue to fall 38% to a trough of QAR141bn in 2016 before recovering to QAR179bn in 2017. We expect expenditure to fall 7% to around QAR203bn in 2016 and a further 3% to QAR197bn in 2017, underpinned by reductions in current expenditure other than salaries and wages. Measures to reduce current expenditure have included reductions to fuel and electricity subsidies, as well as travel and office expenses for government employees. The activities of state-owned organisations such as Al Jazeera and Qatar Museums have been scaled back. The number of government ministries has been reduced to 15 from 18. Nevertheless, the exact composition of the planned headline expenditure adjustment is unclear.

The adjustments to budgetary items have been accompanied by reforms to the fiscal framework, many of which were initiated in early 2015. Project proposals and budget requests are being more closely scrutinised, even as departments have more flexibility to shift spending between different items. Non-core functions are being outsourced. The government intends to pass a new law on public-private partnerships (PPPs) by end-2016 and to use PPPs to finance the construction of 40 schools, 10 medical centres and other infrastructure projects by the private sector.

The government is also taking steps to increase non-oil revenues, focusing on indirect taxes and levies. It has increased stamp duty and plans to levy additional taxes on alcohol, tobacco and energy drinks starting in 2017. It plans to start applying VAT at a rate of 5% in 2018 on all goods and services, excluding selected food and medical items, potentially adding QAR12bn-15bn per year to the government's coffers.

We expect non-hydrocarbon growth to slow to 6% in 2016 from an estimated 8% in 2015. Average non-hydrocarbon growth has been 10% over the past five years. The slowdown will be a result of a less benign fiscal environment, where a contraction in current spending and a focus on fiscal efficiency leads to a slowdown of both private and public consumption growth. Some of the contraction will, however, be compensated by lower imports. With the government's capital spending expected to remain at QAR94bn per year through to 2021, its commitment to key infrastructure projects will support economic activity. After this, the non-oil growth outlook is highly uncertain.

In our forecast, hydrocarbon growth will pick up to 2.2% in 2016, after contractions of 3.2% in 2015 and 1.5% in 2014. This will raise overall growth to 4.1% in 2016 from 2.2% in 2015, despite the slowdown in non-hydrocarbon growth. The Barzan gas development should come on stream in 2016 and will add 1.4 billion scft/d of production of sales gas when it reaches full capacity, on top of additional production of LPG and condensates. The Ras Laffan II condensate refinery should be completed by 3Q16 and will add 146,000 bbl/d of capacity for petroleum products, offsetting the impact of declining crude oil production on overall hydrocarbon production. Oil field redevelopments could positively affect hydrocarbon production after 2020.

A widely expected glut in global LNG capacity poses a risk to Qatar's fiscal and external revenues, on top of the risk stemming from low oil prices. Qatar's market share in LNG exports, which stood at 31% in 2014, will likely shrink, although this should be partly mitigated by a focus on long-term customer relationships through flexible sales arrangements.

Banking sector liquidity has deteriorated as the public sector has drawn down on some of its deposits even as bank lending continued to grow. The banking system's loan-deposit ratio rose to 120% in December 2015, from 105% in December 2014, and interbank rates rose sharply in 4Q15. However, banks have been able to find funding abroad, and we believe that the Qatar Central Bank (QCB) has at its disposal the tools to support liquidity, with the QCB's repo rate and required reserve ratio both above 4%. Concentration of bank exposures to large business groups is a risk, as is their exposure to the real estate sector.

RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to a negative rating action are:
- Sustained weakness in hydrocarbon revenues and a failure to scale back expenditure, eroding fiscal and external buffers.
- A materialisation of large contingent liabilities, such as from government-related enterprises or the banking sector, resulting in a rapid draw-down of sovereign assets or build-up of debt.

The main factors that could, individually or collectively, lead to positive rating action are:
- Improvement in structural factors such as reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework.

KEY ASSUMPTIONS
Fitch assumes that Brent crude will average USD35/b in 2016 and USD45/b in 2017 and rise to a long-term average of USD65/b.

Fitch assumes natural gas prices will evolve broadly in line with oil prices.

Fitch assumes that regional geopolitical conflicts will not impact directly on Qatar or on its ability to trade and that the domestic political scene will remain stable.